Why equivalence may not be a fight worth having for the City

Brits don’t like being told what to do. A tacit bolshiness is part of the national psyche. Still, after a bit of grouching, we largely comply.

There is plenty of grumbling in the City about regulation after Brexit, amplified again now there is a Brexit date. A lobby group’s report, out on Thursday, gives voice to the Square Mile’s concerns. Equivalence, the mechanism by which the EU gives access to its financial markets, risks forcing the UK to copy EU rules passively ad infinitum.

For once, the UK needs to stand up, not suck it up. On equivalence, moaners have a point. The financial services sector has been left with no good options. An equivalence ruling is made unilaterally, and the EU can withdraw it on 30 days’ notice. That would leave the City permanently on edge. There are benefits to being able to go your own way, not least agility. The UK should think hard about how much it wants to give away for access.

The EU pitches equivalence as an “outcomes-based” system that looks at the results of regulation, not the rules themselves. That should, in theory, give Brexiters who want to reclaim the UK’s rule books more latitude to write their own rules. In fact, it does nothing of the sort.

Equivalence can be withdrawn on flimsy premises — and political, not legal. The Swiss found that out last year when equivalence was withdrawn from their stock exchange.

A policy shift last summer means divergence from the rules is now more closely monitored. Negotiations were already hard, as the protracted EU-US talks on derivatives clearing showed. The threat of reopening equivalence discussions every time a rule is tweaked could hamstring regulatory reform within the City.

This is not to say they need us more than we need them. But the Square Mile still has some leverage, for now. European companies rely on London’s capital markets: almost half the debt and equity raised for eurozone non-financial companies between 2012 and 2018 was done through London-based banks. Aspects of the financial services system fall outside the equivalence regime anyway — retail banking, for example. On some of the major areas such as derivatives clearing, the City’s dominance will be hard to overturn regardless of EU actions.

There are others where access is important, such as data-sharing. In a global market where trades bounce between continents in microseconds, joined-up regulation is clearly desirable. Unchecked liberalisation is not. But for the UK, fighting for equivalence might not be worth the price.

Lock down on Anglo

Thieves are stealing catalytic converters in hybrid cars for their high concentrations of palladium, which is now pricier than gold. Palladium prices top $2,500 an ounce, writes Kate Burgess. Toyota, maker of the Prius, urges UK drivers to buy “Catloc” devices to protect their converters from bandits.

Anglo American, a hybrid metal producer, has also become a concentrated play on palladium. Anglo American Platinum is valued at £17bn. Better known as Amplats and majority-owned by Anglo, it churns out about 1.4m ounces of palladium a year. It is now worth close to half the total value of the FTSE 100 miner’s shares. That underrates the rest of Anglo’s operations delving for diamond, copper, coal and iron ore in diverse geographies. Sure, diamond and copper prices have been weak. Rough diamond production in the fourth quarter fell 15 per cent, Anglo said on Thursday. Copper production, hit by the drought in central Chile, was down 13 per cent. But iron ore prices are persistently high. The equity value of iron miner Kumba, Johannesburg-listed like Amplats and two-thirds owned by Anglo, has risen to a five-year high of about £7bn.

Broker Jefferies says that excluding Kumba and Amplats, the debt-plus-equity value of Anglo’s rump is about 2.8 times earnings and could be double that. Shareholders pay a big penalty for Anglo’s exposure to Africa. The group’s shares trade at about nine times forecast earnings. Rivals BHP and Glencore both trade at 13-plus times.

There are risks. But the strength of being a hybrid, whether car or company, is that it helps you last the distance. Savvy Mark Cutifani, Anglo’s boss, is also taking a green option on potassium-based fertiliser with the acquisition of Sirius Minerals.

Anglo American shares are a steal. Investors should lock them down.

Tally ho

“Lord Sassoon will retire from Jardine Matheson . . . to pursue his family and other interests”. So said the Hong Kong conglomerate this week. We wouldn’t worry except this is a relation of Siegfried Sassoon, war poet and author of Memoirs of a Fox-hunting Man, a disguised autobiographical account of family life.

Equivalence: cat.rutterpooley@ft.com


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