That argument has now been settled by Brussels itself which, acting largely from pique, has refused to grant Britain the equivalence that it offers to China or Mexico.
That decision will hurt the EU more than it hurts Britain, reducing the access of Continental firms to the world’s best money markets just when Europe needs to recapitalise. Britain, understanding that protectionist measures mainly hurt the places that impose them, has not been so foolish as to retaliate in kind. But we can’t stop the EU from self-harming.
In doing so, it also forces our hand. As the Governor of the Bank of England, Andrew Bailey, put it earlier this month: “I’m afraid a world in which the EU dictates and determines what rules and standards we have in the UK is not going to work”. Indeed. As my old Oxford tutor Jeremy Catto liked to say, historians make the best bankers. With equivalence off the table, there is now no argument for delaying divergence.
Britain has left the EU’s walled garden, and is free to make its way in the wider world, setting its own rules. Some large banks are nervous about change. Some regulators are reluctant to loosen their grip. But most of the City recognises Bailey’s logic. If the EU is turning inwards, Britain needs to raise its eyes.
Happily, there is now a voice for those in the industry who want to make use of our new freedoms: CityUnited, which is run by the former CEO of Liffe, Daniel Hodson, and to which I am an adviser. Its aim is to structure regulations and taxes in such a way as to maintain Britain’s dominant position.
How? First, by dismantling those EU rules which were opposed by the industry when they were brought in, even if, having now assimilated the compliance costs, some established actors have lost interest in repeal. We need to think of future businesses as well as existing ones. We should undo the parts of the EU’s MiFID 2 and Solvency 2 regimes that we opposed at the time, and scrap the Alternative Investment Fund Managers Directive and the short-selling ban.
More broadly, we need lighter-touch regulation. Many of our rules are still aimed at preventing the 2008 crash, rather than at facilitating future growth in fintech, green investment and digital trade. At the very least, we should make competitiveness an explicit part of the regulators’ mandate – certainly no less than stability, confidence or consumer protection. Other regulators, such as Singapore’s, take it for granted that boosting competitiveness is part of their role.
At the same time, London should pursue partnerships with other financial hubs, from Chicago to Tokyo – either institution-to-institution or through trade deals. By inserting financial services chapters into its free trade deals, Britain can realistically hope to set global standards. At the same time, we should allow the sector to employ whom it will, and recognise qualifications from around the world.
Even rabid anti-capitalists might struggle to get exercised about regulatory alterations. A harder sell will be the fiscal changes needed to maintain our lead: ending the bank corporation tax surcharge, removing stamp duty on share trading, reversing the recent changes in non-dom status that drove wealthy individuals abroad, with the result that the Treasury no longer gets the millions a year they used to pay in tax. And we need to end the absurd rule which limits bonuses – thus whacking up bankers’ basic salaries and reducing the link between performance and pay.
All these changes are open to caricature by their opponents. But, given our economic circumstances, we need to be ruthlessly Lafferite, setting tax rates to maximise revenue, and seeking to reshore jobs that have been driven to friendlier fiscal jurisdictions.
London has immense opportunities. Just as it benefitted from American protectionism a generation ago by establishing the euro-dollar market, so it now stands to gain from European short-sightedness. We might well see a “euro-euro” market here as Continental institutions flee their own regulators. But these things won’t happen on their own. We need to adapt – and quickly.