The City for Britain represents the views of practitioners from across the financial services industry. Our members have direct hands-on experience in the sector and many are currently involved in Brexit implementation projects for institutions in the City. We initially came together before the referendum to campaign for Vote Leave, and our sole concern is the future prosperity of UK financial services – unlike so many (often conflicted) multinational groups whose voices are loud but whose bases and shareholders are largely overseas.
Below I set out, on behalf of The City for Britain, key points which we hope will be considered with respect to the upcoming “meaningful vote” on the Prime Minister’s proposed Withdrawal Agreement (WA), which we are urging MPs to oppose – for the future prosperity and protection of Britain’s largest and highest employing and exporting industry.
During the referendum, much was made of the impact to the City in the event of a “Leave” vote. Since then, however, the noise has been conspicuous by its absence.
There are good reasons for this.
Financial institutions have been reviewing their operating models and by now most have already implemented the changes they will need in the event of “no-deal”. Estimates of job losses have been drastically revised down as banks have dealt with the realities. The focus has been on establishing EU27 legal entities. Job relocations have been few as EU employment laws and lack of local talent motivated firms to make minimal operational changes.
Furthermore, conversations between UK and EU regulators to minimise systemic risks have sensibly made good progress. For example, on 13th November 2018 the European Commission released a paper setting out how EU firms will be able to continue to access UK clearing houses, which stated:
“Should no agreement be in place, the Commission will adopt temporary and conditional equivalence decisions in order to ensure that there will be no disruption in central clearing and in depositaries services. These decisions will be complemented by recognition of UK-based infrastructures which are therefore encouraged to pre-apply to the European Securities and Markets Authority (ESMA) for recognition.”
The Bank of England has issued similar advice on how it will recognise non-UK CCPs, subject to reciprocity.
We can expect further agreements in the coming months, as there is now insufficient time for the EU to prepare the necessary legal framework or build the required capacity to support the moves that had been feared. Smaller financial firms (both in the UK and in the EU) are more likely to have deferred changes and will benefit most from such agreements. These agreements will be both with the EU and with individual member states. For example, the French Government is currently implementing legislation that will allow UK financial firms to continue their activities in France and also ensure French firms may work with UK firms as a third-country entity.
Conversely, there would be costs to the UK financial services industry should Parliament accept the WA.
It is widely recognised that the WA has the effect of giving the EU a veto over the UK’s departure from the Single Market. The WA negotiations have shown that the EU would have no incentive to ever waive that veto, since the UK is unlikely to propose a deal that the EU would prefer over the new status quo that would arise.
The UK’s financial institutions would, then, be forced to adhere to EU regulations – both now and in the future – but without any input or veto into their formulation. Whilst this plight would be shared by all UK businesses, it poses a particular threat to the financial services industry due to the EU’s history of continually increasing and centralising regulatory oversight. Moreover, due to the size of the financial sector as a proportion of the overall UK economy, the UK is particularly exposed to financial risk but would have no control over the EU policy-makers.
The Markets in Financial Instruments Directive (MiFID II) is a good example. Intended to enhance transparency, the increased regulatory burden led to ICE moving 245 futures and options contracts from London to the US. Thus it had the perverse double whammy of driving business overseas and reducing oversight within the EU. While the relocation of business from the UK to the US is unlikely to be of concern to the US investment banks, it should be a concern to Her Majesty’s Government.
Another example of regulation-gone-wrong is the bonus caps. These were ostensibly introduced to curb excessive risk-taking and encourage bankers to take a long-term view. Instead they drove talent overseas and increased fixed salaries for the firms, increasing costs and reducing any future “claw back” for misdemeanours. Under a WTO deal the UK would be free to scrap this regulation and instead place more emphasis upon the Senior Manager Regime, something supported by Mark Carney.
The biggest threat to the City, however, would be the EU’s proposal for a Financial Transaction Tax (FTT), first put forward in 2013 by the European Commission. The idea was revived in December 2017 as a pet project of French Finance Minister Bruno Le Maire and raised yet again by French President Emmanuel Macron in July 2018. More recently Olaf Scholz, German Finance Minister, called for a FTT in a speech in November 2018 (the same speech in which he is reported to have called for France to relinquish its UN seat to the EU, a Eurozone budget and an EU army).
Although there has been a lack of consensus between the EU27 on the matter so far, under the WA the UK would be powerless to object to it. The tax would increase costs (ultimately born by pension funds) and have the effect of driving business offshore, with the US again being the likely beneficiary.
The Political Declaration contains encouraging words about the prospect of equivalence between the UK and the EU, which would enable financial institutions of one jurisdiction to provide certain services in the other. What it doesn’t mention is that, even if the UK were ever able to escape the WA, a French proposal to reduce the scope of equivalence is now working its way through the European Parliament. These changes would render equivalence virtually worthless.
The story hasn’t really moved much since 2016, and where it has, it is in the favour of leaving. The most dangerous part of the WA for financial services is the damage that would be caused by a Financial Transaction Tax that the UK would be powerless to prevent. The forecasts of a mass exodus from the City have been revised down considerably as the institutions and regulators have got down to the business of actually working out what is necessary to manage the change. Meanwhile the potential prize from a more competitively-focused regulatory framework is still very much there for the taking.
To read the piece in full, click here.