Just over a week ago, the City of London is coming to a hardened understanding of its post-Brexit future: a financial services agreement with the European Union may be too small, too late to protect its dominant position.
Negotiations are scheduled to begin shortly to determine the outline of regulatory cooperation between the UK and the EU, after the industry was largely put aside in the trade agreement that marked the UK’s separation from the EU on 31 December. and so far the details – including who will lead the discussions – are scarce.
The early days of Brexit revealed what is at stake: London lost 6.3 billion euros ($ 7.7 billion) in daily stock trading for EU locations on January 4, the first business day after the transition. The overnight loss added momentum to requests from financial companies and the London stock exchange for lawmakers to ease the rules and help City gain a competitive advantage over European rivals.
One of those changes came over the weekend, with the UK Treasury saying it plans to allow trading of Swiss shares, reversing an EU ban on activity. London’s ability to offer business to companies like Nestlé SA and Roche Holding AG will help offset part of the loss in EU shares. But the stance also deepens the UK’s split with the EU, making the bloc less likely to offer access to markets.
These conversations – centered on a principle called “equivalence” – are open, without the deadline that governed the business. Little progress has been made in most areas.
European authorities have little incentive to reach an agreement, while financial centers from Paris to Amsterdam win business at London’s expense. Bank of England Governor Andrew Bailey issued a pessimistic note last week, saying access to the bloc should not depend on the dictates of Brussels.
Although dramatic, the loss of EU shares is unlikely to still have a noticeable impact on corporate tax in the UK, which was over £ 3 billion last year. But it was an immediate warning of the potential costs of Brexit. As a whole, Square Mile was responsible for around £ 75 billion in taxes in 2019, including taxes on employment, according to the City of London Corporation.
“The EU stock trade is over, it won’t come back,” said David Howson, president of Cboe Europe, the largest place for EU shares in London. The company saw nearly 95% of that business turnover, Howson said on Bloomberg Television on Thursday.
As ‘equivalence’ is the key to the post-Brexit bank: QuickTake
Bankers and asset managers said the week was virtually free from interruptions. This was due to years of preparation by companies, some of which involved transferring business – albeit less than initially feared – from the UK
Firms like JPMorgan Chase & Co. and Goldman Sachs Group Inc. have already changed dozens of jobs and hundreds of billions of dollars in assets, while asset managers, including Janus Henderson Group Plc and Standard Life Aberdeen Plc are using funds in Luxembourg and Ireland for customers within the block.
Still, this leaves companies indefinitely burdened with the complexity and additional costs of supporting operations in London and the EU. Others, like Hargreaves Lansdown Plc, decided to stop marketing to European customers.
The return of continuous cross-border business with the bloc depends on equivalence decisions by policy makers, which allow companies to do business in each other’s territory. A comprehensive deal would help preserve London as an EU funding hub, but that may not be the bloc’s priority. It has long wanted to have more financial infrastructure that caters to EU and euro area economies based in member countries.
“I’m very realistic about that,” Bailey, of the BOE, told lawmakers last week. “If the price of this is too high, we can’t just go ahead.”
Brexit Exodus
More than $ 9.4 billion in Europe stock trading moved from London on 6 January
Source: Cboe Global Markets
The unacceptable cost: London losing its ability to freely define its own rules, which is seen as a vital tool to attract new business. This prospective freedom has already spawned a series of initiatives.
The UK Treasury is reviewing the stock market listing rules, with the LSE among the advocating easier ways for companies to sell their shares in the capital. Jonathan Hill, who was once the EU’s financial services commissioner, is considering changes to allow Britain to compete better with the US, Hong Kong and European cities, which are looking for more stock sales.
The Financial Conduct Authority is reducing barriers to encourage investors to trade large orders and reviewing the rules for trading derivatives. Chancellor Rishi Sunak proposed reforms to grab more nascent green finance industry. The reversal of the Swiss stock trading ban is expected sometime in the first quarter.
“I don’t think this is a mortal blow to London’s importance in global capital markets,” said Philip Hampton, former president of NatWest Group Plc. “Some of these London advantages – history, law, language – cannot be easily equated by other centers. London still has a lot to fight for and a lot to fight for ”.
Still, these new opportunities may not replace lost business for the EU. Swiss stock trading in London averaged 1.3 billion euros a day before the ban, about a fifth of EU stock trading. And with no deal in sight between the UK and the EU, there may be more changes coming to an end in London’s financial center in the coming years.
“Our entire negotiating strategy has despised the city and we will regret it,” said Paul Myners, a former city minister and member of the House of Lords, in an interview. “I think the change in the next 10 years can be quite profound.”
– With the help of Suzy Waite, Benjamin Robertson and Andrew Atkinson
(Updates with details of Swiss stock trading starting in the fourth paragraph)