Sunday, January 21, 2018
Both sides need a good Brexit deal for the City
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

In the spirit of Anglo-French co-operation of recent days, which included a Sandhurst summit and the offer by President Macron of a loan to this country of the Bayeux tapestry, let me today say how much I agree with Christian Noyer, a former governor of the Bank of France, its central bank.

Noyer, who now has the role of luring financial services business and jobs to Paris, particularly from Britain, said in a BBC interview that the City of London would not be displaced by any other capital as Europe’s leading financial centre. He is right.

London is the world’s leading financial centre, according to the most recent Global Financial Centres Index produced by Z/Yen and the China Development Institute. It ranks ahead of New York, in second place, as well as Hong Kong, Singapore, Tokyo, Shanghai and Toronto. The next European challenger to London, in ninth place, is Zurich, which is not in the EU. No other EU financial centre in in the top 10, with Frankfurt in 11th place, Luxembourg 14th and Paris way down in 26th.

London’s financial infrastructure and expertise puts it way ahead of its EU rivals, with a market dominance that is almost embarrassing. In several key areas its EU market share ranges from 50% to more than 80%. There are few, if any, other parts of the British economy this can be said about.

In the light of this, it would be easy in the forthcoming phase two of Brexit negotiations for the government to take a relaxed attitude towards the City and concentrate on other things. There are, after all, few votes in standing up for the Square Mile. Some Brexit voters, perhaps a considerable number, see the vote to leave as an opportunity to bring the City to heel and tilt the economy away from reliance on it.

Add to that the stated position of Michael Barnier, the EU’s chief negotiator, that there will be no place for financial services in a post-Brexit EU-UK trade deal, and ministers might decide that there is no point banging their heads against a brick wall.

“There is not a single trade agreement that is open to financial services,” Barnier said last month. “It doesn’t exist.” This was a consequence of Britain’s so-called red lines: “In leaving the single market they lose the financial services passport.” That, notwithstanding my entente cordiale with Noyer, was also his view. Macron has this weekend confirmed that there will be no financial services’ deal for Britain equivalent to single market membership without a continuing contribution to the EU budget, and Britain accepting the four freedoms of the single market and the jurisdiction of the European Court of Justice.

Notwithstanding this it would, however, be a big mistake for the government not to place a high priority on the City and financial services in the forthcoming negotiations, both to ensure early agreement on a transition deal to stem any outflow of jobs, and to seek to break Barnier’s convention and ensure that the eventual deal between Britain and the EU does include financial services.

So, even if London does continue to be Europe’s biggest financial centre after Brexit, which I expect, it would do so even if it lost a significant part of its activity and jobs to other centres, such is the lead London has. But the loss of those jobs and activity, in the absence of a deal to preserve something like existing passporting arrangements, would be detrimental for the economy and Britain’s tax base.

It would also seriously undermine London’s standing in relation to other international financial centres. If enough activity peels away without a deal, which it could well do, it is unlikely that in five or 10 years’ time we would still be able to talk of the City as being the world’s leading financial centre. A slip down the global rankings would seem inevitable.

Targeting an EU-UK deal for financial services could not only underline the scale of the government’s ambitions but provide a template for other sectors. Britain starts from a position of regulatory alignment with the EU but also with a regulator, the Bank of England, which is trusted on both sides and which has been operating within the EU but outside the eurozone for years.

The result of this, according Sam Woods, a Bank deputy governor and head of the Prudential Regulation Authority (PRA), is that it should be “entirely doable” and “technically feasible” to conclude a financial services agreement within the next three years, in other words before the end of the transition period. Similar arrangements should also be “doable”, on the basis of continued regulatory alignment, for other sectors.

There is a final argument. There are very few areas associated with Brexit where the damage to the EU is greater than the damage to Britain; in most cases it is comfortably, or perhaps uncomfortably, the other way around. Logic, however

Financial services is, however, one of them, as Mark Carney, the Bank governor, has made clear. Woods described the “worst outcome of all” as one in which there is no transition, on co-operation and regulators on both sides would have to resort to a “deep fallback” position.

Cutting the EU’s businesses and banks from the City’s markets would be the equivalent, for EU countries. Of cutting off their noses to spite their face. The City, he has said, is “Europe’s investment banker” and accounts for roughly half the debt and equity issued in the EU. “I don’t accept the argument that just because it has not been done in the past [a trade deal including financial services], it can’t be done in the future,” he said last month.

In the short-term, the EU would suffer financial dislocation, including the complication of the £20 trillion of derivatives’ contracts which are at risk, together with £60bn of insurance liabilities. In the medium-term, the loss of London to the EU would mean higher transaction costs, a rise in the cost of capital and the acceptance of less efficient markets and more thinly-spread expertise.

The logic for a deal which maintains something close to the status quo for the City in the EU therefore looks inescapable. Logic, however, has not always been uppermost in the Brexit process.