Should we be worried that the UK didn’t get all that it wanted for financial services in the UK-EU Trade deal, as the PM mentioned to the Sunday Telegraph? Financial services are our biggest export industry by some margin, including to the EU, as well as (arguably) our biggest taxpayer, so anything that hampers it could have serious economic repercussions. The EU for its part has said that it will consider in its own time if it will grant ‘equivalence’ to UK financial services, making it easier for UK based institutions to serve customers in the EU, and will only do so if it is in the EU’s interest. The Chancellor, Rishi Sunak, has already unilaterally granted EU equivalence status, providing continuity for EU financial services companies operating here.
The truth is that the biggest threat to our financial services industry is not whether the EU grants equivalence. As chief executive of the British Bankers’ Association at the time of the Brexit referendum, I co-ordinated the negotiations between UK financial services companies, the UK government, the European Commission and the European Council, and it soon became clear that there are enough legal mechanisms for UK based financial services companies to carry on serving their clients in the EU whatever was in the final trade deal, or indeed no deal. It required setting up legal entities in Frankfurt and Amsterdam, setting up some IT systems and transfer of some capital and staff to satisfy local regulators, which is what the industry then did. There is a reason why our banks employ some of the most creative, intelligent and well-paid lawyers on the planet. I simplify, and there are exceptions (such as retail banking), but the more we looked at how the industry should respond to Brexit, the less a threat it seemed. Many of the UK’s top bankers told me, in private, that Brexit actually didn’t really make any difference to them.
The bigger long term threat is how far the EU uses future financial services regulation to become more protectionist and shut UK-based institutions out. I was on the board of the European Banking Federation for five years and in the first meeting after the Brexit referendum, I wanted to reaffirm a commitment to maintaining a single market in financial services. I expected it to be 27 to 1 ; it was 27 to 1, with the isolated one not the UK, but France – the French Banking Association alone immediately saw this as an opportunity to isolate London and set about turning other countries to their view. After the Brexit referendum, the French government launched a high profile campaign to get banks to relocate to Paris, but they were largely rebuffed. With the UK no longer around the table, we should be prepared for a barrage of new EU regulations whose unstated aim is to force London businesses to relocate. What will stop are new EU rules that make the EU less competitive compared to London. A leading French banker told me after a few glasses of wine: ‘you shouldn’t underestimate how terrified the French government is of Britain going it alone’.
For the UK, this is now an opportunity to set out our own clear strategy as the leading global financial services centre. The Chancellor has launched a review of the future of financial services and is quite rightly talking up the upsides. The umbrella body theCityUK (on whose board I sat for many years) is setting out its vision of a global financial services powerhouse based on high standards, innovation, competitiveness and openness to global talent, powered by a close working relationship between industry, regulators and government.
One area it could be useful to review is extraterritoriality: the global application of the financial services regulation we have inherited from the EU. Brussels, with a keen eye on the US, has relished trying to set global standards by requiring EU-based financial services institutions to obey EU rules wherever they operate in the world, rather than operating by local regulations. This extraterritoriality can put EU and UK institutions at a serious disadvantage compared to those from other countries (including the US). This is far more of an issue for the UK than other EU countries because so many more of our financial institutions are global in reach.
On a recent delegation to Brussels, British financial services representatives were told by a laconic senior French European Commission official: ‘There is now a clear race between the EU trying to take a bigger share of London’s business, and London trying to take a bigger share of international business’. But the official is also a realist and added: “We all know who is going to win that race”.