Taste of freedom
Bit by bit, the City is reaping the benefits of liberating itself from Brussels’ regulations
The bankers would all flee to Frankfurt. The hedge funds would head to Paris, and the asset managers would decamp to Dublin or Amsterdam. If there was one sector of the economy that was going to get hammered by our departure from the European Union, it was the City. At best, it would have to plead to stay inside the single market for financial services and adopt whatever rules Brussels devised. At worst, it would be squeezed out of existence.
And yet, as it turns out, six months after we left something far more interesting is happening. The City is gradually liberating itself from the EU. From rules on equity trading, to sustainable finance, to derivative trading, in small but significant ways the financial markets are discovering – or perhaps rediscovering – that the power to regulate yourself can be hugely valuable. It might not make many headlines. But over the medium term, it will create a rebooted and reinvented financial centre – and one that can flourish as well.
It remains to be seen what kind of deal the UK can finally work out with the EU once the transitional agreement runs out at the end of this year. The signs are not exactly promising. Even with face-to-face negotiations restarting, the gulf is still a huge one. On issues from fishing to state aid there is little common ground. The UK may well walk away without a deal.
Rewind two years, and that would have been a catastrophe for the City. The UK’s banks, insurers and fund managers depended on “passporting rights” that allowed them to sell their services across Europe. Over three decades, London had become the
Continent’s financial centre, generating vast wealth for itself. Locked out of the single market, all that would disappear. And with very little to replace it, the City would quickly be in deep trouble.
As 2020 has unfolded, however, even amid the distraction of a pandemic, the City has started to work out that making its own rules is not such a terrible outcome. We saw one example last week. The Government decided to opt out of the EU’s new rules on settlement of equity trading. A problem? Not really. “Growth companies on quoted markets have dodged a bullet that would have struck the heart of liquidity in the small cap market,” said Tim Ward, chief executive of the Quoted Companies Alliance, in a statement on the decision. That is true enough. The EU’s scheme – pithily entitled Central Securities Depositories Regulation – illuminates much of what Brussels gets wrong. It takes a largely non-existent problem (very few trades don’t settle), tackles it with hugely cumbersome rules, complete with brutal financial penalties for noncompliance, while completely ignoring a much larger issue, which is that the number of quoted companies is collapsing largely because there is already too much regulation (here’s a suggestion – a new set of directives is not the best way to start fixing that).
The City has dodged a bullet on that one. Outside of those rules, it can start to build a better small cap market – and probably attract lots of high-growth European companies looking for a cheap and effective place to list.
There are other examples. The Treasury has indicated the UK may not adopt the EU’s new rules on “sustainable finance” designed to prevent fund managers marketing assets as green when they aren’t really. True, there is some merit in that. A product should always be accurately described. And yet, as so often, the EU’s rules are mind-bogglingly complex. The directive on sustainable finance runs to 9,580 words, footnotes included, of densely written legal jargon. In reality, existing advertising standards will be fine. And Britain’s thriving fund management industry will be better off ignoring those rules, and saving some money that can be used instead to invest in companies and generate better returns for investors (sort of the whole point of fund management, come to think of it).
Meanwhile, in its latest plans for post-Brexit financial regulation the Treasury is promising standards on bank and derivative regulation that will be significantly different from the EU’s, and will then leave it up to Brussels to decide whether they match its own.
Step by step, the City, under the control of the Bank of England and the Treasury, is shaping its own regulatory system. True, there are risks in that. The City may lose access to European markets. That matters. British financial exports to the rest of Europe amount to £26.1bn, or 21pc of total UK services sold across the Continent, and that is far more than we import. And yet, despite that, it is still the right decision.
In reality, the more innovative and dynamic an industry is, the more it benefits from light-touch, flexible regulation. It can fix mistakes simply and quickly, such as the EU’s crazily complex rules on equity trading, before they do too much harm. And, more importantly, it can try new things and explore new markets. Sustainable finance is going be important, but it is a fair bet the UK’s light-touch regime will work better than the EU’s microregulated one. Rebuilding small-cap equity markets, probably by integrating booming crowdfunding platforms, could be a huge growth area. So could tech-based settlements and payments. Digital currencies, app-based trading, financing frontier markets and AI-driven portfolio management are all huge potential areas of expansion.
Even if the UK finds it slightly harder to sell some products in Spain or Austria, growth in those new sectors will more than make up for it. The UK is finally learning how to regulate its own financial markets again – and the more it does that, and the more self-confidently, the more the City will flourish in the decade ahead.
‘Step by step, the City, under the control of the Bank of England and the Treasury, is shaping its own regulatory system’
Step by step, the City of London is shaping its own regulatory system