Taste of free­dom

Bit by bit, the City is reap­ing the ben­e­fits of lib­er­at­ing it­self from Brus­sels’ reg­u­la­tions

The Daily Telegraph - Business - - Front Page - Matthew Lynn

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

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