Inside Hard to swallow
The City’s silence on withdrawal from the EU does not mean it is happy
It was an omission that will have surprised precisely no one in the City. In attempting to explain the benefits of her Brexit withdrawal agreement, Theresa May said the deal would protect “hundreds of thousands of manufacturing jobs” and the “cross-border trade in goods”; she said nothing about finance jobs and the cross-border provision of services.
The City used to be at the front of the lobbying queue. But, since the financial crisis, it has slipped way down the pecking order. A banker in Canary Wharf might generate more money for the Exchequer than a car worker in Sunderland, but the importance of the two roles flips when viewed through a political lens. No one’s listening to the economic argument any more. And who could really argue that the City has anyone but itself to blame for that?
Nevertheless, there’s a growing sense that the Government is not so much making a deliberate political calculation about Brexit priorities as failing to understand what the UK’S departure from the European Union means for this country’s most important industry. This misunderstanding was apparent from the start when politicians blithely declared that bankers wouldn’t move to Frankfurt and failed to appreciate that it would be the jobs that moved, not actual people.
Something similar is happening now. The City has given up protesting about Brexit. It has done so because it has already spent an awful lot of time and effort putting in place contingency plans. The reason for protesting – to ensure that time and effort need not be expended – has therefore gone. That has been taken in some quarters to mean that the City is fine. One commentator even went as far as to suggest that the City has got most of what it wants from May’s Brexit plans.
This is nonsense. And regardless of whether May’s deal passes through Parliament, such views demonstrate a worrying lack of understanding about what is actually happening. In fact, the trade-offs that the City is being asked to swallow are a microcosm of the trade-offs that the whole country is being asked to swallow. The only difference is that the City has already swallowed them.
Let’s just wind back the whole Brexit process and look at how it has gone for the Square Mile.
The City, in aggregate, wanted the UK to stay in the European Union. It didn’t get that. Then it hoped to at least maintain the “passporting” that would allow Uk-based firms to sell their services to European clients. It didn’t get that. So it downgraded its aspirations to a system of “mutual recognition” between UK and EU regulators, whereby the two sides would essentially trust each other to oversee the activities in their respective jurisdictions. It didn’t get that. Finally and forlornly it pushed for enhanced equivalence, a slight step up from what is offered to any country outside the EU. It didn’t even get that.
So the City has in fact got its fifth-best option, which is the default level of access available to any country in the world and something that was described by Chancellor Philip Hammond back in the mists of time (March) as “wholly inadequate”.
What is equivalence? Basically the European Commission looks at the financial regulation of a country, and, if it is deemed to be as tough as its own, allows the financial institutions of that country to operate in the single market. Sounds fine, right? And clearly the UK should qualify as its rules are currently exactly the same as the EU’S because it is currently in the EU. So, what’s wrong with equivalence?
Well, how long have you got? Equivalence has been cobbled together on an ad hoc basis over a number of years. The system is therefore patchy – it doesn’t, for example, cover many areas of wholesale finance. The granting of equivalence is not a technical decision (adhere to certain criteria and you qualify) but a political gift. Brussels recently granted the Swiss stock market equivalence but only for one year because it didn’t want to set a precedent ahead of the Brexit negotiations.
And, most dire of all, equivalence can be withdrawn at short notice. There have been reports that this might be extended from the current 30 days. But even if the notice period became as long as a year (unlikely), no serious company could operate with such a sword hanging over them.
Oh, and by the way, equivalence also requires the UK to accept at least partial ECJ jurisdiction. So equivalence is a step up from the chaos of a no-deal Brexit but no more than that. Hopefully the two sides will in time move towards “enhanced equivalence”, whereby each side would at least consult the other before withdrawing access.
In theory it would also ensure that existing contracts could still be honoured even if access were withdrawn. But don’t hold your breath.
As it stands, equivalence is a halfway house. It is not as good as being in the EU and it doesn’t afford the UK the freedom to tear up the rule book and create Singapore-on-thames.
It is important to be clear that this is not a disaster for the City – it will still be one of the world’s most important financial centres. Regulators on both sides have done a lot of work to ensure that clearing can still operate as before and old derivative and insurance contracts do not have to be rewritten.
But Brexit will lead to greater costs, the duplication of some activities, more complicated regulation and higher capital costs. In fact, it’s already doing all these things. And they will be passed on to clients in the form of more expensive services, less choice and more fragmented markets. This means it will be harder for companies to raise money for investment and more difficult for investors to save for their retirements.
And this has been described as a win? I’d hate to see what defeat looks like.
‘The City has already swallowed the trade-offs the whole country is now being asked to swallow’