Governor’s call to arms

The choice of Britain’s EU negotiators to put fishing ahead of finance and sectors such as music was highly political. The argument about the City was always that it is so dominant and willing to bear risk that Frankfurt, home of the european Central Bank, would never want to take up the cudgels.

If Andrew Bailey is believed, then this is exactly what is happening as the battle over trading in £1trillion of sophisticated derivatives contracts a day heats up.

Two weeks ago at the Mansion house in London, Bailey asked the rhetorical questions as to why, if countries as diverse as the United States, Singapore and Brazil have been granted ‘equivalence’ on financial services rules with Brussels, the UK was being left on the sidelines.

In an appearance before the Treasury Select Committee, the Bank of england’s Governor toughened his rhetoric, arguing with untypical ferocity that the EU was engaged in a ‘very serious escalation’ in the battle over financial services.

Loss of trading in euro-denominated shares is one thing. Losing dealing, clearing and settlement of derivatives contracts would be quite another.

Bailey is fearful that the EU is prepared to exert pressure on locally based financial firms to shift derivatives deals out of London to Continental centres.

earlier indications from UK regulators were that the EU has been prepared to grant the UK temporary equivalence on derivative contracts. It didn’t want to take on trading obligations more in keeping with liberal capitalism than europe’s co-ordinated market approach.

But if the EU were to migrate a chunk of trades to Frankfurt, Amsterdam and elsewhere it could be thin edge of the wedge. Balkanisation of derivatives trading would be destabilising, making it harder to regulate.

It would reduce liquidity, raising the cost of contracts and the potential for serious disruption. It is a hair-raising possibility which shows a degree of vindictiveness within the EU that can only reinforce the conviction Britain was right to get out.

The surging pound, now trading at $1.41, tells us what the markets think.

Wealth choices

The achievement of Antonio horta-Osorio at Lloyds has been to make the bank boring. The pizzazz provided by his personal life and the £60m taken through pay and bonuses appears a high price to have paid for a new normal.

But the Lloyds he inherited after the financial crisis had a recklessly unstable balance sheet, was in the forefront of the payment protection insurance (PPI) scandal and had the overhang of a big Government stake.

horta-Osorio tackled all of that, although the bank has never satisfactorily made good on the damage wreaked by fraud at the former HBOS branch in Reading.

Lloyds’ laser focus on domestic consumer banking has left it exposed to thinner profits in an era of low interest rates, in spite of a huge, historic market share in mortgages. It has accumulated large cash deposits in the Covid era but this has not translated into profit.

A combination of lockdowns, which reduced household borrowing, and pandemic bad loans shrank pre-tax profits to £1.2bn, down from £4.4bn a year earlier.

So how does Lloyds grow? The plan left for successor Charlie Nunn, a refugee from HSBC, is to expand wealth management from just 2pc of the market at present to 15pc by 2023. The laudable aim is to do this organically, trading on its partnership with Schroders. The temptation might be a short cut through acquisition.

Barclays Smart Investor partly grew out of the purchase of Charles Schwab europe in 2003. Morgan Stanley spent £9bn-plus on online brokerage etrade last year. Lloyds could buy a financial adviser, such as Rathbone, or fintech player Nutmeg.

If it really wanted to go big it might think about investment platforms such as AJ Bell or hargreaves Lansdown. In the grand old days of the late Brian Pitman it had no hesitation about stalking the biggest prizes.

Finding solace

The prospect of fallen star Neil Woodford making a comeback to fund management ought to fill the industry with horror.

The public silence has been deafening. Full marks then, to former Newton boss helena Morrissey for bravely speaking out against the dangers of celebrity managers.

If Woodford wants redemption, he has chosen the wrong path. The Gogarburn (see page 78) route is the way to go.