Post-Brexit: What Will Be The Impact Of Brexit On The City Of London?
By Amar Ali, Immigration Solicitor
One of the biggest worries about Brexit, among many others, was the potentially negative impact it may have on our financial institutions, and in particular, the city of London’s financial district. For a country of 66.25 million people, London punches far above its weight when it comes to financial services. It may only be a square mile in physical size, according to TheCityUK, it is, “considered one of only two full-scale international financial services hubs globally—the other being New York”. And, according to Z/Yen’s Global Financial Centres Index, London ranks second as a financial services centre globally. Much has been written and said about how financial services, banks, and investment companies will need to relocate to the EU in order to retain access to the European market, and that in doing so, the City of London will lose some of its valued status as a financial powerhouse. In this article, we will discuss the possible impact of Brexit on the City of London’s financial services sector.
Why Is The City Of London’s Financial Status At risk?
One of the main reasons that London’s status is at risk is that financial services were largely left out of the Brexit trade deal between the UK and the EU. This left a great number of question-marks over our future trading relationship on financial services. The two parties did agree, however, to construct a ‘Memorandum of Understanding’ (MOU) on financial regulatory cooperation by March 2021.
One of the main areas to be discussed and agreed is that of ‘regulatory equivalence’. The UK is reliant on the EU to agree that the UK has regulations which are equivalent to its own, in order to grant access to its market. Herein lies the problem; the UK financial sector is now reliant on a decision which will be made by Brussels to determine its EU trading destiny. It must be remembered that European centres are all actively looking to take as much business as they can from London. As Bloomberg states, “If anything, there’s an incentive for them to prolong the uncertainty and lure business away”.
Talks Have Started To Form The MOU
The UK has already started talks with the EU on how regulators can cooperate over financial services. According to the Prime Minister’s spokesperson, Jamie Davies, the UK wants to “preserve financial stability, market integrity and the protection of investors and consumers…We did push for a broader agreement on financial services as part of the negotiations, and the Treasury will continue that work with the commission beginning this week”. The government has confirmed that the Chancellor of the Exchequer Rishi Sunak and Economic Secretary to the Treasury John Glen will be heavily involved in the talks.
Many experts and professionals in the financial sector do expect some form of regulatory equivalence to be agreed. A survey by consulting firm EY of banking executives, money managers, and insurers, found a reasonable amount of optimism, with 76% of respondents saying they believed the EU would offer some equivalence. 8% of those polled expected a full equivalence pact. The difference between some and full equivalence will determine the extent of market access available to UK based financial services businesses.
Is A Second ‘Big Bang’ On The Horizon?
During the Thatcher era, rapid deregulation in the financial services market led to what many refer to as the ‘Big Bang’, helping the British banking sector to boom to its current size. Rishi Sunak now believes that ‘Big Bang 2.0’ is possible if the financial sector is carefully positioned. It is believed that there is considerable potential in exploiting products and services in which the UK is already making a name for itself, including fintech, green bonds and “sustainable” investment.
The risk is that by deregulating too far, this will prevent access to EU markets. As Peter Swabey of the Chartered Governance Institute says, “One of the strengths of the UK market is its governance so I think that any desire to deregulate on the governance front should be looked at very carefully”. As such, there will need to be a carefully calculated balance made between relaxing of regulations to attract investment in areas such as capital markets and fintech, and deregulating, which harms access to EU markets. As Julian David, the chief executive of techUK says, “A lot of people want to get in on this game so New York, Shanghai and the Middle East are the places that we should have a real eye on as we build on what we’ve got in fintech, notwithstanding that we still want to keep as much European business as we can”.
Anne Richards, chief executive of Fidelity International, believes the government should focus on “re-regulation”, not deregulation, “with the aim of creating a financial universe fit for the 21st century”.
Will The City Of London’s Financial Sector Survive Or Thrive?
Unfortunately, it is not possible to say at this stage how things will turn out. To a large extent, when it comes to EU market access, we are now reliant on the decisions being made by Brussels. This fact should come as a considerable concern to many who argued Brexit would put the UK in the driving seat and return its sovereignty. Thousands of financial sector workers and traders have already left for the EU, or are planning an imminent move. This is, in part, due to the fact that UK bankers can no longer try to sell transactions to clients within the EU directly, without the involvement of a third-party within the EU.
Final Words
While we are now in a post-Brexit world, we still do not know the true impact of the decision to leave the EU. It may take years for this to really take shape, especially in the financial services sector. Anyone who believes that the status-quo will be maintained is likely to be sorely disappointed. The battle to achieve the Tory government’s goal of a deregulated ‘Singapore-on-Thames’ will either prove to be a pipe-dream or a solid-strategy; only time will tell.
