When Michel Barnier railed against “brass plate” access to the EU’s single market, Britain’s financial services firms knew they were uppermost in the former Brexit negotiator’s thinking.
Ever since the EU referendum vote in 2016, City firms have been quietly leasing space in Dublin, Luxembourg, Amsterdam and Paris to make sure they can conduct business with their EU clients without exporting more than a handful of staff. Most of the headquarters, jobs and tax revenues of Europe’s largest trading houses have remained in London. The question is, for how much longer?
Now, within a month of the transition period ending, Amsterdam has stolen London’s crown as Europe’s major share trading centre. Last week an average €9.2bn (£8bn) of shares a day were bought and sold on the Dutch city’s three main exchanges, compared with €8.6bn in London.
Likewise, the euro-denominated market in derivatives – instruments used to hedge against movements in currencies and interest rates – has flooded out of London to Amsterdam, Paris and, in a warning to the EU, to New York as well.
Believing they have a right to feel as aggrieved as the fishing industry, financial lobbyists watched as Boris Johnson allowed British firms to lose their EU “passport” to the single market on 1 January when the Brexit transition period ended.
The EU has said it could offer a deal that means City firms regaining “equivalence” – a mutual recognition of each side’s regulatory standards – though the approval system would be run by Brussels, making the UK a “rule taker”.
In the meantime, the EU is clear that it expects jobs and business to move from the City. Mairead McGuinness, the European commissioner for financial services, said last week: “There has been this discussion around movement of employment and investment. Already some has happened and it is likely that more will follow.”
Bank of England governor Andrew Bailey and chancellor Rishi Sunak want to bring London back under the EU umbrella, first with a memorandum of understanding due to be negotiated by the end of March, and then with a fully fledged deal, but not at any cost.
In a speech last week to City grandees, Bailey said any attempt by the EU to place stricter regulations on financial traders in London than on either equivalent EU centres or those in other countries – such as the US and Switzerland – would be unfair and most likely force the UK to walk away. Barnier has said the UK should commit to tracking every twist and turn of EU regulations in return for equivalence.
In the City there is a weariness and a sense of gloom about the prospects for a deal. Nevertheless, fund management veteran Martin Gilbert, former vice-chairman of Standard Life Aberdeen, says a deal should be a top priority for Johnson’s government. With more than 50% of fund management assets in London coming from the EU, it is clear why this arm of the industry would want a deal.
Speaking to the Observer, he said: “There are great opportunities for UK banks, insurers and asset managers in Asia, the Americas and Africa, but that does not mean the opportunities on the continent should be ignored.”
Gilbert is chairman of online money management firm Revolut, which had to switch 9 million EU accounts across the Channel after equivalence rights were lost. “Brexit has prompted a debate over divergence versus equivalence,” he said. “But much of the regulatory framework in place in Europe, in part driven and agreed by the UK when it was a member, works well and has benefited UK firms.”
Catherine McGuinness, policy chief at the Corporation of London, said she was also optimistic one can be negotiated about a deal: “If the EU is intent on sucking business out of the UK, first there is a limit to how much will leave, and second, it should realise the main winner will be New York and other centres.”
Kevin Ellis, chairman of accountancy firm PwC UK, agreed: “We mustn’t forget that London has a scale that isn’t easily replicated. For example, 2 million people are employed in financial services in the UK, and a million of those are in London. However, London does have to evolve to ensure its ongoing relationship with the EU and all of its trading partners.”
Abrasive attitudes to the City taken by Brussels, France and Germany won’t come as a surprise to the Bank or No 10. In 2017, French president Emmanuel Macron, standing on Downing Street, eschewed diplomatic niceties when explaining his position on the post-Brexit landscape: “I want banks, talents, researchers, academics and so on. I think that France and the EU is a very attractive space.”
And while Brexit has poured fuel on this fire, the desire to undermine the City isn’t even particularly new. With the launch of the euro, and the decision of Tony Blair and Gordon Brown not to join it, the Square Mile’s position as Europe’s premier financial hub had been seen by influential figures in EU capitals and policymakers in Brussels as a dangerous anomaly, posing a risk to the bloc’s economic stability.
The 2007-8 economic crisis was said by some to be the fault of a deregulatory “Anglo-Saxon” form of capitalism, and tensions have persisted since then. In 2011, David Cameron complained of “constant attack through Brussels directives” on the UK’s financial services sector.
Indeed, while there was some surprise that the UK did not try to get more for its financial services sector during the last year of negotiations, it was always a bit of a lost cause. The handful of equivalence decisions to allow UK financial services to continue to operate in the EU market were made purely on a temporary basis and to avoid any risk to its own economic stability.
The message from Irish commissioner Mairead McGuinness recently has been clear: don’t expect that to change any time soon.
Who gains from the UK’s loss?
The Dutch capital has been the biggest beneficiary of a move of share trading from London into the EU, with daily volumes quadrupling to €9.2bn (£8.1bn) in January compared with December, according to CBOE Europe.
Dublin was the most popular location for financial services companies moving jobs out of London, according to data up to October 2020 tracked by EY. A total of 34 companies, including asset managers, insurers and banks including the UK’s Barclays and Bank of America, said they had moved jobs to the Irish capital.
Low-tax Luxembourg is a favoured domicile for investment funds, and according to EY it was second to Dublin in gaining jobs. Credit Suisse, Lloyds Banking Group and Citibank have all moved jobs to the Grand Duchy.
President Emmanuel Macron, who is a former banker, has made clear his desire to attract more business to Paris after Brexit. A Parisian lobby group has estimated a gain of 3,500 jobs, among them workers from JP Morgan and Japan’s Nomura, as well as prodigal sons from France’s Société Générale and BNP Paribas.
The German city, home of the European Central Bank, has long been seen as London’s main European rival. It has gained hundreds of billions of euros of banking assets from US banks such as Morgan Stanley, JP Morgan and Goldman Sachs. German bank Helaba predicted 3,500 job moves by the end of 2021.
Trading in derivatives, contracts used to protect against market movements, was a key strength of the City. Yet US financial centres were among the winners after London’s share of global derivatives trade slumped from just under 40% in July 2020 to about 10% last month, data company IHS Markit said.