Will the City lose out if we leave the EU? It helps to look at this question from two points of view. First, what are the City’s innate qualities that attract business? Second, does EU membership enhance or undermine its basic strengths?
London was a global financial entrepot long before Britain joined the EU in 1973. It established itself when Britain was at the height of its economic and political power in the nineteenth century, and its influence has been extended into the post-imperial era by the skill sets resident in London, the English language, and a time zone that allows for sameday working with both Japan and the US. In the 1960s and 1970s, US financial repression spurred the development of the Eurodollar markets in London. In 1986, the Big Bang deregulation cemented the City’s dominance in global capital markets.
Many of these advantages could survive Brexit. But membership of Europe’s Single Market has given London an additional strength. The City has become a passport location for US and Asian firms seeking to sell financial services across the EU. It has also become an attractive place for large EU firms (Deutsche Bank, BNP, and Societe Generale, for example) to locate some of their activities.
This second advantage will disappear if we are no longer in the EU, as the French finance minister rightly argued recently. And reliance on the first advantage is unwise since the global marketplace is being rolled back in favour of national approaches in the wake of the financial crisis.
But what about the red tape which Brexiteers suggest is imposed on the City by Brussels? There is no doubt that market players have grounds for some complaint at the burden of regulation. The multiple initiatives introduced since the crisis may each have been well intentioned. But collectively they are probably more onerous than needed.
But is Brussels really to blame? My answer to that is in large part no.
We in Britain are pretty good at creating red tape ourselves. Our supervisors frequently feel political pressure to ‘do something’ about whatever is the latest problem to emerge in the media. If they ignore the court of public opinion, they will be accused of ‘light touch’ or being asleep at the switch.
For example, the regulation of bankers’ bonuses is often blamed on Brussels. But in reality the clamour for action started in the UK. The same is true of Solvency II, the rules that underpin the soundness of insurers. The industry complains about the cost of these regulations and blames Brussels, an impersonal and easy target; the British government and regulators are equally happy to hide behind the EU. But the push for Solvency II originated in Britain.
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Likewise, the Vickers report, which brought about the unpopular ring-fence between old fashioned banking and the so-called casino of investment banking, was a London regulation not an EU one. Similar measures under discussion in the EU have been less harsh on the banks than those devised in the UK. So I can’t imagine we would create less regulation if we were out! Nor would regulation be liked more just because it was made in Britain.
Moreover, many regulations introduced by Brussels are in fact the result of global agreements, brokered in bodies such as the Financial Stability Board in Basel. They are not invented in Brussels even if they are implemented through it; if we leave the EU we will just have to do that implementation ourselves. And it is worth noting that the EU has launched an initiative to roll regulation back by calling for evidence of unnecessary burdens and unintended consequences. No such initiative has been undertaken in Britain.
Even if one still takes a dim view of the EU’s regulatory record, there is the question of how best to improve it. Brexit would not exempt City firms from EU rules if the City wishes to retain any vestige of the passporting advantage. By staying in the EU, the City would retain real influence over those rules, even if sometimes we get outvoted. London-based hedge funds may bridle at AIFMD—the EU regulations for the ‘alternative’ asset management industry—but would undoubtedly have been much worse absent our hand in improving it. You should have read the first draft.
Then there is the question of our global influence. Britain’s financial expertise enables it to punch above its weight when it comes to global standard setting. This is enhanced where the UK and EU combine forces, particularly when confronting the weight of US insistence on approaches that work for them but not for us. Accounting standards are an example. If we leave the EU, this concerted power will be far harder to muster. Britain and Europe will both lose. Looking to the future, China may eventually emerge as another formidable player in financial rule setting. We need to be ready.,
The bottom line is that leaving the EU would damage the City. What will take its place as a leading earner for our service-based economy?
Edited by Sebastian Mallaby
Some thoughts.
– Any ‘access tariff’ – in whatever form it took – could be offset in the tax code, and recoupable by the Revenue either by a similar level of tariff being imposed on EU services imports (60bn) or through the 9bn recouped by no longer having to pay EU membership. The break-even point cost/benefit for and ‘access tariff’ is 10% on 90bn exported or 30% on the balance of trade. Both of these are fantasy figures.
– Passporting only requires a shell subsidiary which the City of London could provide free of charge to all businesses based in London. Many global businesses operate a similar system through Dublin and Luxembourg.
– Regulation that originates in the UK can be reformed by the UK. Plainly this isn’t the case in the EU. We would only have to submit to EU regs when dealing with the EU and our more “liberal’ attitudes would force change in the EU if they wished to br competitive.
– Global regulation – and globalization generally – is the EU’s own direction of travel, with TiSA and the Really Good Friends of Services Group. We could take advantage of the opportunities the EU readily perceives far better as a quick witted ‘one’ rather than an unwieldy ‘twenty eight’.
– The City will benefit by our Leaving the EU. As will our democracy.
I have worked extensively on Solvency II. For those of you who do not know about it, the directive is a far reaching piece of EU legislation designed to improve the insurance industry. It is very expensive to implement and thousand of insurance experts have worked on it over the last 5 years. The industry is currently quoting implementation costs of between 2.5 and 4 bn. As a result you would expect it to bring real benefit to both the insurance industry and also the consumer.
Hand on heart I feel that the legislation has not delivered the benefits for several reasons.
1. It is overly complex and interns of reporting, very expensive to comply with. (In one of the regulatory reports there are over 15,000 data fields)
2. Our insurance industry is already very good with a world wide reputation which it richly deserves.
3. It was already ably regulated by the FCA, PRA (FCA) and Lloyds of London if you are in the Lloyds market place.
4. It has made every insurance product including pensions more expensive. (The Equitable life has just written to all its policy holders and referenced SII as being one of the reasons for an increase in costs and indeed they are correct to do so).
5. I am unable to name a major insurer who fell and therefore consumers lost out due to the last banking crash. Therefore indication that UK insurers were already able to withstand financial stresses. By comparison we lost most major UK Banks which were already under EU legislation.
In summary the EU by implementing this directive, has made EU insurance products more expensive, therefore less globally competitive without providing a better product for the consumer.