Prospects for the UK
financial services sector remain rosy.
The UK financial services sector (including related
professional services) accounted for over 10% of GDP and employed more than 2.3
million people at the end of 2019 (Source: CityUK). Moreover the financial
services sector is the largest UK taxpayer (more than 10% of all tax revenues)
and the biggest exporting industry generating a trade surplus of US$77bn in
2019 (including related professional services some US$102bn) - the largest in the
world.
Yet in contrast to goods and manufacturing, and even the
tiny fishing industry (accounting for 0.02% of GDP according to the ONS) there
was barely a mention in the Trade and Co-operation Agreement (TCA) bar a Memorandum
of Understanding which so far has largely been limited to derivatives so as to
maintain EU market liquidity. This was no oversight. The EU has a large goods
trade surplus amounting to £97bn in 2019 with the UK but a services deficit of
some £18bn with us (rising to £44.3bn for financial and related services alone,
according to the ONS). In fact over a third of our financial services exports
currently go to the EU.
The EU countries have longed to see EU financial market
business move within its sphere having viewed the City of London with suspicion
and envy, and a belief that such activity should be in the core Eurozone. Its
aim in the negotiations was if possible to avoid such agreement whether this
would be in terms of mutual recognition or in some form of equivalence - other
than dynamic alignment - so that it could chip away at London’s dominance of
the European financial markets. (The City accounted for nearly 80% of its EU
foreign exchange trading, three-quarters of derivatives trading, 85% of hedge
fund activity, and 60% of capital market business). It has largely viewed this
strategy as based on a zero sum game when in reality there are costs associated
with such a policy of market fragmentation in terms of the loss of economies of
scale, and of expertise and the knowledge that London has. The EU’s approach
was greatly facilitated by a poor negotiating strategy by the Tory government
under PM May and a “Remainer” Parliament (and other institutions) that resulted
in the UK giving into the sequencing of negotiations preferred by the EU that
resulted in the Withdrawal Agreement and the loss of our negotiating strengths
including payment of the £40bn divorce bill, the effective splitting of the UK
between GB and NI, and the granting of freedom of EU residents to reside in the
UK.
Anyway the damage to the City has been nothing like most
commentators had predicted, just like with Brexit more generally. Many
typically forecast the loss of up to 100K or even 200K jobs. A London Stock
Exchange Survey in 2016 concluded that 232K financial services could leave the
UK. By contrast I suggested that it would be more like 10K and that the City
would continue to prosper in various reports and speeches that I have made (eg
Brexit and Financial Services 2017). The reality is that some 7.5K jobs had
left according to the EY Financial Services Brexit Tracker at the end of 2020. It
also states though that some £1.6trn assets had been transferred – a figure
that has increased since. Moreover the
number of people working in the City has continued to rise since the referendum
result. An FT Survey of 24 large international banks and asset managers in
December found the majority had actually increased their London headcount over
the past five years.
There will be further negotiations between the UK and the EU
on access to financial markets in the coming months that may yield further
agreements in areas such as reinsurance but they are likely to be modest. The
EU will only agree to anything if it clearly benefits them. The EU’s preference
is for the City of London to follow EU regulations very closely. But as Andrew
Bailey the Bank of England governor recently said we should not become a rule
taker, which would not only lead to us losing the opportunity for better and lower
regulation but also as Michel Barnier, the EU’s Chief Brexit Negotiator said
any access to EU financial services is a gift from Brussels than can be
withdrawn freely – clearly one cannot operate under such a threat. We should be
focusing on how we can protect our position as a global financial powerhouse.
And anyway despite diverging from EU rules and the loss of passporting,
international law protections will still allow financial institutions to
provide certain cross border services to wholesale clients
The City of London is one of only two leading global
financial centres (See the rankings in the Global Financial Centres Index
produced by Z/Yen consultancy) and its future lies in being a global centre,
being innovative and not hampered by unnecessary regulation and high taxation.
We are competing against the likes of New York, Tokyo, Singapore, Shanghai and
even Dubai or Bahrain. Not so much against Frankfurt, Paris, Amsterdam or
Dublin, none of which can be viewed even as serious rivals as a leading
European financial centre. For example in the rapidly growing fintech sector,
our rivals are really only Silicon Valley, Hong Kong and Singapore.
The best approach is what Barney Reynolds of Shearman and
Sterling LLP has dubbed the World Financial Centre Model where we go it alone
and design a more attractive regulatory framework, freed of the EU’s
restrictive policies and process-driven approach. In light of this, UK
Chancellor Rishi Sunak is promising a “Big Bang 2.0”. While good governance
remains paramount there is a desire to cut unnecessary red tape with changes to
the EU rulebook such as on MIFID2, and Solvency 2 for insurance companies. Also
recommended as by the Institute of International Affairs is that the UK form
alliances with other major financial centres through multilateral mutual
recognition. Switzerland and Singapore would be two obvious financial centres.
Pivotal to the success of the City going forward will be the
Fintech sector. It is worth £7bn employing over 60K people in the UK and
includes brands such as Monzo, Revolut and Starling Bank. An independent Review
of the sector led by Ron Kalifa was
launched in the Budget of March 2020 to support the City’s competitiveness through
“ensuring it has the resources to grow and succeed, conditions that are right
for the widespread adoption of financial technology, and that the UK’s global
reputation for innovation is maintained and advanced. Also important is Green Finance
where again it is one of the world leaders alongside specialist financial
centres Amsterdam and Zurich. Over the last three years the amount raised in
green bonds has almost tripled from £8bn in 2017 to £22.4bn in 2020 with 139
listed on the London Stock Exchange. There are also now 22 green funds listed
on the LSE. Furthermore the UK is leading the world in committing to reaching
net zero carbon emissions by 2050. It has committed £12bn investment in green
finance over the next 5 years among other things.
The City has a long history of resilience, adaptability and reinventing
itself. It survived the 1930s and two world wars. It saw the rise of the
Eurobond market in the 1960s as a result of US balance of payment controls. And
it prospered after ‘Big Bang’ which was launched in October 1986 by the
Thatcher government with its extensive market deregulation. Finally, it was
unaffected by the UK’s decision to join the Euro. In any case despite the lack
of agreement the City prepared well for Brexit and I have no doubt that the
right steps will be taken to ensure its future prospects are rosy.
