The City of London felt neglected during the UK’s trade talks with the EU, but as the British government looks to prioritise promoting the City, new opportunities could beckon.
What is happening?
Much of the recent news about the City of London in relation to Brexit has been negative. This includes trading in euro-denominated shares and carbon emissions fleeing to the EU. So far, the number of jobs shifting from the City to the EU is low, at around 7500, compared with some predictions that it would be as high as 200,000. However, once the Covid-19 pandemic has passed, thousands more may decamp to the bloc as travel becomes easier again.
Despite this negative backdrop, investor interest in City of London real estate — the buildings that house all those traders and bankers — started reviving late last year. Even a new trophy development, 55 Gracechurch Street, has just been approved by the City of London Corporation, the square mile’s municipality. These events are doubly surprising because some form of remote working is probably here to stay in financial services following the pandemic.
But some real estate investors are clearly bullish over the City’s prospects, even though the EU may not grant equivalence to the UK for financial services.
Maybe they have good reason to be optimistic. Though it might not have been evident that financial services were a priority in the UK’s trade talks with the EU, they have figured more prominently in trade talks with non-EU countries. And in terms of regulatory reforms, UK finance minister Rishi Sunak seems determined to ensure UK financial services remain globally competitive. This year he will reveal more detail over how the UK’s financial regulatory regime will be repositioned. One possible advantage of not gaining broad EU equivalence is that the UK will be freer in its approach.
Why is it happening?
The City of London needs new opportunities outside the EU, to replace business lost with the bloc. Recent UK trade deals with other countries are mostly cut-and-paste jobs of existing EU agreements — though the one with Japan does contain enhancements on data, which could be useful for financial services.
The UK’s application to join the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership, if approved, could be interesting as it provides, by international standards, an advanced chapter on data and digital services (although many bankers will remark that this is inferior to being in the EU’s single market).
In terms of changes to the UK’s regulatory regime, not much is expected to happen to the core of it. It will likely become more principles-based and more nimble, helping the City of London to capture new opportunities in fast-moving areas such as fintech, cryptoassets and green finance. Also, rules around companies listing in London are likely to become more flexible, improving its attractiveness to tech and foreign companies.
Meanwhile, the UK is likely to promote an ‘outcomes-based’ approach towards cross-border access to financial services. If it catches on — and it does have supporters beyond the UK’s shores, such as the US Commodity Futures Trading Commission — this could open many new opportunities for the City of London.
What do the bankers say?
Though certainly not the view of all bankers, Jes Staley, chief executive of Barclays, believes Brexit is an opportunity for UK finance, with more upside than downside.
He said the UK has an “opportunity to define its own agenda” and that it must make sure that the City is one of the best places to manage capital flows in terms of regulation, law and language. And the government seems to be all ears.
Will it provide the incentives?
Whatever reforms the UK makes to its regulatory regime, it must not degenerate into a light-touch approach, with many bankers warning against this. Besides, the big financial institutions have made vast investments to become compliant with tougher rules and these have enhanced trust in London’s wholesale financial services.
And the City might just get lucky too. Beyond opportunities in fintech and green finance, some analysts think a good old-fashioned commodities supercycle might have started; even the prices of much reviled fossil fuels are firming. If this is the case, then the City is perfectly placed to finance the production and trade of all these commodities, and to manage the vast new wealth they will create for their owners.
