The UK finance minister’s annual Mansion House speech set a path towards steering the City of London towards new distant pastures, as hopes of gaining financial services equivalence from the EU evaporate. By Justin Pugsley.
What is happening?
At the annual Mansion House speech, UK finance minister Rishi Sunak pretty much admitted defeat on winning equivalence from the EU on financial services. However, he suggested that this gives the UK more leg room to pursue its own regulatory vision and to forge deals with non-EU countries.
He cited the US, where he wants to deepen regulatory co-operation; China, where he wants the UK to gain more access to its financial services market; and emerging markets as priorities. He also aims to enhance the UK’s edge on fintech and artificial intelligence, while pioneering green finance. If this comes to fruition, it could have a substantial impact on the City of London 10 years from now.
Why is it happening?
The UK’s regulatory regime is among the most EU equivalent of any third-country regime in the world. However, the EU is not awarding equivalence because it wants to build its own financial centre and does not want to reward Brexit.
This has cost the City business, which is why Mr Sunak is gazing so intently towards the rest of the world for new markets.
Brexit is also making the UK Treasury think carefully about tweaking the UK’s regulatory regime to make it competitive without endangering financial stability. Mr Sunak signalled this would all happen within the parameters of global norms, set by the likes of the Financial Stability Board, so radical deregulation is not on the cards.
What do the bankers say?
Bankers seem to have accepted Brexit and are moving on. EU entities can still conduct some forms of wholesale financial services business in the UK. And then there is a world of opportunity in digital, green finance and possibly from emerging markets if the UK can strike the right trade deals. Bankers are also aware that the UK is trying harder than ever to make itself an attractive location and maintain the City’s status as a world financial centre. Indeed, EU authorities have had a difficult time persuading London-based financial services professionals to ‘up sticks’ to move to an EU member state in significant number.
Will it provide the incentives?
Millions of words have been expounded on the downsides if Brexit goes wrong; however, some upsides might be emerging. The type of deals the UK is negotiating around the world are tailored to the UK’s strengths, which include digital, professional and financial services. These tend to be more profitable than, for example, car exports. They often include digital chapters and seek to create a bigger opening for financial services.
The financial services deal the UK is negotiating with Switzerland could become a trailblazer for the sector, possibly serving as a template for agreements with other like-minded countries. The EU did not prioritise financial and digital services exports in its trade negotiations, focusing instead on manufactured and agri-goods to suit Franco-German interests.
The share of UK exports has been shifting towards other parts of the world for many years, and less than 50% has gone to the EU since 2008. Brexit will likely accelerate this trend. Indeed, during the first quarter of 2021, there was a shift in UK imports from the rest of the world surpassing those from the EU, suggesting the pivot away from Europe might be happening faster than anticipated.
PwC’s forecast of the world's top 10 economies only includes two west European countries, Germany and the UK, in ninth and 10th place respectively, while six are emerging markets. The growth of new middle classes with savings, the expansion of the internet through low-cost satellite technology and the democratisation of finance via cryptoassets could present big opportunities for the City of London, providing it can adapt and stay relevant.
Meanwhile, the UK has applied to join the 11-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which looks hopeful and will improve market access to several densely populated emerging market countries, including Mexico and Vietnam.
In some respects, this is returning the City to its roots, when it helped to finance the development of many emerging market countries, including the US.
The City of London is entrepreneurial and as long as it can continue attracting the brightest minds, and providing the world does not descend into protectionism, it will very likely pivot away from Europe and continue to succeed.
