Financial services left in the cold amid Brexit turmoil

Notably absent from the cross-Channel shouting match, financial services is one of the losers in the scramble to make sense of the UK's EU exit. The writing has been on the wall for over four years, but the UK, and indeed the EU positions, on this economically important industry have become tangled and confused.

As we approach the end of the transition period, even a basic trade deal is touch and go. Vital interests are at stake, but sadly financial services does not appear on the UK’s agenda. Fish looms large and vague notions of industrial policy remain seemingly formidable obstacles. Upholding the rights of City firms to continue to operate across the EU looks now sadly doomed.

There was a time when UK governments, particularly Conservative ones, used to care about the City. Financial services with its ‘invisibles’ contribution – transactions with a not involving physical goods – to the nation’s balance of trade, and substantial annual cheque to the exchequer, is one of the countries success stories, a national champion if ever there was one. Some nations go in to bat for their car companies, others for their yogurt makers. The UK’s batsmen clearly have set themselves very different, less obvious priorities. It is not really clear economically or industrially what these are, but UK financial services is not one of them.

Lack of priority from the UK negotiators has exposed the UK financial services sector to competitive stress from the EU. This was always to be expected. Perhaps the political assumption was that financial services is sufficiently creative and adaptable that it will simply take these trends in its stride. The sector will adapt. But as industry veterans know, whereas the institutions themselves will carry on, it is the City of London, the place, which will be the likely loser. But there have been mistakes and faults on both sides and it would be wrong to simply blame the UK side for the outcome.

During the Brexit negotiations ordeal, the UK based financial services sector did not benefit from air cover. But the lack of a plan lies not just on the UK side of the discussions. It is interesting to note that the City found itself pitted against a fragmented set of national aspirations with a clutch of cities competing for the spoils in place of a centralised cohesive EU with a plan.

Instead therefore of relocating some of the London based functions to a shiny new EU hub, the result is a patchwork quilt of different migratory businesses in scattered locations. UBS chairman Axel Weber spoke recently of the EU’s lack of vision and cohesion in financial services and the extraordinary plethora of regulatory regimes. There may be some hope for the London hub.

There is a second peculiarity to this stand-off with the EU. The insistence that activities and transactions involving the euro need to take place and therefore be regulated on EU soil, is a strange one. While it is consistent with the deep distrust of the City style of regulation, it is another attempt at deglobalisation. Even the Americans, never usually shy of stretching their regulatory reach, do not insist that all US dollar-linked operations take place in New York.

Certainly, the power of the Anglo-Saxon vision of principles-based, lighter-touch regulation and growing market power did not fit easily with continental European philosophies and industrial priorities. Brexit has therefore provided the necessary cover to challenge and roll back that vision.

In efforts to limit some of the damage, the UK regulators have offered access to the UK market for EU operators under the banner of equivalence, but the EU side has refused to reciprocate. Equivalence is a strange and uneven mechanism – a unilateral arrangement easily and rapidly revoked on the basis of caprice or local political expediency. Lawyers have long pointed to its inadequacies. Today this is the best the City can hope for, but even this is not forthcoming today, although it has been granted to other third part jurisdictions such as the US, suggesting once more that the EU has political and commercial objectives at the heart of its strategy aimed pointedly at the City.

As the UK government juggles its other priorities, it may have overlooked the importance of this equivalence technicality. In a debate in which I spoke four years ago, that notable fund manager and politician Jacob Rees-Mogg very casually dismissed concerns about a likely absence of equivalence recognition as just more unjustified worry. Now we know where we stand and already a lot of functions have been moved to other EU cities.

The City will nevertheless remain a hub and will concentrate on much of the 75% of its operations that are not EU focused. It will fall back on its strengths of language, law, time zone, culture and deep pool of talent. Fragmentation of financial services across the EU may leave the door open in future for a resilient London.  

Financial services and the UK authorities will need to repair their frayed links, reset their relationship and look ahead. After all the government now has a few large bills to pay – financial services is a more likely source of cash than the cold waters of the North Sea.

Tim Skeet is a career banker in the City.