Brian Caplen blog 2016

In the Brexit trade discussions, finance looks like being sacrificed to fish. Is finance ready to swim without borders?

Former WTO director general Pascal Lamy pointed out in a recent BBC discussion programme on Brexit trade talks that fish – one of the most contentious issues along with state aid – do not respect borders. They swim where they please without asking the permission of either the UK government or the EU.

The fishing industry accounts for roughly 0.12% of UK GDP whereas finance’s contribution is closer to 7%, it delivers 10% of total tax receipts and regularly notches up a huge trade surplus. Anyone apart from a Brexiteer must therefore be mystified as to why fish not finance is centre stage in the current very tortuous Brexit trade negotiations. The FT recently reported that the UK is set to secure less on financial services with the EU than in the recently concluded trade deal with Japan. Another report suggests that the future direction of the EU on finance is becoming increasingly protectionist.

But is all this at odds with the future direction of the global economy whereby technology allows for deals to be executed anywhere and competitive advantage has more to do with Artificial Intelligence and data than having on the ground operations? Bankers have always been adept at swimming through reeds anyway and in the new environment might they become as free as fish? There are some reasons for believing this is the trend but also some working against it such as the fact that finance is more highly regulated than most industries and national champions are likely to retain preference in business allocation.

Is all this at odds with the future direction of the global economy whereby technology allows for deals to be executed anywhere?

The Brexiteer argument has always been that business lost in the EU will be more than compensated for by new business from fast growing areas of the world such as Asia. As the UK does nearly 40% of its financial services trade with the EU compared with 0.5% with China and 0.4% with India, the scale of the repositioning involved is enormous. Some critics have wondered anyway whether Asia will really be looking to London to supply its financial needs or whether it would prefer to rely more on its own firms. In other words, UK banks swimming away from the EU will not have the wider ocean completely to themselves.

In a new report from the think tank New Financial, the argument is made for accepting Brexit losses as a fait accompli and moving gradually to a regulatory regime that enhances the UK’s appeal in global markets. This might involve changes to EU initiatives such as Solvency II (that inhibits pension funds and insurance companies from investing in infrastructure) and Mifid II as well as in prudential supervision, bank capital and structure. The report recommends the UK take the lead in digital regulation, in ironing out the tax bias towards firms funding with debt as opposed to equity and in exploring a third way between private and public markets for companies not ready to do a full listing.

Finance may not ever swim quite as freely as fish but changes such as these would help make the global ocean seem half full rather than half empty.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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