Brexit is creating existential angst for the City of London but it’s unlikely the City will be replaced as the global financial centre of choice.
I remember a long conversation between myself and my boss back in the 1990s when Frankfurt became one of the liveliest markets for derivatives and futures trading. His prediction was that London would lose its shine over the next 25 years and Germany would take over.
It didn’t come true.
Writing in the Guardian in 2011, Will Hutton, executive vice-chair of the Work Foundation, argued that a reformed financial system in the UK was needed to support innovation and investment. “In 2035, there is thus a good prospect that Britain will be the most populous (our birth rate will be one the highest in Europe), dynamic and richest European country… My caveat is if the City remains strong, in which case economic decline and social division will escalate,” he wrote.
This is a key question – and, notably, Mr Hutton was writing before Brexit and Covid-19.
Mark Boleat, former policy chairman of the City of London Corporation, wrote an article in the Evening Standard in 2017 about the consequences of Brexit on the UK and the City of London: “[If] the UK moves to a third-country arrangement with the EU, without any regulatory equivalence, and its relationship with the EU is defined by World Trade Organisation terms, up to 50% of EU-related activity (£20bn ($26bn) in revenue) and 35,000 jobs could be at risk, along with £5bn of tax revenues a year.”
These are just two examples of a surplus of doom-mongering and scare stories.
Yet so far, such predictions have not come true. In 2018, the UK’s Office for National Statistics showed that exports from the UK’s financial services sector climbed from £78bn to £82bn and that the balance surplus rose to £63bn, making finance the biggest contributor of any sector of the British economy. It is for this reason that we keep coming back to this question in the UK: will it stay that way?
According to Ernst & Young’s Financial Services Brexit Tracker in October 2020, the UK has seen 7500 jobs move from the UK to Europe since 2016, along with $1.6tn in assets.
The reason I am writing about this now, in November 2020, is that we are about to reach the end of the road and go over the cliff into the unknown. The moment when the UK leaves Europe with or without a deal, with or without a face mask, with or without a clue.
What will happen?
Well, I’ve watched the doom-mongering and scare stories for four years and I don’t believe them. First, the job losses are far fewer than originally forecasted – 7500 versus 35,000 – and the loss of assets is not the same as the loss of revenue. The movement of assets is a concern, but the one area that the UK expected to be hardest hit by Brexit was euro clearing. That hasn’t happened.
The €100tn interest rate derivatives and forward contracts market, for example, is dominated by LCH, the London Stock Exchange’s clearing house. Eurex, the key German player, expected to gain a lot more of this market but has seen a “slower growth path… primarily due to Covid-19 and its implications”, according to a recent comment from Eurex Clearing board member, Matthias Graulich.
In other words, markets stay where there is liquidity but, more than this, where there is the talent pool and network of buyers and sellers in those markets. That network is firmly in London, even while many of their traders, buyers and sellers work from home.
A unique status
And yes, I expect that you will all say that I’m biased as a Brit, but if I were giving a prediction for 2045, I would still say that London will be the primary European global financial centre. I don’t say this for nationalistic reasons but because I had this debate 25 years ago and could not see a way in which other European centres could ever build that pool of talent, liquidity, network and platform. And I still don’t see it.
In fact, the strength of the City of London is nothing to do with the UK leaving Europe, deal or no deal. It’s far more to do with capability. We have seen that shown by Singapore, Dubai, Hong Kong and more. We will continue to see that in London in the future.
Finally, I have a strong belief in the future of the City of London as a financial centre because of a little-known fact: it is actually a separate jurisdiction to the rest of the UK, as created by a quirk of history dating back to the Magna Carta of 1215. That constitutional document enshrined the City of London and gave the Corporation of London, its government, a special status within the constitution. That special status has been upheld by a stream of charters and privileges over eight centuries, all of which protect the City from external interference.
Therefore, to all the doomsayers and scaremongers – prove me wrong.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
This article first appeared in the November edition of The Banker magazine. View a digital edition here.
