Where is the City’s ambition? Some consider the City to be the home of ravenous ambition, both individual and corporate. That might be true, but it is not the question of the hour; that question relates to the City as a financial centre, as a financial jurisdiction and as a hugely important part of the nation’s economy. What does the City want in the new life, post Brexit, that this country has chosen?
Sometimes you just feel like saying “why bother to ask?” You know that what you will get is a torrent of grief about the damage that Brexit will do to the country, how the City should be at the heart of Europe, how important passporting is and how the EU is going to take us to the cleaners. But that is the last war; we need to look at the way that we are going to use the opportunity, a rare opportunity, to shape our financial regime for the future. That would be so much better than spending the year bemoaning the past.
Citizens are broadly aware that prophets of economic doom have turned out to be quite wrong and that the UK has been the best performing European economy. Since 2016 thousands of British SMEs have abandoned EU markets but have been winning far more lucrative export contract all around the world. The key high growth markets for our exports are North America, the Middle East and South Asia. Exports to Taiwan have grown 40% in the last year.
Nevertheless, the gloom and doom factory is hard at work. Many of the loudest voices, including a number of media organisations, have adopted a strategy, or is it just a habit, of speaking only of privileges lost, contrasting a dark future with a wonderous past, and doing so entirely in the context of doing business with EU clients, as if there were none other. There is also a striking tendency to focus on ways that the EU can damage the City, saving EU negotiators lots of hard work, while ignoring ways in which we can discourage damaging measures, how we can take advantage of the EU’s liking for self-inflicted wounds and how we can maximise the value of financial services delivered to the wider world.
It is a strange thing to see City elders publicly fingering those issues that they hold most dear. The City is supposed to be full of dealers, traders and negotiators. They, of all people, should be alert to the obvious: the more you say you want something, the more the price goes up. Keep on banging on about ‘delegation’ and guess what. “Yes, my friend, you can keep delegation but you must let us have your fish, your marbles and your freedom to …………” You know the story. More effective, perhaps, to talk up ways that the UK can take advantage of any such daft restriction, while repeatedly pointing out what damage will be done to EU-domiciled investment funds if they lose their freedom to choose who manages their assets. Or we can just to ask where, in the pecking order of EU considerations, features the consumer. Little wonder that the Brussels mob have spawned a raft of populist parties who show they do care about the poor bloody voter.
And there is another strange sight too: how passport-carrying financial directives have moved from being enemies of the industry and the people alike to hot competition for the Seven Wonders. Something of a case study, really. AIFMD springs to mind. Hands up all those who supported it when it was introduced. Bet you didn’t. So, why now so popular? Isn’t it because, since the referendum, it is fashionable to speak highly of the EU? Well, at least partly? But maybe it is also because of the EU’s self-fulfilment. Ever since bringing in AIFMD, in the teeth of opposition, the Commission, with a little help from its friends, has sought to eliminate other means of cross-border business, the very concept that they claim to prize.
So, what is it to be? What does the City want, trying to be realistic and, yes, starting from here? Some would say that dynamic alignment would do nicely. Others might observe that that provides no advantage in global markets and that EU regulation made by 27 nations, most of whom have no discernible financial services industry, might, just might, not be that considerate to a sector that many so dislike. Those of a more competitive spirit might note the opportunities for carefully crafted regulation that works against the interests of the City, entirely fortuitously, you understand.
The alternative, so widely known as divergence, which might arise from our own initiative but also, potentially, through our inactivity while the EU diverges, offers scope. Anyway, that is the way we are going and the City would do well to learn to like it. Yes, there may be a price to pay for diverging – the possible loss of any equivalence generously granted – but let’s measure the pros and cons when we get there, never forgetting that equivalence may have a short shelf-life in any event. Who will tell us what divergence might bring? Whose will be the voice that rattles the EU into trying to buy us off? Then let’s measure the pros and cons and see whether they are paying enough for our forbearance – that would be a change. What might it be? Investment funds that are safer and more liquid? Banking that is the best capitalised in the world? Insurance that is recognised as the best value? Properly regulated lending? Mortgages that truly cross national borders? Improvements to EIS, making it much less demanding for SMEs seeking risk finance? And are the regulators themselves the best we can devise? Answers on a postcard, and a loud one at that.
So, before we cast aside all such opportunities, let’s not forget that the EU itself, while expressing concern that a fully independent UK might plunge into de-regulation, is now looking at dropping recently introduced measures, strikingly including the ban on various inducements. We may not be able to prevent them from racing to the bottom, but there is no need for us to forego our place at the top.
Howard Flight and Oliver Lodge
March 2020
Lord Flight was a Conservative Member of Parliament 1997-2005 and a Shadow Treasury Minister 1999-2004.
Oliver Lodge is a regulatory consultant and an elected Member of the City of London Corporation
This article was originally published in The Daily Telegraph on 2nd March 2020