With one year to go before the UK’s departure from the European Union, an acceptable deal on financial services between the UK and the EU looks likely.
This is undoubtedly good news. But to make the most of Brexit, it is vital to consider how the City’s perspective has evolved, and what needs to be done to ensure that the global financial services industry will remain in the UK come what may.
The City has moved its post-Brexit position massively since the Referendum.
In 2016, the City of London Corporation’s policy chairman, Mark Boleat, told City A.M. that passporting is an absolutely necessity for investment banking.
Six months later, the City’s main lobby group, made up of the world’s largest financial service companies including five EU27 headquartered banks, moved away from wanting EU financial passports to advocating for mutual recognition instead.
Now the consensus opinion, from both multinationals and SMEs, is that the City must not become a rule-taker after the UK leaves the EU.
For now, London’s position is stable, but not invincible. London has again topped the Z/Yen Global Financial Centre Index, which ranks the competitiveness of financial centres, but the gap between the City and its non-EU rivals is closing.
To ensure that London remains competitive internationally, the UK regulatory authorities and Treasury must take the opportunity of Brexit to match regulations and taxes in line with Britain’s major competitors, rather than with the EU.
The UK regulator’s first move must be to review some of the EU’s one-size-fits-all-policies.
For small local banks that are not internationally active, the Bank of England should remove the capital adequacy requirements that comply with Basel III. These were meant for internationally active banks, but were adopted by the EU for all banks, as all EU banks had the potential for cross-border transactions even if few exercised this right.
Solvency II, that harmonises EU insurance regulation, also needs to be reviewed: its probability assessments may work well for life insurers but less so for catastrophe insurers.
Mifid II is so overly protective of private client investors that it discourages financial service firms from dealing with them at all.
And all EU regulation discriminates against small, medium and startup companies, as the cost of compliance acts like a fixed cost that is easily borne by large multinationals but onerous for their smaller competitors.
It is important that regulation is applied proportionately to keep the market competitive. A small company that poses no systemic risk should not be regulated like a large firm that does.
Encouraging new market entrants is a vital element of London remaining a competitive financial centre, but it also has implications for the general economy, as it is the smaller investment banks that will happily provide financial services to startups. This keeps the whole economy vibrant.
Equally, the UK’s own eight per cent bank surcharge was tolerated when first introduced, as British corporate taxes were more than eight per cent below most other G20 nations. With the lowering of US corporate taxes to 21 per cent, this is no longer the case, and many of the multinationals operating out of London could easily move their more profitable divisions to the US.
The Treasury should look carefully at this and the other taxes aimed at the banking industry.
When the top rate of income tax in the UK was 40 per cent, the Treasury could be quite comfortable that bank employees would not want to be based anywhere else in Europe. But with higher income taxes, bonus caps, expensive housing made more so by stamp duty, and a generally higher cost of living, London is losing some of its unique selling points, for bankers at least.
The UK is a global financial marketplace – it exports more insurance and financial services to the US than to France, Germany, and the Netherlands combined. The Prudential Regulation Authority oversees 170 international banks from over 50 jurisdictions – slightly more than New York and a lot more than Paris.
This has very little, if anything, to do with passporting – the issue that has dominated talk of a financial services deal – and much more to do with openness based on mutual recognition of regulatory standards.
The onus to maintain London as the premier financial service centre does not lie solely with the regulators and the Treasury. The financial services industry must also seek out new markets. Global economic growth is moving away from the EU to Asia, and to emerging and developing nations.
Financial services companies must follow this trend, and UK regulators should encourage this by forming alliances with financial markets that meet similar international standards and regulatory outcomes to the UK. That is the only way to truly make a success of Brexit for the City of London.
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