Just over a week in, the City of London is coming to a hardening realization about its post-Brexit future: a financial services accord with the European Union may be too little, too late to protect its dominant position.
Negotiations are set to kick off soon to determine the outlines of regulatory co-operation between the U.K. and EU, after the industry was largely sidelined in the trade deal that marked Britain’s split from the EU on Dec. 31. A March deadline has been set and so far details — including who will head up the discussions — are scarce.
The early days of Brexit have laid bare the stakes: London lost 6.3 billion euros ($7.7 billion) in daily stock trades to EU venues on Jan. 4, the first business day after the transition period. The overnight loss added impetus to calls by financial firms and London’s stock exchange to policy makers to ease rules and help the City get a competitive edge over European rivals.
One such move emerged over the weekend, with the U.K. Treasury saying it plans to allow trading in Swiss shares, reversing an EU ban on the activity. London’s ability to offer trading in firms like Nestle SA and Roche Holding AG will help compensate for some of the loss in EU shares. But the stance also deepens the U.K.’s division with the EU, making the bloc less likely to offer market access.
Those talks — centered around a principle called “equivalence” — are open-ended, without the deadline that governed the trade deal. Little progress has been made on the majority of areas.
European officials have little incentive to hammer out an agreement while financial hubs from Paris to Amsterdam win business at London’s expense. The Bank of England’s Andrew Bailey has also sounded a downbeat note last week, saying access to the bloc must not hinge on Brussels dictating standards.
While dramatic, the loss of EU shares is unlikely to have a discernible impact yet on the tax generated by the business in the U.K., which was more than 3 billion pounds last year. But it was an immediate warning of the potential costs of Brexit. As a whole, the Square Mile accounted for about 75 billion pounds in tax in 2019, including employment taxes, according to the City of London Corporation.
“EU share trading has gone, it will not return,” said David Howson, president of Cboe Europe, the biggest venue for EU shares in London. The firm has seen nearly 95% of this business move, Howson said on Bloomberg Television on Thursday.
Bankers and asset managers said the week was otherwise largely disruption-free. That was due to years of preparation by firms, some of which involved moving business — although less than initially feared — out of the U.K.
Firms like JPMorgan Chase & Co. and Goldman Sachs Group Inc. have already shifted scores of jobs and hundreds of billions of dollars in assets, while asset managers including Janus Henderson Group Plc and Standard Life Aberdeen Plc are using funds in Luxembourg and Ireland for clients inside the bloc.
Still, that leaves firms saddled indefinitely with the added complexity and cost of supporting operations in both London and the EU. Others such as Hargreaves Lansdown Plc have decided to stop marketing to European customers.
The return of seamless cross-border business with the bloc hinges on equivalence rulings by policy makers, which allow firms to do business in each other’s territory. A comprehensive agreement would help preserve London as a hub for EU finance, but that may not be the bloc’s priority. It’s long wanted to have more of the financial infrastructure that services the EU and euro-area economies based in member countries.
“I’m very realistic about this,” the BOE’s Bailey told lawmakers last week. “If the price of this is too high then I’m afraid we can’t just go for it whatever.”
The unacceptable cost: London losing its ability to freely set its own rules, which is seen as a vital tool to attract new business. That prospective freedom has already sparked a slew of initiatives.
The U.K. Treasury is reviewing stock-market listing rules, with the LSE among those advocating for easier ways for companies to sell shares in the capital. Jonathan Hill, once the EU’s financial services commissioner, is considering changes to allow Britain to compete better with the U.S., Hong Kong and European cities that are gunning for more share sales.
The Financial Conduct Authority is easing hurdles to encourage investors to trade big orders, and reviewing rules for derivatives trading. Chancellor Rishi Sunak has proposed reforms to grab more of the nascent green finance industry. The reversal of the ban on trading in Swiss shares is expected sometime in the first quarter.
“I don’t think this is anything like a death knell for London’s importance in global capital markets,” said Philip Hampton, former chairman of NatWest Group Plc. “Some of these advantages of London — history, law, language — are not easily capable of being matched by other centers. London has still got a lot to fight for and a lot to fight with.”
Still, these new opportunities may not replace the business lost to the EU. London-based trading of Swiss shares averaged 1.3 billion euros per day before the ban, about a fifth of the trading in EU shares. And with no agreement between the U.K. and EU in sight, there could be more shifts fraying away at London’s financial center in the years ahead.
“Our whole negotiating strategy was pretty dismissive of the City and we’ll come to regret that,” Paul Myners, a former City minister and member of the House of Lords, said in an interview. “I think the change over the next 10 years could be quite profound.”