One of the recurring themes during the recent EU referendum campaign was that if Brexit did go ahead the City of London’s status as a premier global financial centre would be eroded. It is certainly true that the City is Europe’s financial capital, and more than that it has actually overtaken New York at least in terms of trading volumes. Following the leave result the French government have made announcements to the effect that whilst they are devastated with the election result they do see this as an opportunity for Paris to step up. I am sure the German government echoes those sentiments in the wider sense and also in relation to Frankfurt.
This article will set out a positive case that Brexit does not necessarily mean that London will lose its status. The article does this from a politically neutral viewpoint, in the sense that it is not an endorsement of the Brexit position, rather an attempt to understand the new reality.
Clearly there are real threats to London’s status. In part because the European single market is an international tariff-free marketplace and the UK’s place in the marketplace is now very much in doubt. However the danger consists of more than just a general doubt over Britain’s place in that market.
One of the dangers spoken of a lot over the last few days is London losing its ‘passporting’ status. In essence this gives the banks and financial institutions based in London the ability to operate freely throughout Europe whilst being based in London. Since the Brexit vote several politicians in Europe have suggested that were the UK to leave the single market British financial firms would lose this right.
Another danger is London no longer being a ‘Euro clearing’ centre. That is London banks no longer clearing transactions in Euros, and those transactions moving to the continent or the Irish Republic instead.
The third danger relates to banks and financial institutions moving jobs away from the City to parts of Europe still in the EU.
The threats can be solved
Following the credit crunch and the global financial crises the EU embarked on an ambitious regulatory regime at the EU level in order to harmonise financial regulation and compliance. This project will culminate with what’s called MiFID II coming into effect on the 1 January 2018. The rules are very technical, however the important thing here is MiFID II states third countries (non EU countries as the UK will be) which have financial regulatory regimes equivalent to MiFID II will be able to operate in financial services throughout the EU.
So in effect London can still be ‘passported’ in financial services, just so long as the UK government introduces laws which are equivalent to MiFID II.
Such a technicality cannot save London on the ‘Euro clearing’ issue, however such is the City of London’s near monopoly of European financial services, the UK government has a great deal of leverage when it comes to negotiating this and other aspects of the financial services exit terms. In short the capital for the rest of Europe is raised in London and all of Europe’s financial industry is so tightly inter-twinned that Britain has a strong negotiating hand.
On the issue of job relocations, following the UK’s exit from the European Exchange Rate Mechanism in 1992 many financial institutions did relocate jobs away from London to Frankfurt and Paris. However within a few years those jobs where back, because those cities simply cannot match London’s infrastructure for financial services. One of the reasons why London has become such the global centre it is is because of the chancery courts and commercial law being so much more developed here than elsewhere. Finally English is the international language of commerce and trade, which is to London’s benefit when considering a challenge to its status from Paris or Frankfurt.
During the Chinese State visit to the UK in October 2015 it was announced that the Chinese central bank would issue RMB sovereign bonds in London. This was a watershed moment because never before had the People’s Republic of China issued RMB sovereign bonds outside of China before. It shows a clear intention on the Chinese government’s part to use London as its foreign markets base.
I would expect the UK to announce similar partnerships with other major emerging markets such as India and Brazil over the next few years, making London even more of a global financial centre.
Though the dangers to the City of London’s status are big and there still might be a short term hit to London’s fortunes, there is clearly a path for the City to retain its global status and indeed to enhance it.
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