12 January 2022

FT: The EU vs the City of London: a slow puncture

For someone who started their career working on the floors of the London Stock Exchange, the hours following the UK’s exit from the single market could hardly have been more wrenching. In a single day, Alasdair Haynes, chief executive of Aquis Exchange, a UK share-trading venue, watched virtually all share-trading business that he had courted over eight years being unceremoniously yanked out of London and transferred in January 2021 to EU exchanges.

The stunning shift, which affected €6bn of trading in European shares that day, seemed emblematic of the blow by Brexit to the City of London’s status as Europe’s dominant financial capital — a harbinger of lost business for London and fresh opportunities for rival centres such as Frankfurt, Paris and Amsterdam. A year down the road the story looks less dramatic and clear-cut, says Haynes, whose customers moved to an EU-domiciled subsidiary in Paris.

The manner of the UK’s departure was undoubtedly “an own goal” by London, he says. But the EU is struggling to map out a winning strategy of its own to build up its capital markets. “In Europe, different centres are all fighting each other . . . to get business back at any cost,” says Haynes, who has held senior trading roles at Morgan Grenfell, UBS and HSBC in his 35-year career in the City. The UK fared better than some expected in 2021, while the EU’s plans to date “have not been very impressive.”

As the City marks the anniversary of its divorce from the single market, bankers and officials confirm that broader picture. Rather than experiencing the big-bang shift of swaths of financial sector business from the UK to the EU that some predicted, the City is enduring a slow puncture that will take years or decades to play out. The EU’s efforts to reduce its reliance on the UK and build up a financial sector commensurate with its economy have remained slow-moving and inconclusive, in part because of a lack of political focus in big capitals.

Brussels is likely, for example, to confirm early this year that it has ditched hopes of rapidly pulling the systemically sensitive job of clearing trillions of derivatives transactions from London into the union, instead embarking on a much more gradual process with an uncertain destination. “We need to take the long view here: developing deeper capital markets in the EU is neither easy nor quick to do,” acknowledges Valdis Dombrovskis, European Commission executive vice-president, adding that the EU has made good progress rolling out legislation. “We still have barriers to knock down.”

The post-Brexit trade deal struck in late 2020 made precious little provision for financial services, and since then Brussels has refused to offer London anything like the same market access arrangements — or equivalence — that financial centres including New York, Tokyo or Hong Kong enjoy. A memorandum of understanding on regulatory dialogue has sat unsigned gathering dust on the shelf — a casualty of EU anger over the UK’s demands to redraw the Northern Ireland protocol. The notion that the UK will lure in large amounts of financial activity after a wide-ranging regulatory bonfire has proven to be an illusion...

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