13 January 2021

Bloomberg: City of London Needs Brexit Limbo to End

Last month’s Brexit trade deal left a giant loose end — the future of finance, the U.K.’s most valuable export sector. Britain and Europe have given themselves until March to agree on just how closely the U.K's financial regulations will mirror those of the European Union. Negotiations between the two sides have seen deadline after deadline get busted since the Brexit referendum in 2016. The City of London cannot afford a repeat of that now. It needs clarity fast.

In an ambitious-sounding interview with the City A.M. newspaper on Monday, U.K. Chancellor of the Exchequer Rishi Sunak highlighted the prospect of a second “Big Bang” for London, referencing the boom after deregulation in 1986, without really explaining what that might entail. As things stand, the City is suspended in a no-deal Brexit outcome without knowing which way to turn.

Certain aspects of the negotiations should, in theory, be simple. In some markets, it makes sense for the bloc to grant so-called equivalence whereby it recognizes common standards. Brent crude oil futures could be one example where small EU firms would benefit from retaining the status quo. But the negotiation is also an opportunity for Brussels to expand its finance sector and relocate business from London.

The key constituent is the Wall Street banks. If they start transferring market-making (facilitating securities trades from their own books rather than as intermediaries) then a trickle of jobs out of London could become a flood. The U.K. will want to find a way of ensuring London provides sufficient EU market access as to remain the European hub for U.S. firms.

Sunak reckons the trade deal included many good things for the City, but some of the benefits cited are difficult to substantiate. Bigger steps on green finance, such as green gilts, are promising, but the U.K. is unfashionably late to a party where EU governments are already dancing. London may have become the European home for fintech but with restricted freedom of movement that advantage is precarious. Changing stock exchange listing rules, to allow initial public offerings of tech firms to have dual share classes, would be fraught with governance risks and sits awkwardly with the Financial Conduct Authority’s desire to be a gold-plated regulator.

Britain has one apparent bargaining chip — a radical regulatory break. As Bank of England Governor Andrew Bailey has made clear, the ability to diverge has to be the one upside of Brexit, freeing the City from being a “rule-taker.” But a bonfire of U.K. regulations would mean short-term pain for British finance through restricted access to the single market. Compensating international business would take time to materialize.

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