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Brexit: Ending the City’s Dominance of European Finance?


The Victorian statesman Lord Palmerston famously said 200 years ago “Nations have no permanent friends or allies, they only have permanent interests”. Today, differing views on “permanent interests” fundamentally divide the United Kingdom from the European Union.The UK defines its “interests” in narrow terms of economic transactions.

In contrast, the EU defines its “interests” in broader political terms – inspired first by the tragedies of the 30 years of war to 1945 but, secondly and remarkably, by the solutions propounded by Winston Churchill in his series of great speeches in the late 1940s. His vision was the creation of “an ever closer union among the peoples of Europe”.

The success of that vision was marked in 2012 by the award of the Nobel Peace Prize to the EU for its advancement of peace. But economic transactions did flow from the political vision: the Single Market and the necessary, complementary monetary union – embodied in the creation of the euro. Profound consequences are now flowing from how Boris Johnson’s government defines British interests

The governance of the EU elects Members of the European Parliament directly from among its peoples – with the nation states sending their politicians to the Council of the European Union to act as an equal legislature with the Parliament. In September 2019, these two bodies elected the 17th European Commission to implement the policies set out in the new President’s Agenda for Europe during the period 2019-2024.

In UK parlance, this was the “manifesto” the Commission was mandated to implement: A strong, integrated and resilient capital market is the best starting point for the single currency to become more widely used internationally.” Unsurprisingly, it has set out to achieve the manifesto. The detailed goals define what the EU sees as its “interests” and it has stated unequivocally in the TCA that it reserves its autonomy to pursue them.

The EU requires regular reviews of financial regulations. Those underway cover most aspects of banking, capital markets, asset management, insurance, and payments systems – as well as digital and sustainable finance.  So it is a racing certainty that virtually every aspect of the EU’s body of financial regulation will be reviewed by 2024. The EU’s course is clear and will take no account of the “interests” of a former member. Why should it?

Now we come to the crunch: everyone in Britain has been told over and over again that Britain is “the fifth largest economy in the world” therefore is “sovereign”. (Actually India has probably now edged ahead). But the media barely report that the EU has seven times our population, five times our GDP and – key to the investment community – three times our investment assets. (Proportionately “they” invest much more in bank deposits than “we” do.) “They” are the world’s largest trading bloc and have set their sights on their currency being used commensurately – part of their concept of their “sovereignty”.

We have solemnly signed a massive Trade and Cooperation Agreement (TCA) with them that commits us to use our “best endeavours” to continue implementing the international standards for financial service regulation that we helped design – and signed into EU law while we were a member.

So the EU was a bit surprised to read in the Financial Times that Chancellor Sunak told MPs in the House of Commons that the conclusion of the Brexit process would now allow Britain to “start doing things differently and better” in terms of regulation.” Then the Governor of the Bank of England told MPs that “I would strongly recommend that we do not become a rule-taker. […] If the price of that is no equivalence then I am afraid that will follow.  As the Chancellor is telling Parliament that we will be doing things “differently and better”, then the plain conclusion is that we do not intend to be equivalent with them – in the medium term (say 2024?).

What is “equivalence”? The TCA states that "equivalence" means the capability of different laws, regulations and requirements, as well as inspection and certification systems, of meeting the same objectives. So “equivalence” does not require word-by-word matching but an equivalent outcome. This is determined unilaterally by the European Commission itself and “the EU will consider equivalence when they are in the EU's interest.”

Financial institutions can read the Financial Times as well.  Regulators on both sides of the Channel obliged them to prepare for Brexit so they are doing as they were told. Now we read that trading in European shares has instantly move to Amsterdam – as has the prized “green” contract for trading in carbon futures. Derivatives trading has also started to move out of the City. Quelle surprise!

Do all these arcane technicalities matter? YES! The City of London Corporation published its latest study on taxes contributed by the financial sector to HMRC. The number is a stupefying £76,000,000,000. Who knows what all these zeros mean? In hard practical terms for every taxpayer in the United Kingdom, if say half this revenue leaves the UK, then replacing it would be the equivalent of putting the 20p basic rate of income tax up to 28p in the £.  That will be part of the price for misunderstanding the real meaning of Lord Palmerston’s dictum 200 years ago.

(For the full, technical analysis, click here)