There have been a few papers published in recent months addressing the question for the City of London of “What’s next”? It’s a reasonable question. “Europe is littered with cities that were once the leading international centre of their day,” intoned Miles Celic, Chief Executive Officer of The CityUK in a recent interview by way of warning. Brexit was inevitably a watershed moment for a mighty industry which under other conditions and in other times might have expected to have figured prominently in the final negotiations over the future intra-European arrangements. In the event, they barely figured at all. Indeed, the British government drew red lines in the sand over the economically irrelevant, but more emotionally charged, fishing industry. Reactions in the City to this apparent snub were conditioned in part by how people voted in 2016, ranging from the Brexiters’ view that the City would flourish whatever happens, to the Remainers’ lament that much would be lost. The truth might well be somewhere in between, but Celic’s admonition hangs over this debate.
The entire debate is also bound up with much irony. A substantial element of the funding for the Leave campaign came from some of the Hedge Fund community and crustier elements in the British City ranks, many of whom will continue to enjoy their places in the south of France well into retirement. The Remain side in the City was very quiet during and after that fateful day in 2016, in part, it should be remembered, because much of the City is neither British controlled, nor British staffed. The City has long been a welcoming and accommodating place to do business and flourished accordingly. Has this changed, or will it simply be business as usual for the coming decades?
For many substantial multi-national organisations and people, Brexit and its consequences are but an expensive and odd dislocation of business. It entailed a restructuring of operations to conform to a new dislocated regulatory environment. As Celic accurately noted, the City had been seen as a convenient and efficient place from where to run a business, the names of its now lost merchant banks – the Warburgs, Schroders and others evidence of a tradition going back two centuries at least. Nationality was not an issue, business acumen and ideas were. But suddenly today, the City potentially becomes a much less convenient place. Nationality suddenly matters, with a restrictive visa policy giving rise to much concern and threatening to send the City down the league tables of globally dominant financial centres.
It is instructive to consider the British political establishment’s reaction to this, which ranges from scepticism that there will be any negative impact on the City to indifference to an industry that is socially not always easy to defend and wins them no votes. For such a major source of UK tax revenue and high-end employment, this is not a good state of affairs. In addition, the employment restrictions make it more challenging to get a drink in the City as many of the barmen appear also to have ‘gone home’ as a result of Covid coupled with Brexit.
In reality the outlook for the City is probably at best cloudy. It might be one of slow decay, where its past lustre fades. Businesses realigned their business models and organigrams ahead of the Brexit break and shuffled around people and assets. Some decline in various functions and staff levels has certainly been recorded, but definitive data is hard to track down as there is little incentive to make public what has really happened. Political downsides are a good reason to leave it to unattributed anecdote or third party surveys and reports to evaluate the situation. The medium term signs of decline will show up in tax receipts, employment returns and other indicators.
This whole subject has been so intensely politically fraught that most rational business leaders, besides the fact that their nationality, might well have been deterred from commenting. Most have simply opted to steer clear, leaving the way open to political pontificators, a bunch of uninformed pundits and external observers, including the media. Financial services are still misunderstood and distrusted, an accusation that might well now extend well beyond the confines of the City and financial services to apply to whole swathes of British business, as evidenced by the recent Conservative Party Conference and its well reported keynote speeches.
What further confuses the overall picture for the City, however, is the lack of clarity over any corresponding EU strategy for financial services. For all the lack of support this side of the Channel, the EU side has been a curious mix of political rumblings and regulatory rulings combined with threats and very nationally motivated sales pitches to attract business. The result has been an exotic patchwork of pieces of businesses that have migrated from London to an assortment of different EU centres. EU financial services have remained subject to local regulatory oversight, notwithstanding the mechanisms set up to centralise overall supervision of banks in particular.
The EU has claimed the need geographically to fix and define businesses which exist and operate globally at a time when global alignment of regulations and mutual recognition of many important services is the natural and safest direction of travel. At the time of writing it remains to be seen what comes to pass in respect of clearing in derivatives etc. It appears clear that messing with the smooth running of existing arrangements is only likely to push up costs and cause inconvenience for EU based users. There are signs that some sense of rational economic judgement is returning to what has been an uncomfortably non-technical and un-pragmatic debate.
We should however ignore the headlines suggesting victory or defeat for different sides of the Channel, some making reference to the ebbing and flowing of nominal trading volumes on exchanges. Many headlines seem inspired by the spirit of a hard fought football match with frantic fans cheering goals. It is still too early to draw hard and fast conclusions – this game will go well into overtime and as for injury time… that’s another question.
Nevertheless, the sad fact (depending on where you sit of course!) remains that the City is likely to lose out, although maybe not quite as much as might have been feared. Still, the impact is likely to be longer term and pernicious. For all that, it is not clear that any EU centre can claim a huge win either. The result overall is likely to be that Europe itself is diminished as a financial centre. This all comes at a time when there is a significant realignment of financial expertise and firepower in other centres, particularly in Asia and specifically China. Moreover, the US has re-emerged post-financial crisis as a powerful, well-positioned force to be reckoned with. Curiously, European regulators, oblivious to this, still seem more minded to grant the US specific equivalence on some areas, rights
which span the Atlantic but don’t apparently reach across the Channel.
Admittedly the poor state of overall financial services coordination and cooperation is a function of the lamentable current state of the relationship between the EU and the UK. Business including financial services is very much caught in the middle of all this. The current stand-off over Northern Ireland (did no one in the British government read the protocol before they signed it?!) overshadows much of the debate, with fishery problems promising to ruin Christmas with an old-fashioned French fishermen’s blockade sailing into view. For those that remember the Icelandic ‘Cod Wars’, stand by for painfully jingoistic headlines on both sides of the Channel, with real business and mutual economic ties held to ransom.
What is really needed is a re-setting of the relationship between the UK and EU and indeed UK and France. It should be back to basics with clear assessment of the overall needs of our region, not a cherry picking approach or confrontational stand-off over headline grabbing fishing rights or sausage exports. For Brexiters to make sense of their policy, there needs to be a plan, part of which should involve rebuilding trust and understanding in a way that allows business to continue to function. Such sentiments are not just idealism – they represent the practical needs of business. The Western world, elections or not, urgently needs to move away from the media-hugging soundbite culture of today’s politics. The City and the financial services needs of the European Union will be better served by a clearer focus on mutual interests and analysis of the competitive threats to our continent that will require a pooling of local expertise.
Somewhere amongst all those fish rights and sausage exports, there is talk of regional European security arrangements where the UK would have to be included on the pragmatic basis that it has a relevant regional military capability and assets at a time when major EU nations, especially Germany, appear reluctant to splash the cash on such non-productive ‘investment’. Financial services should in time prove to be similar – the acknowledged expertise and concentration of financial firepower in the City is still an asset for all the region, even after Brexit. This will, however, take time to be accepted, as, unlike defence spending, financial services assets are viewed as potential plunder, the spoils of Britain’s self-imposed isolation.
Moving beyond the realms of cross-Channel relations, the post Brexit City landscape is still taking shape, under domestic influences as well. The urge to conduct a ‘bonfire’ of regulations has not turned to action and, indeed, the financial services sector does not like change that comes with yet more cost and adjustment. A bonfire would not be welcome, particularly as much of the regulatory framework was of British design in the first place. However, some changes around tax and the visa terms in the industry would be welcome.
Here I have not tried to even raise the multiple challenges and questions around the future of work, the meaning of work clusters, post-pandemic, the rise of Fintech, the looming reach of ‘crypto’ or a host of other known and unknown changes to how we do and plan business in financial services. Nevertheless, peering into the future in this industry is akin to playing three dimensional chess. What is clear is that the City of London retains for now a deep and vibrant pool of talent and ideas, and many excellent pubs. One thing is certain, as we all slowly return to our offices after the period of lockdown and hybrid working. The City and its many specialisations remains an exciting, innovative and dynamic place. Whatever the marginal impact of the political movement of the tectonic plates, the character of the City and its unique combination of expert clusters, easy networking, international spirit and imagination is not about to disappear. The career opportunities and learning possibilities, the start-up culture, and the entrepreneurial traditions combine to make The City still the stand-out place to be for many ambitious people. Add to the mix the colour and pageantry of 800 years of tradition in the form of the City’s governance and guilds, and there is no place that yet rivals its uniqueness.
To conclude, the future for the City and indeed the overall EU financial services sector appears somewhat uncertain. Some will voice wild optimism, others dire pessimism depending on their political standpoints. The sober assessment is somewhere in between. The continued antagonism between the two sides of the Channel over a variety of post-Brexit adjustments is damaging – mostly no doubt to the UK side, but frankly also to the EU side also in the finance sector. Europe needs a financial centre. We must look forward to a time, hopefully not far off, when the economic and social interests of the region can be calmly promoted inclusively and we can finally put this dismal period of political upheaval and faulty analysis behind us. Regrettably, that time is not now.