The double fault of Brexit – The New European


The annual Wimbledon tennis tournament may, you think, have little to do with financial services, the City of London and Brexit – but it does. Because long before Andy Murray finally won the men’s title in 2013, Wimbledonization had entered the dictionary.

It describes what happened to the City of London after the “Big Bang” of 1986. Following this moment of Thatcherite financial deregulation, almost all British finance houses, brokers and traders were taken over by foreign companies, desperate to be part of the arrow. Very quickly, the city was dominated by Japanese, American, German, Swiss and French companies.

People worried desperately that while the UK had become the financial capital of Europe, hardly any of the big players were actually British. But in the end, it was decided that it didn’t matter. Much like the Wimbledon tennis tournament, the UK had created the facilities, built its reputation, created an attractive venue and established the rules of the game. If foreigners were keen to play here and were better at playing here, it was quite good.

It only mattered that they lived in London, worked in London and, above all, paid their taxes in London.

This is one of the main reasons why one of the biggest dangers of Brexit for the UK is not the decline in trade in physical goods with the Continent, but the impact on services, and in especially financial services. Unlike goods, they create a massive trade surplus for Britain. The UK has a natural advantage in financial services, and therefore the City is an exporting superpower. It pays 5% of all taxes in the UK.

But the City of London hasn’t attracted all this foreign investment simply because of its own charms. It has also done very well thanks to Britain joining the EU, using it to become the undisputed base of European finance. Deregulation and the Big Bang came just in time for global financial services companies to move to London to take advantage of the newly created single market.

The City was so successful that it even became the center of financial transactions carried out in euros, when the United Kingdom was and never would be a member of the euro zone. The UK won a famous court case at the European Court of Justice (ECJ) to avoid being discriminated against by eurozone countries who wanted the highly lucrative trade for themselves. It is a victory that Brexit spoiled.

The City’s fortunes are therefore not guaranteed and it has rivals on the continent, from Amsterdam to Zurich, who have long watched it with jealousy. Brexit gave them the opportunity they wanted to slowly and surely develop plans to undermine the City’s wealth and success.

Brexit has hurt UK financial services in many ways, and most importantly the City has lost its right to do business throughout the EU unless a company has a subsidiary in the EU. The rather naïve hope was that this could be circumvented by a method known as “brass plating” – setting up a brass plate outside a small office in Paris or Dublin and then carrying on as forward, passing all business through London.

Unsurprisingly, European governments and their regulators decided that while they faced the prospect of having to bail out UK banks and other companies ostensibly operating in their country, they also wanted capital, liquidity, compliance, auditors and therefore jobs in their country. . As a result, £900bn was transferred from the city to the EU and the city lost around 7,400 employees to the mainland, all because of Brexit. That’s better than most forecasts, but that’s 7,400 very well-paying jobs that should be in London.

It is also the reversal of a very long-standing trend which has worked to the great advantage of the United Kingdom. The single market has enabled the free movement of goods, services, capital and people across the EU. The last three of them played perfectly in the hands of the city. Why keep big offices in Rome, Madrid, Copenhagen and a dozen other European cities when you could move everyone to one big office in Docklands? From there, they could visit their customers when they needed to, but the jobs, money, and people would all stay in one place: the city.

The savings were huge, the concentration of capital massive, and the taxes were all paid in the UK. All of this happened because London was the gateway to Europe for thousands of businesses. Following Brexit, this trend reversed.

Andrew Pilgrim, a partner at the international accounting firm EY (formerly Ernst & Young), which is the head of the British government and financial services, has been monitoring the consequences of Brexit. He says: “Many companies were very happy to have their European headquarters in London and to be able to serve their customers from the UK. Changing this was expensive and required a lot of time, investment and people to do. Once that’s been done, it’s not easy to relax, that money, cost and time has been spent.

Fortunately for the UK, the City is not just a European financial centre. He is a global player. But having lost the ease with which it did business in Europe, it now has to work even harder to seek new markets.

As Nicola Watkinson, managing director of international trade and investment at TheCityUK, an industry-led body representing UK-based financial services, asks: “How is the UK growing and repositioning itself- in international markets? When I was sitting in New York, a lot of companies were looking to the UK and there was the slogan ‘the gateway to Europe’. While this relationship remains important, post-Brexit the UK has redefined itself, focusing on growing its business with other markets like the US and high-growth markets like Asia.

The City is still the largest and best financial center in Europe, but its attractiveness is being undermined. Latest research for TheCityUK by EY shows its lead has narrowed. “The gap between the UK and France in second place has narrowed significantly in 2021. France is an increasingly popular country for financial services investment and these results should signal to the UK that ‘There is still a lot to do to maintain its leading position,’ he reports.

Amsterdam is also doing its best to poach business from the city, and it ended 2021 as Europe’s top stock trading venue. It was a position held long by London, which it lost despite its efforts to make UK stock markets more attractive. When the UK left the EU, trading in euro-denominated shares by European investors had to stop in Britain. Amsterdam just ruined everything.

Of course, one way to increase London’s attractiveness was for the government to abolish the cap on bankers’ bonuses, forgetting that it was runaway bankers who nearly brought down the global financial system in 2008, what we are all still paying for.

If the Liz Truss wing of the Conservative Party had succeeded, it would have been followed by a bonfire of regulations, rules and controls so that the city could prosper.

There is, however, one major problem with this plan. UK financial services have lost their ‘passport’ right through the EU. Under single market rules, UK regulations have been accepted across the continent, giving the city the ability to trade seamlessly across all 28 countries.

Now these regulations only count as ‘equivalent’ to EU law: i.e. they are good enough for now, but you manipulate them and the EU can and you will cut off from your larger market.

Playing into the hands of your competitors is never a brilliant move. But the City still has huge assets, many of which are safe from the ravages of Brexit. Good schools, cultural and sporting life, fine dining and even better shopping, the advantage of speaking English and, of course, as Watkinson explains, the sheer size of London creates its own gravity.

“There’s a whole ecosystem,” she says. “It’s not just about particular pockets of expertise. It actually has the full range of professional and financial services. You can get everything you need in London and that’s a huge advantage for businesses based here. The other point is that talent creates a center of gravity, because when you have so many people based here and so many jobs here, that attracts people.

So far, London’s rivals have been limited to trying to poach specific markets, skills and trades. None have the size or depth of expertise that can seriously rival London on its own.

But that won’t stop them from going after him, poaching jobs, attracting companies and swinging the rules in their favor. Pilgrim says this will continue: “We have seen moves towards Dublin, Frankfurt and Luxembourg and these cities will want to continue to develop their financial services industries, and the EU will want to build its own infrastructure and be competitive. So I don’t think you can ever say that any jurisdiction has won or that we’ve reached the status quo.

Wimbledonization is fine, as long as you’re the only player in town. But everyone moved to London because it was the best place in Europe to do business across Europe. These companies had and have no loyalty or ties to the UK itself, while Brexit means rivals are now finding it easier to attract these big players.

Which means when there’s a better game in another city, they can and will just play it.


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