The dramatic migration of share trading from London to Amsterdam and the foot-dragging by Brussels over granting UK access to EU financial markets has prompted some tough talk about the future of City regulation.
The EU’s refusal to declare UK regulation equivalent (except in a couple of areas on a temporary basis) has made things much clearer, say the hard-liners in the City and Westminster.
There is no point trying to keep the UK’s regulation in line with the EU’s if there is no benefit in terms of market access. So the UK should align its rules with other markets in North America and Asia to get better market access there.
There is something in this. The balance of risks and rewards from staying in step with the EU has surely shifted a bit.
However, it would be a mistake to think, as the Chancellor Rishi Sunak suggests, that aligning regulation with other economic blocs would facilitate new free-trade agreements and therefore boost exports.
Sam Lowe, a trade expert at the Centre for European Reform, says that the scope for increased cross-border financial services sales into non-EU countries is greatly exaggerated. There are “few opportunities” to expand these because national regulators are very reluctant to allow more activity to take place outside their jurisdiction.
Free-trade agreements have “only a small role to play”, he says in a new report. “They are unlikely to provide new market access for UK services exporters — as evidenced by the UK’s recent deal with Japan, which did not unlock any additional Japanese services liberalisation over and above what Japan unilaterally already offers other countries.”
In a report on financial services exports, UK Finance, the banking lobby group, says that the government could at best hope to use new free-trade agreements to “lock in” existing market access for UK firms.
Desirable as that might be, it is hardly going to fill the gap left by thousands of City jobs moving to the continent.
Even if cross-border access to Asian markets was improved, it is not clear that this would be much of a boost for London. The big financial services exporters in the City are set up to sell into Europe. They service Asian markets from Asia. JPMorgan isn’t going to start exporting to Taiwan from London just because there is a trade agreement.
So if the potential trade upside from realigning regulation is modest what about the downside in terms of losing EU market access?
The sceptics say it is now clear that Brussels wants to grab as much business from the City as it can and will continue to deny UK firms access whatever the reality of regulatory equivalence. That may prove true.
On the other hand it may be that Brussels listens to those EU voices arguing it would be in the bloc’s interest to allow broader market access for the UK, at least until the EU’s capital markets are more developed. Even if that lasted just a few years, it would be economically very valuable for the UK.
The UK should therefore be cautious of diverging from EU regulations in a way that would make this less likely.
There will be some rule changes that the government decides are worth making anyway. The Solvency II insurance regime probably falls into that category. The FT’s Robert Shrimsley reports that the Treasury is also thinking about lifting the EU bonus cap, despite City minister John Glen’s recent declaration that “there are no plans” to look at it. But it seems sensible to tread carefully until the EU’s strategy becomes clearer. After all, there are plenty of other things the government can do to bolster the City without such risks.
High up the list should be making it as easy as possible for UK firms to bring top foreign talent to London.
The threat of more City jobs being pulled into the EU has been made even more serious by the experience of lockdown, which has demonstrated that many roles can be carried out anywhere. It is vital that placing jobs in London, rather than Paris, Amsterdam or Frankfurt, is made as attractive as possible.
The government must improve the UK’s visa schemes as proposed by Ron Kalifa’s fintech review. The high visa application fees should also be slashed or scrapped.
However, when this issue was put to home office minister Kevin Foster he replied that it was right to impose these costs on employers who “should not be turning to immigration in the first instance for their recruitment needs or as an alternative to offering rewarding packages to UK-based jobseekers”.
So much for global Britain. Changing that sort of attitude would be more valuable to the City than chasing illusive free trade agreements.
To contact the author of this story with feedback or news, email David Wighton