EVENT REVIEW – After Brexit: The Future of the City of London, Part 2

 

 

By Olivia Cooper

INTRODUCTION:

On Tuesday 7th March 2017 Parliament Street hosted its second round table panel discussion on policy post Brexit. Again the focus was on the City post Brexit. The discussion was chaired by Olivia Cooper Consultant lawyer with DMH Stallard LLP, she was joined by the Right Honourable Peter Lilley Member of Parliament for Hitchen and Harpenden and Member of the Select Committee for Exiting the EU; Mr John Mills Chairman of JML and Mr Jonathan Ford, Chief Leader Writer for the Financial Times.

In this synopsis we review the panel’s response to questions posed by members of the audience.

 

OVERALL VIEWPOINT POST BREXIT:

 

In this second discussion forum it was obvious that the panel’s main focus was on ‘no deal is better than a bad deal’. The panel was in complete agreement that it would be worse for the UK to sign a ‘bad deal’ with the EU than to simply walk away from the negotiations and return to WTO regulations and tariffs.

Public opinion, in general, favours a complete break and a return to WTO rather than give up sovereignty and be obliged to comply with free movement of people.

 

WILL WE GET A DEAL WITH THE EU AND IF SO WHAT SHOULD WE BE LOOKING FOR?

Much of the discussion centred on whether the UK will secure a deal with the EU and if so what form this should take?

The best possible deal for the UK would be a free trade agreement with the EU. The panel recalled that the government has repeatedly made clear that fundamental to the UK leaving is to regain complete sovereignty over its laws, to not be answerable to the ECJ and to have control over its borders thereby not in compliance with freedom of movement regulations. Members of the panel were sceptical that the EU would sanction a free trade agreement which allowed the UK access to the Single Market without being subject to any of the EU doctrines.

It was considered likely by the panel that the EU would offer a compromise deal whereby the UK would be allowed to stay within the EEA gaining access to the Single Market however it would have to accept free movement of people and the sovereignty of the ECJ.

The panel was unanimous in agreeing that this would be disastrous for the UK and that if faced with the choice between staying in the EEA with all the extra regulations and leaving completely and relying on WTO regulations then the UK should have no hesitation in taking the latter course of action. It was far more beneficial for the UK to go it alone than to be tied into an even worse deal than it suffers now.

The panel acknowledged that some elements of the House of Commons and the House of Lords favoured the EEA option for the UK and hence it was essential to demonstrate to the UK electorate, business and politicians that the WTO option was superior to the EEA choice if that was the scenario after the UK Government had ‘negotiated’ with the EU.

 

SO IF NO DEAL WHAT NEXT?

The panel agreed that although it hoped that the UK would obtain a free trade agreement with the EU it was unlikely to do so simply because politics would trump economics in the negotiations. Despite the fact that the UK has a huge deficit with the EU, it was thought that Eurocrats would be too concerned that giving a good deal to the UK would encourage other countries to consider leaving and drive up support for Eurosceptic political parties across Europe.

If the UK walks away from the table and returns to WTO regulations what does this mean for the City? Firstly WTO tariffs are not as high as has been perceived, the average WTO tariff is 2% if you factor in food the rate rises to 4% but if you factor in services then it drops back to 2.5%.  

Non-tariff barriers are more complicated, however at present the UK not only has equivalent regulations but exactly the same regulations so that all that would be needed is an agreement as to what would happen should one party diverge from the equivalent regulations.

In terms of the City the main concern appears to be for passporting rights. It should be recalled however that passporting has only been in existence for a relatively short period of time and that cross-border transactions were undertaken by the City long before passports were introduced.

It is also increasingly argued by financial experts that passports are now fast becoming irrelevant as the City moves towards equivalence. Given that the City enjoys the same regulations as those in the EU there should be no problem in proving equivalent regulation.

It was muted that the City has overreacted to Brexit just as it overreacted to Big Bang given that only about 10% of the City’s revenue stems from the EU and out of that 10% only 10% is at risk once the UK leaves the EU. This would result in only 1% of the City’s total revenue being at risk from Brexit.

It was further noted that the City is a crucial source of financing for the EU and that this cannot be replaced overnight it would therefore be folly for the EU to damage its own business by restricting access to the City’s finance market and losing political and regulatory influence by having to deal with alternative financial centres. The Panel agreed that Brussels/EU would end up having to deal with New York, Singapore or Shanghai if they forced business away from London and that Paris or Frankfurt would be highly unlikely to benefit from any loss of business imposed upon London.

Finally it was muted that the majority of the City’s work is carried out with the rest of the world rather than the EU due to the fact that the City’s work is mainly wholesale rather than retail; services are delivered at the point of delivery i.e. the City.

With regard to Euro-Clearing it was argued that once again it would not be in the interest of the EU to restrict this practice to the Eurozone if it intends to continue to maintain the Euro as a global currency. It would also be impractical, as to stop the City embarking on Euro-clearing the European Central Bank would have to instruct all its member banks to restrict euro-clearing to within the Eurozone. The banks would incur greater costs which would be passed on to the consumer and which ultimately would make them less competitive.

The City should therefore not be concerned for a no-deal post Brexit relationship with the EU, it managed to operate within Europe prior to the Single European Act and it shall continue so to do.

REGULATION OR DEREGULATION THAT IS THE QUESTION?

In the Cameron renegotiation one of the key discussion points was regulation of the City, centring on retaining access for the City to the single market while accepting EU regulation of the City.

This problem stems mainly from the banking crisis dark days, prior to this EU regulation of the City was relatively light however since the crisis the EU has brought forth a bevy of new regulations some of which have proven to be extremely onerous on the City, potentially causing it to lose its competitiveness.

The EU is very keen to retain regulatory rights over the City while the City is looking to break free of the shackles. So will leaving the EU usher in a new golden era of deregulation?

Despite the UK leaving the EU and regaining sovereignty over City regulation it is unlikely to cause the government to totally deregulate the City given the aftermath of the financial crisis. Nobody really wants to see a return to ‘Casino Banking’.

It is however likely that the City will enjoy better regulation as the government will be able to weed out the unnecessary and bureaucratic regulations that crept in via the EU and which have a negative impact on the City’s competitiveness on a global scale. Indeed by repealing these unnecessary regulations it would be hoped that the City would be able to better compete against its main rivals namely New York, Singapore and Hong Kong.

 

REGULATORY DIVERGENCE DOES THE UK GO WITH THE US OR EU?

 

In order to rely on equivalents the UK must maintain an equivalent regulatory system as that employed in the EU but happens if either side decides to change its system?

The City’s main rivals remain New York, Hong Kong and Shanghai, there are those that argue that given that extremely low volume of revenue gained from the EU the City needs to be ensuring that it remains competitive rather than worry about equivalence with the EU markets.

With the recent talks about the repeal of Dodd Frank in the US, should the UK be considering similar drastic deregulation in order to remain competitive and if so where does this leave its relationship with the EU?

Banks are intrinsically unstable and therefore good regulation is needed to protect consumers however the problem has been overregulation by the EU. Once the UK leaves the EU it should begin to remove the bureaucratic regulations that do not afford any protection to the consumer and simply have a detrimental effect on the City’s competitiveness.

 

HOW CAN THE CITY PREPARE AND POTENTIALLY PROTECT ITSELF FROM THE FALLOUT OF THE COLLAPSE OF THE EUROZONE?

 

It would be preferable if the Eurozone did not collapse but if it does the effects felt will depend on the manner in which the Eurozone collapses. The best result would be that it was quietly dismantled rather than it blowing up like a bomb.

If the latter takes place then the shock waves will be felt across the globe including in the City which may indeed take the brunt of the hit given that the City carries out the majority of the EU’s transactions.

The UK has exempted itself from bailing out European banks or indeed other EU countries however this may be said in practice it may not be so easy to walk away from the consequences of a collapse.

Even if the UK is not obliged to contribute the loss of business from the EU will cause some problems and it is likely that we will see large numbers of insolvencies across Europe. It should be recalled that the UK’s investment in the European Investment Bank may be lost if the Eurozone were to collapse.

 

FIRST BREXIT – NOW THE FRENCH PRESIDENTIAL ELECTIONS – SHOULD THE UK BE CONCERNED ABOUT MARINE LE PEN?

 

If Marine le Pen were to become the next president of France then there would indeed be shock waves, not just in France or the EU but across the globe. It should be recalled that interestingly if Macron or le Pen win the Presidential election then they will be a president without a single MP – one might query how easy they will find it to implement their wishes with such a lack of political support.

The rise of the Five Star Party in Italy which is fundamentally Eurosceptic and stands a good chance of taking power was a much more interesting scenario for the Panel, who believed this had a realistic chance of happening and thus posed another dilemma for the EU with Italy’s membership of the € likely to be in question then.

 

POST BREXIT – WHAT WILL HAPPEN TO THE UK’s ACCESS TO EU RESEARCH GRANTS / SCIENTIFIC FUNDING?

 

It is reported that the UK will have a surplus of approximately £13 billion once it leaves the EU giving it every opportunity to fund its own research grants and scientific research.

The PM made clear in her recent speech on industrial funding that there will be £2 billion of funding.

 

IMMIGRATION POST BREXIT – RESTRICTING IMMIGRATION COULD HAVE A DETRIMENTAL EFFECT ON THE UK’S INNOVATIVENESS?

 

There is still uncertainty as to the exact terms of the UK’s immigration policy post Brexit however it is likely to be a work permit system rather than a points based system.

The main concern regarding immigration in the UK has been in the influx of no-skill or low-skill workers with low wage expectation which then serve to undercut wages. There is no evidence to suggest that the UK public is averse to managed immigration.

Highly skilled workers should not worry about the possibility of access to the UK due to a change in the immigration policy indeed for those coming from outside of the EU it should be easier as now all those attempting to access the UK will be facing the same regulations.

There is no wish for the UK to not maintain cross-border research facilities or indeed relationships which have proved so useful to increasing the UK’s competitiveness and innovativeness. Cross boarder projects will still be entered into and academics, business persons and other highly skilled individuals will still have access to the UK.

 

CONCLUSION:

 

The UK has nothing to fear from leaving the EU and that most importantly it should be prepared to walk away from negotiations with no deal and return to WTO as this would be far more beneficial to the UK economy than tying the UK to the EU via a deal which would see the UK remain in the EEA.

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