Dublin-on-Thames? City leaders debate the post-Brexit future
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This is the final article in a series on the Future of the City of London
In the mid-1980s, Goldman Sachs was choosing between London and Paris for its new European headquarters.
When the US bank weighed their respective merits — infrastructure, financial rule book, immigration policy, labour laws and taxes — London “clearly won”, says Richard Gnodde, now head of Goldman’s international arm.
What clinched it for the UK capital was Big Bang, Margaret Thatcher’s sweeping deregulation of the City of London, which began in 1983. From then on, most international financial services companies came to the same conclusion. The UK capital was seen as a launch pad to Europe, heralding the explosive growth of London as a global financial centre.
Now, on the eve of Britain’s departure from the EU, Mr Gnodde says policymakers should remember that “it wasn’t preordained in 1980” that the UK would enjoy the success it has. If it is to continue to thrive, “London has to get that playbook out from 1980-85.”
In London’s favour remain several immutable advantages: its language, timezone and rule of law. It also benefits from the agglomeration effect of its wide array of financial services and related industries, which makes the City one of the most desirable places for ambitious graduates.
But Brexit brings a new challenge and the City must find new ways to thrive. Top finance executives suggest simplifying regulation, targeting new sectors such as green finance, cutting taxes and paying more attention to emerging markets outside Europe.
The City’s new chapter has also been complicated by the coronavirus pandemic, which has raised fundamental questions about how and where we work, and threatened city centre ecosystems. Meanwhile a record £260.8bn deficit casts a shadow over the UK government’s policy response.
Protect the golden goose
Three days after the Brexit vote in June 2016, Barclays chief executive Jes Staley summoned his top lieutenants to its private bank headquarters off Park Lane.
Over the course of that overcast Sunday afternoon — followed by drinks at The Dorchester — they concluded the issue was so intensely politicised that a deal could not be expected before midnight on deadline day. They began planning for the worst.
Mr Staley says London’s position as “one of the great financial centres” relies on retaining its £8.5tn fund management industry. The main battle with Brussels will be over delegated authority, which allows UK managers to manage EU clients’ money out of London.
“Don't look at where the banks are. Look at where the people managing these extraordinary pools of assets are,” Mr Staley said. “The users of capital find the providers of capital, not the other way around. Unless a portfolio manager at Legal & General or Fidelity relocates, we are not going to have the exodus some predicted.”
Bernard Mensah, international president of Bank of America, said: “The EU has been less successful so far in attracting the money. The holy grail is removing delegated authority of fund management. That would really tighten the grip . . . London maintaining that industry here really helps it maintain a critical mass.”
To remain attractive to those investors — in the face of growing competition from other European cities — London should take advantage of its new regulatory freedom, said Mr Staley. The real threat, he contends, is not Paris, Frankfurt or Milan, but New York, Singapore and Hong Kong.
Paul Marshall, co-founder of $50bn hedge fund Marshall Wace and an ardent Brexit supporter, puts it more bluntly. “The starting statement has to be that the UK and Europe are now backwaters in global financial terms,” he said. “In a global context, even the discussion of Brexit is parochial.”
Britain’s membership of the EU brought the financial sector two big benefits: access to skilled migrant workers and a free passport to sell their products and services across the region’s single market.
Both are under threat from Brexit. The UK had been hoping its regulations would be recognised as equivalent to the EU’s, which would enable UK-based institutions to maintain access to EU customers. However, Brussels has so far refused to reciprocate.
On the other hand, diverging from the EU rule book is seen as an opportunity for the UK and a threat in Brussels.
Sam Woods, deputy governor of the Bank of England, said in a recent speech that Brexit means the UK will no longer be “shackled in lockstep” with the EU. It can pursue “a more British style of regulation” based around “openness” and “dynamism” in the “rough-and-tumble” financial sector.
Wary of that, Mairead McGuinness, the EU’s financial services commissioner, warned earlier this week that the EU cannot permit itself to be “captured” by the City of London, saying: “Our interest is making sure that we are not captured by a system that we don’t regulate, or controlled by it.”
People including Mr Staley and former BoE governor Mervyn King told the FT they would rather see the UK gravitate towards American rules.
“The biggest threat to the City comes from New York,” Lord King said in an interview. “If we are to pursue regulatory equivalence with anyone, it should be the US. The key thing is to not be too out of step with them in the areas of capital and liquidity.”
“Being free from EU rules is an important step forward. We can make regulations simpler, but more effective in making the system safe,” he added.
He also criticised Europe’s wide-ranging Mifid II reform of financial markets, which “has simply increased costs while doing absolutely nothing to give useful information to investors”.
The UK has also been a longstanding opponent of the EU bonus cap, which was introduced in 2014 in response to the financial crisis and limits year-end payouts to twice a banker’s salary.
Goldman Sachs’ Mr Gnodde said removing the bonus cap would “put the UK on the same footing, aside from the EU, with every other major financial centre”.
“Removing that ratio makes London a more attractive place for sure,” he added. “If I move a senior person between New York and London I am driving up the fixed cost of our operations. If that rule doesn't exist, I don’t have to think about that.”
The City is also already lobbying on taxation. Sir Paul of Marshall Wace said that London should position itself as “Dublin-on-Thames”, matching Ireland's 12.5 per cent corporate tax rate to attract more multinationals.
William Jackson, managing partner of €26bn private equity firm Bridgepoint, concurred: “If we really wanted to steal a march on our European friends, you'd make us the offshore [centre], a more favourable place to be based from a tax perspective.”
“The EU is looking at this very closely as well, because they don’t want Singapore sitting across the English Channel, being a massive competitor,” said Mr Jackson. “I don’t think we’ll see the true colours of this government until we get through this Brexit negotiation, but the mood music is very positive.”
Yet the UK government is also considering reforms of capital gains tax that could hurt the private equity industry’s lucrative carried interest tax break. And while Britain has tightened its regime for UK residents with non-domicile tax status — historically a big draw for foreigners to come to London — countries such as France and Italy have been offering non-dom tax breaks of their own.
As the government weighs up a tax overhaul, it is also working on initiatives to develop new sectors. Last month prime minister Boris Johnson outlined plans for a UK “green industrial revolution” focused on nuclear, hydrogen, electric cars and offshore wind power, all of which will require tens of billions in financing.
“The opportunity is to double down on green finance,” said Huw van Steenis, chair of sustainable finance at UBS and a former adviser to the BoE. “We need to be relevant [and] it’s probably more about whether we have expertise than [EU] access. But the risk is that Brexit has distracted from innovation.”
Future of the City
In a series of articles, the FT examines how London’s financial centre will fare in the decades ahead as Brexit negotiations reach their climax
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The City has some catching up to do in its ambition to become a global centre for the near-$1tn market for green bonds. Sixteen countries including Germany, France, and Sweden have already sold green sovereign debt, while the UK’s intention to start a green gilts programme was only announced last month.
Another area marked for expansion is fintech. The UK has nine fintech “unicorns” — private companies valued at more than $1bn — such as app-based neobanks Monzo and Revolut. The rest of Europe has just six, according to CBInsights. However, that trails the 37 based in the US. And the two most successful European fintechs are Sweden’s Klarna and Dutch payments giant Adyen.
Looming over all of this is the fallout from coronavirus. The pandemic has forced a shift to remote working and financial services firms have coped better than any of them expected. That has caused executives to mull whether expensive offices with thousands of staff are necessary. Mr Staley said: “That may ultimately be a bigger issue than Brexit.”
Additional reporting by Nicholas Megaw and Owen Walker in London
Correction: An earlier version of the article incorrectly said that the UK has a record £2,076bn deficit. This has now been updated.