How will Brexit reshape the City of London? | Lex Megatrends
Brexit has eroded the City's position as Europe's financial hub. From Singapore-on-Thames to a lawless Dodge City, the FT's Lex looks at how the City will reinvent itself
Design and Animation by Russell Birkett, additional illustration by Dreamstime. Words by Jonathan Guthrie, voiced by Alan Livsey
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Lex Megatrends. City Scenarios: from Singapore-on-Thames to the Spires of Gaia. The city of London has been many things - Roman trading outpost, financier to the British empire and deregulated yuppie playground. Now Brexit is eroding its position as Europe's financial hub. The city needs reinventing. How do different scenarios stack up?
The first is repressed rule taker, odds 30 to 1. City bosses hoped Brexit would bring little disruption. The UK would mirror EU financial regulation. But the EU is not granting equivalence for city businesses to operate on an equal footing with locals. By requiring EU investors to onshore trading and clearing progressively, the EU can make lots of non-EU capital switch too. Before, more than half the trade in EU equities was in London. Now, less than a fifth is.
The second scenario is Singapore-on-Thames, odds 3 to 1. The south-east Asia hub serves a whole region, just as London serves Emea countries. It's also a forum for interregional dealmaking. Regulation is seen as flexible but muscular. Singapore is a welcoming city for expat financiers. Top rate personal tax is just 22 per cent. Corporate tax is only 17 per cent. That wouldn't work in the UK which is raising corporation tax to 25 per cent.
Authoritarianism is another Singaporean trait the UK wouldn't copy. Regulatory style is a bigger deal breaker. The UK would need to adopt the agile economically-driven approach of Singapore's monetary authority. The UK's slow-moving Financial Conduct Authority would need a heavy overhaul. But overzealous deregulation could trigger the third scenario.
Dodge City, odds 7 to 1. The UK may let founders wield extra votes over premium-listed companies. It could make prospectus rules much lighter and it could tweak solvency requirements for insurers. If the UK deregulates too hard, bad money would drive out good. Dodgy cowboys would replace honest brokers. The UK has some form for laxity. It lured listings in the noughties from Asian resources groups. Some of their business practises were as grubby as their polluting products.
Today, the city hopes for a green makeover under the fourth scenario, the Spires of Gaia, odds 5 to 1. Raising money for renewable energy businesses is no harder than doing it for polluters. You just need a critical mass of capital and expertise. Carbon transition is a good trend for London to embrace. It's complex, involves large sum and will take a long time. It's a pity the UK has limited credibility in green finance.
The government has not issued green bonds yet, unlike other big EU countries. The UK stock market lacks big renewable companies to match Denmark's Orsted. London does have legacy hydrocarbons businesses such as BP and Royal Dutch Shell, which financiers can help reengineer. It also boasts a trade in carbon derivatives.
ICE, an exchange, operates a futures market in European emission permits dealing in the equivalent of 12.2 gigatons of carbon used. Unfortunately trading recently moved to Amsterdam because of this. Similarly, while the UK has some great fintechs, the US will attract the listings while valuations and liquidity are higher there.
Irish-rooted payments group, Stripe, plans to float in New York. For the city to thrive the government must do more than commission think pieces from Tory peers. A national financial services strategy is needed. Margaret Thatcher had a plan for the city in 1986. It was called Big Bang. Her successors need to rethink London's financial cluster again.
Things aren't so bad for the city. The refusal to grant equivalence could take the EU down a self-defeating path. In the past, nationalistic financial restrictions in Napoleonic Europe and the US in the 1960s were great for the city. The higher the walls of protectionist EU builds to retain and control capital, the greater the amount that would go elsewhere. Thanks for watching to the end.