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London will not only survive but thrive after Brexit (or will it?)

The hottest debate in London’s financial centre for the past year has been about its future prospects outside the European Union.

The debate became even more urgent in March 2017 when the UK government triggered Article 50 of the European Treaty, starting an expected two-year countdown of negotiation culminating in the UK’s exit from the EU. The financial services sector, focused on the City of London, is currently the EU’s financial centre as well as a major hub in its own right. The vexing question in UK business and politics is whether it will remain such a major contributor to the UK economy after Brexit.

To mark the triggering of Article 50, Thomson Reuters hosted a formal debate in London in April 2017 on the motion “The City will not only survive but thrive under Brexit”. The format was simple: two speakers for the motion; two against. On each side one speaker would offer a legal perspective; the other would speak for financial services.

The speakers for the motion were Barney Reynolds (partner and head of the Financial Institutions Advisory and Financial Regulatory Group at Shearman & Sterling LLP) and Helena Morrissey (chair of the UK’s Investment Association). Against the motion were James Grand (partner, Freshfields Bruckhaus Deringer LLP) and Alan Houmann (head of Government Affairs, Citi). The moderator was Reuters editor at large Axel Threlfall.

The event was held under the Chatham House Rule, so none of the comments below are attributed to any individual speaker.

The event opened with an audience poll on the motion: 23 percent supported the motion; 45 percent opposed; and 31 percent were undecided,

For the motion

The future looks bright for the UK: the country can now determine its own future. The challenge it faces is similar to a country achieving independence – to be like Singapore, for instance, which gained independence in 1965, with an economy the approximate size of Jamaica’s at the time, and set about building an economy and a society based on its strengths.

For the City, it is also an opportunity to repair its relationship with the British people, to reconnect with those who supported Brexit by demonstrating how financial services can support the UK’s development into a thriving commercial centre outside the EU.

The UK is already the world’s number one global centre for FinTech finance, green finance and high corporate governance standards. The main language is English, one of the most widely-spoken languages in the world, and English law is favoured across the world for contract law.

It also looks outwards for new opportunities. Before the Brexit vote, the UK government body the Financial Services Trade and Investment Board conducted research on the UK’s main trading partners and determined the key markets for the future would be China, India and the US.

Brexit is also an opportunity to decouple the British economy from membership of the EU. The eurozone represents the greatest systemic risk to the global economy, as there are fundamental problems in the design of the euro which had weighed on the UK’s original decision not to join, principally the failure to value accurately the risk of member state bonds. The introduction of the euro, we were told, also locked-in a federalist approach to the EU’s development, far from the free trade area (FTA) initially envisaged by the UK.

The UK has two options now: agreeing a deal with the EU based on some form of “enhanced equivalence” or a “go-it-alone” model which would allow the UK more freedom to devise the appropriate regulatory system.

As the financial markets operate on global processes there are already many global rules in place, and they are already observed by any economy aiming to be a global financial centre. Enhanced equivalence might simply be a re-stating of these – an acknowledgement that financial rulemaking aims for global standards anyway. But for the EU any deal on enhanced equivalence must not interfere with its trade rules. The UK’s rules would change – not the EU’s.

Go-it-alone on the other hand would massively enhance the competitiveness of the City by ensuring the optimum regulatory environment. UK regulators have already stated that there can be no lowering of regulatory standards as a result of Brexit. The UK’s trading partners would therefore be assured that current standards would remain and could be enhanced independently of the EU’s slow, committee-based regulatory change.

Against the motion

The question for the opponents of the motion was not whether the City would survive but whether it would thrive. It was agreed that the City would survive, but the opponents of the motion believe it will be smaller, with fewer avenues for growth – and it is happening already. When financial institutions say they will weather the effects of Brexit, they probably mean they will do so somewhere else.

Brexiteers (the popular term for campaigners for Brexit; the contrasting group are Remainers) were making a political argument, not a business argument. Businesses were left to ask the question: how can I be sure I can satisfy my clients without interruption during the next two years?

Brexit is not an “abandon ship” moment: the changes will be incremental; implementation will be pushed out to the last possible minute. But the direction of travel for businesses preparing for the future is unmistakable. Their EU-facing business will need to relocate to somewhere within the EU: where that is a small part of a business, the move is happening now.

As for the EU’s rulemakers, they are also the people who are going to set the agenda for the Brexit discussions. The sooner that agenda is agreed, the sooner everybody gets to discuss the things that matter. Discussions will have to take place within the confines of whatever is agreed at the agenda stage.

As for the cost of doing business, the UK is going to make it harder to attract and engage the best talent. The White Cliffs of Dover are no longer an invitation to talented people, but a wall they will have to scale.

The people most affected are already working in the UK: the consequence of Brexit is on people’s lives, and in the City that means the many thousands of people filling its offices.

The opponents of the motion separated its parts into whether the City would survive and whether it would thrive. It would survive in a reduced form; but as to whether it would thrive, the evidence suggested this less unlikely. The UK would lose its rights to “passport” its business into the EU. A report by Oliver Wyman for TheCityUK said if the worst came to the worst – if the “passporting” regime allowing UK businesses access to the EU were to fail – 70,000 jobs would go, £40 billion of revenues and £10 billion of taxes.

Globally the City is strong: by some measures it is the world’s financial centre. So what does New York have that London does not? It has the US as it deposit base, its hinterland. The City’s hinterland is the EU – one-third of its business is EU-facing – and without it the question is whether the UK can remain a global centre.

What would make the City thrive would be making the most of its competitiveness. But that doesn’t mean dropping taxes, or imposing light touch regulation. Neither is really on the cards. The EU would respond very badly.

So what is actually needed in order for the City to thrive would be a really good deal with the EU: something like joint supervision to maintain stability. A really good treaty.

The result

The audience poll was retaken at the end: 23 percent still supported the motion; but 70 percent now opposed; and only seven percent were undecided.

Motion rejected.

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