By Lionel Laurent
THE Bank of England’s outgoing boss, Mark Carney, has long come under fire from pro-Brexit politicians for his grim predictions for the British economy outside the European Union, including the possibility of a recession. It got to the point that it looked like one of the biggest tasks for his successor, Andrew Bailey, would be to un-ruffle feathers.
Yet Carney seems to be taking a more optimistic note of late, at least on the City of London’s ability to navigate Brexit and retain its role as a preeminent financial center. As the EU lays down the gauntlet on the trade rules and regulations it expects the UK to follow in return for access to the 27-member bloc’s lucrative single market, Carney seems unimpressed with the idea that the City should follow its lead. “It is not desirable at all to align our approaches, to tie our hands and to outsource regulation and effectively supervision of the world’s leading complex financial system to another jurisdiction,” he told the Financial Times last week.
This is a view shared by Boris Johnson — the UK Prime Minister recently rejected the idea of “regulatory alignment” as a basis for a post-Brexit partnership — and one that financial-industry executives have eagerly lined up to back. Legal & General Group Plc’s Nigel Wilson told the Telegraph the UK should “move as far away as we can” from EU rules. Paul Feeney, chief executive officer of wealth-manager Quilter Plc, went further to say future rules should be designed to strengthen Britain’s position as “a competitive and leading global investment center.” This sounds like the City wanting to have its cake and eat it too: Access to EU markets without the cost of having to play by EU rules.
It’s worth taking this chest-beating with a pinch of salt. Brexit is not a win for the City, and was never designed as such. The fact that the UK is leaving the single market and customs union, and that financial services aren’t part of the Brexit settlement, shows how little the interests of the financial sector have weighed in the debate since the 2016 referendum. London owes much of its growth in recent decades from the free movement of capital and labor that comes with EU membership. It exports about £60 billion ($78 billion) annually in financial and legal services to the bloc every year, and is still the world’s No. 1 center for trading euro derivatives. Barriers to trade won’t help any of this.
What the confident rhetoric is really about is trying to extract preferential treatment within the EU’s rules, rather than pretending that City firms could afford to do away with them altogether. This hinges around the technical details of so-called “equivalence” — a badge of approval granted to countries the EU deems close enough to its rules to be given market access to areas like investing or insurance. What the likes of Carney and Wilson are saying is the City is too important to be forced into a one-way street on regulation — simply adopting the EU’s rules — and should be given wiggle room within equivalence. This might mean tweaks to capital requirements under Solvency II, or to equity trading curbs under MiFID II, or even to banker-unfriendly rules like caps on bonuses. The terms of equivalence aren’t set in stone, and are a negotiation in themselves.
In an ideal world, a compromise deal on financial services would be straightforward. The EU knows that it can’t replace the City overnight either: London is currently its biggest capital market, and it would take years if not decades to properly integrate the continent’s disparate hubs. It seems eminently sensible that equivalence with the UK should be a two-way street: The City should recognize that it’s the best way to guarantee EU market access right now, while Brussels should understand that in the long run a bit of “rule-taking” from London might actually help its own ambitions to build a continent-wide financial system to replace Britain’s.
But that requires trust and goodwill on both sides. And to EU ears, the City’s current stance will sound too much like it wants to secure market access while also setting the rules. One of Brexit supporters’ favorite threats has been that deregulation would insulate the UK from any serious economic hit from leaving the EU. So Brussels is acutely sensitive to any sign that the country is more interested in competing with the EU (via regulatory arbitrage) than partnering with it. Talks over trade, while technically separate from financial services, will doubtless involve the kind of horse-trading over fish or agriculture that could sour the mood on both sides. And the EU is also keen to keep up the pressure on UK-based firms to relocate more activities to the continent, as reiterated by European Central Bank Vice-President Luis de Guindos last week. Even Legal & General is among those expanding their presence in the euro region to keep business going.
Considering how easily the upcoming talks could deteriorate, it’s far too early for anyone to gloat — least of all the City.