London to take Brexit in its stride

Do not weep for the City of London. Britain’s financial hub has withstood challenges far greater than Brexit.

London’s financial district. Pic: AFP

Do not weep for the City of London. Britain’s financial hub has withstood challenges far greater than Brexit. It has risen from the dead on many occasions.

Until 1914 the square mile was the global hub for the gold standard, the international system of fixed exchange rates. Then war broke out, the gold standard collapsed and London’s main source of business disappeared overnight. But in the following years the City reinvented itself as the leading destination for financiers to trade and hedge their newly floating currencies.

In the 1940s the US Treasury Secretary Henry Morgenthau pledged to “move the financial centre of the world” away from London. He failed to make even a dent.

In the 1950s and 1960s, politicians around the world slapped controls on capital flows. The City’s response was to invent the Eurodollar market, allowing banks to circumvent national regulations by funnelling their money through London.

The City became the pre-eminent global hub because of — not in spite of — regulations imposed by bureaucrats and politicians. So it is odd that the latest argument against a clean break with Europe is that UK banks would become mired in extra red tape. There are plenty of reasons why cutting our ties might be foolhardy: what about the implications for trade, for capital flows, for customs rules and immigration? What about our awful current account deficit, our reliance on the rest of the world for capital?

But the City?

To understand just how flimsy such arguments are you need to hold your breath and do what no politician likes doing: examine the details. Consider the chief scare story — that if Britain left the single market, it would also forfeit the right to what is known as passporting. With a passport, EU-based firms can easily sell financial services to others on the Continent. Described this way, the system sounds pretty indispensable. But dig deeper and it becomes much more equivocal.

These passports might better be described as single-use visas. Say you’re an investment bank wanting to sell shares in a public offering across the EU: you will need 27 different passports, one for each country you’re selling to. If you also want to sell a different product, such as insurance, that’s another 27 passports. The upshot is that while there are 5,476 firms in London in possession of at least one passport, there are a staggering 336,421 passports in total.

By the way, the passports do not liberate you from onerous national regulations. Want to sell a product in France? You’ll also have to appoint a “paying agent” based in the country. Want to market funds to investors in Croatia? That’ll be a 0.3 per cent fee please, to be paid to local businesses.

Nor are passports particularly cheap — there are multiple processing fees. And that’s before all the other invisible costs, such as translating your prospectuses into German, Danish or Greek.

In short, while passports have made doing business with Europe easier, particularly for investment banks, they have hardly eradicated compliance costs. According to an estimate by the Open Europe think tank, the cost of regulations in the asset management industry alone is £2 billion a year.

Still, for all the system’s flaws, surely we’re better in than out? Again, not altogether clear. For one thing, parts of the passporting scheme will soon be replaced by a new set-up known as “equivalence”. Instead of having a passport, a country can have its financial regulations rubber-stamped by European authorities, allowing it to do business on the Continent. Crucially for Britain, equivalence is open to countries outside the EU.

What’s more, the EU is even considering giving passports to outsiders. The European Securities and Markets Authority said recently that it saw no reason why Canada, Japan and Switzerland should not be eligible for passports to trade investment funds. In other words, Britain might not lose all its passporting rights if it left the single market.

That so little of the above has been aired is hardly a surprise. The vote may be over but the scaremongering continues. Would losing passporting be a disaster for the City? Probably not, said the ratings agency Moody’s in a report this week.

Then again, as with so much else, everything depends on how the next few years of negotiations go. Britain could lose passporting and never know the difference. It could keep passporting and still face extra barriers from national regulators. More fundamentally, whatever the result, we can probably presume that the City will do what it has done for centuries, and survive.

However, take a step back for a moment. Not long ago, we were debating whether the financial sector was good or bad for the UK economy. Now everyone is debating how we can safeguard it. It is another reminder of the most invidious feature of Brexit: that it has got us all asking the wrong questions.

The question should not be how to save the City, but how to ensure it doesn’t destabilise the rest of the economy. Not whether we’d be better off inside the single market trading on World Trade Organisation rules, but why Britain can do nothing to improve its trade deficit. The real travesty of Brexit is that it has forced us to focus on piddling policies like passporting at a time when we need to be answering much bigger questions about our future.

The Times