A reminder of what’s at stake as the UK begins to negotiate the City’s future relationship with the EU

Darren Sinden

60% of the continents capital markets business, 78% of its FX business and 74% of its derivatives business is transacted in London

Talks between the European Union and the UK are due to start in earnest over the future relationship between the two parties in financial services, and in particular about the status of and access to financial markets in the wake of Brexit.

London is, of course, the pre-eminent financial centre in Europe and in some markets such as foreign exchange and insurance it is the world’s number one market place.

However, the UK left the trading bloc without any hard and fast agreement in place for this key business sector, which officials will now try to formally negotiate.

An article from the website Briefings for Britain, which brings together academics and business leaders on key issues such as politics and trade, has set out exactly what is at stake in these negotiations.

The article highlights that the City of London transacts six-times as many financial services business with the EU than comes the other way and that Canary Wharf alone does a greater volume of business than the rest of Europe combined.

London accounts for 40% of all of Europe’s assets under management, and 85% of hedge fund assets. 60% of the continents capital markets business, 78% of its FX business and 74% of its derivatives business is transacted in London.

The UK s banking industry is the largest source of cross border lending to EU banks and corporates with more than £1.0 trillion in outstanding loans between the groups.

However, as the article points out the UK Government appeared to be more concerned with negotiating fishing rights than securing equitable terms for the City of London. The City and its invisible earnings contribute around 300 times as much annually to the UK economy as the fishing industry does, a mismatch that needs to be addressed in the upcoming negotiations.

At the moment there is little more than a place holder between the UK and the European Union over financial services, in the shape of a non-binding commitment for the two sides to corporate to reach a memorandum of understanding and that any negotiations should begin before March 2021.

Under the current situation, UK financial services businesses can only access the single market if the UK’s regulatory system is deemed equivalent to that of the EU. However, that judgement of equivalence is not binding and can be withdrawn at short notice.

The UK’s regulatory framework and rules were deemed equivalent up until midnight on the 31st December and very little if anything has been changed on the UK side since then. With the FCA only trying to clarify grey areas and make accommodation for them, while allowing access to the UK for many EU businesses without reciprocation.

So it seems as though there is a political dimension at work here and that Brussels is trying to make a land grab for a chunk of the city of London’s business. However, there are no large integrated financial centres in Europe rather just a series of far smaller competing regional hubs. It’s questionable, that even if the EU did get its way, exactly how and where that business would be facilitated.

The chairman of UBS and former Bundesbank President Axel Webber told an FT conference in December that: “No other city had emerged as a viable challenger to the City (of London) as a base for international finance”

He added that “The division of Europe is a massive benefit to the City of London because if Europe were united the impact of Brexit would be much more,”

Mr Webber highlighted that his own firm had more than 5000 staff based in London and that no more 250 had relocated to the EU in preparation for Brexit.

Though perhaps his most telling comment was this: “Europe is a fragmented market of 27 regulators, 27 financial markets, with a 28th regulator on top. You would not invent a system like that if you were to design a functioning system”

The UK will need to adopt a firm hand in its negotiations with Brussels but it will also need to be mindful of limiting the damage that could be done to the City in any protracted transition. Simply because dragging the talks out could well be part of the European Union’s strategy.

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