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This article is part of the Brexit and the City special report.
UK politicians and financiers are confident and even excited about life after Brexit for the UK financial services industry.
The sector is estimated to account for 10 percent of UK tax income and 2 million mostly highly skilled jobs. And as the UK economy adapts to life after Brexit, the importance of the financial sector is only likely to grow.
Still, London’s financial business has suffered the latest rules passed by Brussels restricting the UK’s access to wealthy EU businesses and private clients.
In January Amsterdam overtook London to become the largest equity trading center in Europe. In the run-up to Brexit, bank assets of over 1 trillion euros were booked from Great Britain in newly opened subsidiaries of international companies on the continent, the bid of the European Central Bank.
Why aren’t policymakers in London more concerned about the post-Brexit future? Here are the main reasons.
1. Regulatory competition
According to the consulting firm EY, just over 7,500 jobs in the financial services sector have been lost as a result of Brexit, compared with estimates from 2016 of around 80,000 potential job losses.
This is mainly because the UK is able to deviate from EU rules to make itself more attractive to businesses and high paid executives. So while billions of pounds of trade and wealth have moved into the bloc, the people who manage that money have largely stayed in the UK
Britain will also be on its feet faster than countries in the EU. With the transfer of new powers to UK regulators like the Financial Conduct Authority and the Bank of England this year, the UK will be able to quickly change regulations to adapt to new risks or seize new opportunities – legal process, which can take 27 years in the EU.
The UK, for example, has already relaxed its “dark pool” stock trading rules to attract more EU companies, while the bloc is still debating whether to strengthen them. The UK banking and insurance sector is also facing a restructuring that will allow smaller players to hold less capital in reserves and invest in riskier infrastructure projects than EU competitors who cannot.
In the meantime, the government is in the process of revising the fintech, asset management and stock exchange regime – and wants to demonstrate the benefits of Brexit and the agility of the new rule-making model.
While “complacency is definitely a risk,” the UK financial sector is in a good position to capitalize on the new post-Brexit reality, said Bim Afolami, a Conservative MP with a previous career in investment banking, in a telephone interview.
“Regulatory flexibility, the ability to change policies quickly when times change, is extremely important to a financial center, and we have it now in ways that weren’t there before Brexit,” he said.
2. Built-in advantage
Britain has long been the home of international trade law as most contracts in world trade are based on the English legal system. Coupled with its world-renowned university sector, the dominance of the English language in global business, and a time zone where business can be done concurrently with Asia and America, the country is in many ways well positioned to continue as a hub of global business wherever Finances play a big role.
The agglomeration effect provided by London’s status as a hub for finance, science, technology, politics and culture is also difficult to reproduce, which gives the UK an edge.
As the financial industry increasingly relies on software and data, employees move seamlessly from banks to large consulting firms, law firms, technology companies and vice versa. Because they don’t have to move home when they change homes, much of that talent is in staying in London.
“We trust in our core strengths,” said Catherine McGuinness, policy director for the City of London Corporation. “We see deep industry commitment to London, so we are not afraid of competition.”
3. Industrial policy
The UK government has included data transmission chapters in its most recent trade agreements, including those with the European Union and Japan. The hope is that through these non-localization agreements, London could build a bridge between Europe and Asia in terms of financial and professional services and related industries such as technology and law.
Government officials argue that the overarching policy of liberalizing the flow of data, promoting fundamental standards for green finance and working closely with overseas regulators will make London the obvious intermediary for companies with global operations.
Westminster is also counting on the success of its vaccination program, which brought the private sector, public service and politics close together and forced them to work together. A similar strategy could, according to experts, be applied to some types of financial services, particularly green finance.
“Unlocking the trillions it takes to invest in the net-zero transition at the pace dictated by climate science requires close collaboration between policymakers and financial markets. The UK government clearly recognizes this, “said Rhian-Mari Thomas, executive director of the Green Finance Institute, a private sector organization that promotes green finance policy.
The government has set itself the goal of seeing London as the world capital of green finance, building on the international clout it has built by hosting this year’s COP26 climate negotiations.
Chancellor Rishi Sunak recently changed the Bank of England’s remit to take sustainability into account when stimulating the economy and mandating large corporations to disclose their environmental impact. The UK is also among the first to adopt a firm net-zero carbon policy, outline plans to ban fossil fuel cars and issue green bonds to the general public.
“We were pleased with the government’s reaction after Brexit,” said one financial policy Officials informed of Sunak’s thinking said. The official added that since the UK left the EU in January, financiers and policymakers have been “on the same side for the first time in years”.
“We are realistic about losing access to the EU consumer. The UK is focused on its strong wholesale markets, ”he said, referring to investment management, foreign exchange and debt trading, efforts to raise capital for infrastructure projects, as well as trading in commodities, derivatives and increasingly digital assets.
The key to success will be for London to remain “more open and liberal to foreign trade in wholesale markets than the EU, US and China,” he said.
“You have to be somewhere where the international, cross-border part of the financial markets takes place. This is london “
-1. Trade loss
Despite these potential losses, London is losing in one important area: trading euro-denominated derivatives.
The total EU derivatives market stood at € 681 trillion in 2019, dwarfing other trading areas such as equity trading. And it’s a sector that is likely to continue to grow – albeit outside of the UK
“Business areas such as share and derivatives trading have shifted significantly to EU financial centers,” Bundesbank board member Joachim Wuermeling told German media.
By the end of 2020, financial institutions had relocated investments worth EUR 675 billion from the UK to Germany. “According to the banks’ current plans, asset removals will rise to 1.2 trillion euros by the end of next year alone,” said Wuermeling.
Derivatives trading is expected to spread across the continent. “The location depends on the underlying asset,” said Hubertus Vaeth, head of the Frankfurt Main Finance lobby group. “Paris is a leader in corporate bonds, Amsterdam is the first choice for stocks and Frankfurt has good prospects for interest rate swaps.”
According to Vaeth, the funds will shift further until mid-2022. By then, the so-called equivalence regime, which gives London-based banks equal access to European markets, will most likely come to an end.
There have been some notable trade moves already. According to IHS Markit, the British share of trading in euro interest rate swaps fell from 40 to 10 percent between July 2020 and January 2021. The market shares in the EU rose from less than 10 percent to 25 percent in the same period.
Not all business goes to the continent. Brexit has also boosted trading in euro-denominated interest rate swaps in the US, which benefits from a standing equivalence agreement.
However, if it is politically easier to lose to New York and not to EU locations after Brexit, London is still losing – especially if New York consolidates its role as a global financial center ahead of London in the long run.
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