This article was originally published on The Commentator
The City of London, perhaps the UK’s foremost breadwinner, was very loudly and very publicly pro-Remain during the referendum. Most people would then assume Londoners would be advocating and pushing for the lightest Brexit model on the table — continued membership of the EU Single Market.
This is not the case, with many prominent figures in the City now calling for withdrawal from the Single Market. Despite being fearful of Brexit, many now see it as an opportunity to increase the wealth and status of the City of London.
So why did most in the City of London support Remain? The most talked about issue is financial passporting. Here, it is important to remember the EU is very protectionist in its trade policy — it wants to defend EU companies against outside competition.
In order to do this, what is called a ‘financial passport’ exists. It means instead of banks and financial firms having to be authorised separately in every single EU country, they can be authorised to do business in all EU Member States. The right to be able to gain one of these financial passports is only guaranteed by our continued membership of the Single Market.
The City’s greatest fear was being shut out of this system, which would heavily disrupt or even remove their ability to do business in the EU after Brexit.
This fear still exists. It is an important part of its business for the City to be the premier financial centre in Europe, but its key players have begun to see the opportunities Brexit offers.
The EU is on the path to increased over-regulation of the financial industry, with the possibility of an EU-wide financial transaction tax. Being outside this regulation would give the City a massive advantage over the financial centres in Europe such as Frankfurt, and allow it to maintain its dominance.
Financial services regulation was one of the areas the UK was often outvoted on in the European Parliament. Outside the EU and the Single Market, the Treasury would be able to set regulations specific to British needs, which because of the size and importance of our financial sector, are very different to other EU members.
There simply isn’t another truly significant financial centre anywhere in the EU — Paris, Frankfurt and Amsterdam all pale in comparison. This is why Britain was unable to stop a regulation called Mifid2, which was very damaging to small and medium-sized firms based in the City of London. They are just nowhere near as important to other EU countries as they are to the UK.
Rather than a set of rules and regulations over which we have only a minor influence, and an overall environment in which the EU seems indifferent to whether or not our UK financial sector succeeds, we will have regulations which are designed to let the City flourish. This can only be beneficial for our financial sector and the UK as a whole.
For the City to continue to thrive to its fullest, it will need continued financial passporting rights with the EU. Given how important financial services are to the UK’s economy, it is vital this forms a key part of the government’s negotiation strategy.
These are not the only demands the big companies in the City are likely to make. Much of their workforce comes from abroad, and concerns have been voiced about a potential immigration crackdown. Here, the City clearly will not have to worry. The pre-Brexit immigration system has been a massive hindrance to the ability to recruit from outside the EU, with reams of talent in the rest of the world closed off to them.
Under a new, fairer, points-based system, it will be easier for the City to hire skilled workers from outside the EU, because of the reduction in immigration from the EU. Already more than half of all foreign workers in the financial sector come from non-EU countries. Without the forced preference given to EU workers, this figure would be much higher. The extra skills and talent brought into the City will be a huge boost after Brexit.
Financial passporting rights are worth fighting for in the EU exit negotiations. It would be foolish to ignore the City in Brexit negotiations, given how important it is to the UK’s economy. Without financial passports, City firms would have to operate like their counterparts in Switzerland, who situate very small offices in EU countries to gain the right to do business there, whilst keeping their main operation in Switzerland.
While this would not be a disaster, it would mean it would make more sense for some companies to shift some business into an EU country. Over time, this would be more than replaced by the benefit of being outside EU regulations, but we should look to avoid this if we can.
There are reasons to think financial passport rights are very possible to gain in the negotiations. Many UK banks hold large amounts of EU bank and government debt. With Italian and other countries’ banks being so close to financial disaster, restricting one of their key lines of credit could very well push them over the edge.
To avoid financial chaos for themselves, they will need to continue to do business with the UK financial sector, making continued financial passports — or something similar — a real possibility.
The City of London has a bright future after Brexit. Whilst key players supported Remain for the sake of stability, many are now positive about the opportunities Brexit will bring. Better regulation and immigration rules will benefit the City, and as long as the UK government handles negotiations well, they could still maintain their financial passports.
Once we Get Britain Out of the EU, expect to see the UK financial sector go from strength to strength.