Alasdair Haynes, chief executive of Aquis Exchange, is old enough to remember Black Monday, the global market meltdown that sent stocks plummeting in a terrifying crash. But the first day of trading in 2021, as the UK began life after the Brexit transition, is up there with the most significant ones in British financial history, he says.
“Monday Jan 4 was one of those days out of the maybe two or three in a career where something extraordinary happens. I’m not quite certain that the man or woman on the street necessarily knows just what a fundamental thing happened.”
Trading in EU company shares worth €6bn (£5.3bn) shifted out of London and on to the Continent in direct response to Brussels’ refusal to recognise most UK regulatory systems as equivalent to its own.
“For the foreseeable future, there is no miracle that’s suddenly going to create a situation where that business is coming back. It means that London as a financial centre is probably in the most precarious position it has ever been in my lifetime,” says Haynes.
Like many City bosses, he views Brexit as a mistake, but still says London should not be written off as a financial centre.
The City is yet to agree its financial trading relationship with the EU
Credit: Moment RF/ Tim Grist Photography
The financial services sector has boomed since the sudden deregulation of markets under Margaret Thatcher propelled it to the forefront of the banking world.
The so-called Big Bang helped drive British finance to become a £132bn industry by 2018, employing more than a million people.
Now, Rishi Sunak is promising “Big Bang 2.0” as he seeks to reposition it on the international stage. The Chancellor, a Brexit supporter, said leaving the EU will “reinforce the UK’s position as a globally pre-eminent financial centre”.
The UK-EU trade deal left the finance industry facing the hard Brexit it had feared and, in most cases, prepared for.
Ministers want to fill some of the gaps through a memorandum of understanding with the EU, but this is likely to be limited to areas where it suits Brussels to permit the UK access.
So far, this has been limited to derivatives trading to help liquidity in EU markets. It could be extended to other areas of UK dominance where the EU27 would like to retain access, such as reinsurance.
Many in the City are already looking beyond narrow “equivalence” arrangements on mutual market access. The focus is shifting outwards from the EU on to how the UK can protect its position as a global financial powerhouse.
Businesses are wargaming how Brexit and rapidly advancing technology can reshape the financial sector. Servicing of British investment funds has seeped offshore to lower-cost locations such as Dublin or Eastern Europe. The reintroduction of trade and regulatory barriers means offshoring this work to the Continent now makes less sense for some businesses. Similarly, the progress of new technology means cheaper overseas labour can now be undercut by software that can be run just as easily from the UK.
“The industry would like more opportunities to bring the broader aspects of investment management and servicing industries back onshore into the UK,” says Tony Gaughan, leader of global asset management at Deloitte. “You might argue that this horse bolted many, many years ago but there’s a feeling that we could have more different types of roles [in the UK] – probably less well paid but higher volume. I think there’s a growing feeling that many have not perhaps considered issues like growing the economic value of the investment industry to the regions, over the longer term.”
Some firms are weighing up whether to bring some operations back to the UK, particularly to places like Glasgow or Northern Ireland, he says.
The opportunities extend far beyond fund management and into growing areas such as fintech, green bonds and “sustainable” investment, where the UK is making inroads.
Ron Kalifa, the former Worldpay boss, is heading a review of how to boost the fintech sector, which is already a leader in areas such as digital payments.
Providing top-class infrastructure and technology to allow people and businesses “to access, borrow and invest their money, will all be critical areas of a competitive edge”, says Richard Hammell, Deloitte’s UK head of financial services.
“I think the UK is going to want to economically invest disproportionately in those areas to be the leading centre for the digital future of financial services.”
In an effort to attract more companies, particularly in tech, to choose London as a venue to list their shares, the Government has called in Lord Hill, the former EU commissioner, to explore possible rule changes. Suggestions include allowing dual share classes which would enable founders to retain a majority in shareholder votes even after reducing their stakes.
This change could help London to close the gap to New York, a favoured destination for tech founders taking their companies to public markets.
The approach is not without risks. Peter Swabey at the Chartered Governance Institute says he is “instinctively nervous” about deviating from existing governance standards without good reason.
However, he acknowledges that regulations should be proportionate to a company’s circumstances. Even if looser standards are “undesirable in some ways”, they can be justified if investors understand what they are agreeing to, he says.
“One of the strengths of the UK market is its governance so I think that any desire to deregulate on the governance front should be looked at very carefully,” Swabey adds.
Ministers insist high standards will remain but are keen to cut red tape. Boris Johnson has issued a plea to business leaders to suggest how to streamline regulations.
One EU rulebook that could face changes is Mifid 2, which was intended to reduce conflicts of interest but is widely felt to have harmed capital markets by reducing the quality of analyst research available to investors keen to invest in smaller firms.
Meanwhile, insurers are eyeing up a loosening of Europe-wide capital requirements. Relaxing the Solvency 2 rulebook could free up billions of pounds on their balance sheets that might be ploughed into the wider economy.
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A common complaint is that the rules, initially driven by the UK, have become unwieldy. “The problem with Solvency 2 is it got so prescriptive in a very European sort of way… that some of it was just counter-productive overall,” says Tracy Blackwell, chief executive of the Pension Insurance Corporation. The rules force insurers to structure some investments in a way that is “nonsensical from an economic perspective”, she says.
Tech firms are hoping that a shake-up could liberate pension funds to invest in smaller, private companies, helping them grow in the longer term.
Deviating from the EU could result in the bloc excluding British firms from accessing its markets. But companies are trying to see the big picture and focus on the UK’s ability to draw interest from around the world for everything from its capital markets to its fintech firms.
“A lot of people want to get in on this game so New York, Shanghai and the Middle East are the places that we should have a real eye on as we build on what we’ve got in fintech, notwithstanding that we still want to keep as much European business as we can,” says Julian David, chief executive of techUK, the trade body.
It will likely take years to understand Brexit’s true effect on financial services, and whether Sunak and his acolytes have judged the response correctly.
Whatever the destination, there will be bumps in the road, says Haynes: “We have politics playing with finance, which is always quite a dangerous concoction.”