Philip Christopher Baldwin is a Huffington Post and Gay Times columnist.
Theresa May’s recent Brexit speech gave clarity on the deal we are aiming for upon leaving the EU. Despite losing the Supreme Court case on Article 50, the Conservative Party has a firm strategy. The Prime Minister has said that, for the sake of clarity and continuity, existing EU regulations will be enshrined in British law, and revoked after Brexit only by the consent of Parliament. EU law includes regulations, which come into force automatically, and directives, which need to be transposed into national law, and have always been open to member state interpretation. We have a trade deficit with Europe. Over the coming year, as elections take place in the Netherlands, France and Germany, we will see a European dialogue emerging which is more amenable to maintaining tariff-free trade relations with the UK.
How the financial services sector, which accounts for around ten per cent of our GDP, develops is going to be of strategic importance to our country. In keeping existing EU laws, May’s strategy sits well with my perception of how the UK financial services market is regulated. London is currently less regulated than the rest of Europe: this is much to its chagrin – and is why most of Europe’s financial business is based in London.
A major risk and a priority in the negotiations must be maintaining the EU’s system of financial passporting for British institutions. Financial institutions are regulated by their home governments throughout the EU. This allows them to do business anywhere in Europe, based on a single European approval. For example, for Barclays to operate in Paris, it does not need French approval – its UK approval is sufficient. Alternatively, for BNP Paribas to operate in London, it does not need Bank of England approval: its French approval is sufficient. The loss of this passporting system for UK financial institutions could result in significant business leaving London.
The sector most vulnerable to the loss of passporting would be Euro currency trading and non-UK share and bond trading, in which London currently has most of the European market. This business could move to Frankfurt or Paris, something the Germans and French are encouraging. Another possibility is that business will simply move to New York or Hong Kong, leaving Europe without a major financial centre. It is frustrating that HSBC and UBS are already moving jobs to Europe. We must give the City specific reassurances that London will remain competitive. We must continue to let the goose lay the golden eggs. It should be noted that any loss of passporting for UK institutions would be partially mitigated by the corresponding loss of European institution passports in London. None the less, on passporting, we have more to lose.
Ultimately, regulation is multilateral, not just UK/EU bilateral. London is currently more regulated than the USA. However, it is rapidly introducing many of the European rules implemented by the UK over the last decade. These includes the Markets in Financial Instruments Directive (MiFID) and client money rules. The City of London must be regulated (and taxed) in a way which is fair, transparent, competitive and has the best interests of our country at heart. Overall, my view is that the mix of customer, investor and credit protection in London is quite well balanced. Perhaps the biggest risk to London’s financial services sector, now that we’re leaving the EU, is the takeover of the London Stock Exchange by Deutsche Boerse. We do not want EU regulations to be allowed in via the back door.
Should the City come under threat, its global position as a financial centre could be maintained not exclusively through a more competitive tax regime. There is unwieldy legislation, which could be streamlined in form, without losing the substance. Keeping EU legislation makes sense during this period of transition and helps stability. However, financial services sector workers have to deal with some clumsy EU legislation. So there is an opportunity for limited deregulation, for which the focus should be making deals commercially more expedient, thereby enhancing our global competitiveness, and keeping and attracting jobs.
An example of this is the Prospectus Directive. This sets out extensive requirements for an offering document used in a share or equity issuance. This document is never used by investors when researching an investment, usually remaining unread by them. Investors have already taken their decision based upon external advice. This is an example of a regulation created by bureaucrats that bears no relation to the commercial requirements of a transaction.
We should be cautious about letting UK civil servants take sweeping decisions on regulations (another reason to maintain the status quo). The City should be carefully consulted, so that future regulations enhance, rather than shackle, the financial services sector. Any deregulation will have to take place carefully. The Vancouver Stock Exchange, for example, is sometimes described as the “Wild West” of the financial services sector. This is because of its excessively light touch approach.
Given the context, May’s methodology of keeping existing EU legislation works well, whilst acknowledging the future potential of Parliament to make revisions once the dust has settled. As Britain progresses towards Leave, we should ensure that a rigorous, yet competitive, commercial environment is maintained. This will ensure our economy continues to be characterised by growth and low unemployment, qualities which remain elusive for many of our European counterparts.