Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
Several of the large City investment banks have promoted the argument that the City supports the Remain case. They enjoy an oligopoly position in a protected (single) market, and are understandably protecting their interests. However, the evidence suggests that a majority of those working in the City are in the Brexit camp and believe that, on balance, the City would be little harmed by Brexit and would have a better future outside the EU.
Nowhere within the EU has anything like the skills and support services of London. Of London’s current business exports, the EU represents approximately 30 per cent. The EU needs London just as much, if not more, than London needs to be able to export its services to the EU. A Brexit deal would, therefore be, likely to deliver passporting services where required.
A focus on the key City sectors also suggests that they would be little affected by Brexit. In the investment management industry those addressing EU retail markets mostly already ise a Luxembourg vehicle. The specialist and hedge fund vehicles are mostly London-listed, Channel Island funds which can address individual markets on the basis of existing country by country arrangements, and Guernsey is also set to be in the first wave of Alternative Investment Fund Managers Directive (AIFMD) equivalent passporting. Most of the exports of the insurance industry are to North America and Asia, where ditching EU Solvency 2 requirements would save extremely costly and over- complicated regulatory requirements. If necessary, the banking industry could use brass plate operations within the EU.
The choice is therefore between leaving and remaining in a badly regulated EU, dominated by 22 out of 28 countries with no ‘skin in the game’ and with a Eurozone agenda. Leaving the EU would facilitate greater opportunities for Britain to trade globally – particularly as China expands its overseas financial activities – and enable us to ditch or reform damaging regulation imposed by the EU.
Of the 20 main financial regulation measures from the EU over the last decade, about half would have happened anyway, and the other half are part of the EU agenda under which the measures have been damaging to the UK. The main items of this have been the Prospectus Directive, AIFMD, the Passporting Services Directive, the Clearing House Location Policy, the Markets in Financial Instruments Directive (MIFID 2) and the Bankers Bonus Cap.
A Financial Transaction Tax, which would drive huge volumes of business to New York, now has the support of ten EU member governments and would be the most damaging of all. More recently, EU state aid policy has been used to damage the UK Enterprise Investment Scheme, which will reduce risk capital for SMEs.
Moreover, in addition to the big-issue, damaging EU regulations are the micro-level ones, of which there are 420 in the pipeline. Examples of these are the European Safety and Market Authority (ESMA), which now seeks to regulate 95 per cent of market-making transactions through pre-advice on prices (which will kill market)s; the ESMA guidelines for market abuse regulation, which are unclear and muddy the system; the detailed requirements of MIFID 2 which are damaging to private client investment management, and the requirements limiting the trading of shares outside stock markets via the use of dark pools.
Culturally, the EU is generally hostile to the financial services industry: three out of four UK appeals to the European Court of Justice have failed, and the appeals were about serious discrimination. EU-driven financial regulation also tends to be protectionist.
Outside the EU, the UK would be able remain a member of all key international financial bodies. Without the damaging regulation that is either in place or in the pipeline, we could have a more competitive global financial services industry and a safer banking system with adequate bank capital requirements. We could strike agreements with other economies bilaterally. We could trade with the EU on WTO terms.
For the City, a crucial requirement of the Remain case which has not been achieved would be for the UK to consent to financial regulation measures on the basis ofa veto, analogous to France’s consent requirements with regard to its largest industry – agriculture.
In the wider context, financial services represent approximately 8 per cent of GDP of which 50 per cent is domestic. City exports to the EU represent only some 1.2 per cent of GDP. Given the weakness of EU economies, the scope for the City to increase its export of financial services to the EU is limited. China, for example, represents key potential growth territory. The impact of Brexit on the UK’s financial services industry would be much less than some large institutions have claimed both relatively and specifically. The investment management industry would be little affected; the banking sector has already a carve up, but could also provide their services if necessary via EU-based brass plate operations, and insurance exports are already largely to other parts of the world. UK exports of financial services to the EU are largely wholesale or institutional, so the scope for negotiating access to the EU is relatively straightforward.
As Mervyn King has pointed out, the decision to go ahead with monetary union was reckless and made by bureaucratic decision, not by democratic consent. Trust with money requires sovereignty. The Euro is having a Gold Standard-type standard on southern European economies, including France for this purpose, which cannot compete with the more efficient German-dominated northern economies. As with the impact of Versailles reparation payments after the First World War the real danger of the Euro is political – that, in due course it will lead to extreme left or extreme right regimes coming to power in these countries.
The UK signed up to the first and second stages of EMU. Arguably, it would be safer and better for both the City and for the UK as a whole to disengage from the ill-conceived Euro initiative before it blows up, and trade on WTO terms, applying parallel EU regulations on exports only where necessary for EU exports, and not on either the domestic UK market or other international financial exports.
Voters should listen to the majority of the City, which is fed up with over-prescriptive EU regulation and for whom exports to the EU are a relatively small part of their business – rather than the oligopolists who are understandably keen to protect their position in a protectionist EU market.