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Brexit and the City City Research Online City, University of London Institutional Repository Citation: Blake, D. (2018). Brexit and the City. London: City, University of London. This is the draft version of the paper. This version of the publication may differ from the final published version. Permanent repository link: https://openaccess.city.ac.uk/id/eprint/19672/ Link to published version: Copyright: City Research Online aims to make research outputs of City, University of London available to a wider audience. Copyright and Moral Rights remain with the author(s) and/or copyright holders. URLs from City Research Online may be freely distributed and linked to. Reuse: Copies of full items can be used for personal research or study, educational, or not-for-profit purposes without prior permission or charge. Provided that the authors, title and full bibliographic details are credited, a hyperlink and/or URL is given for the original metadata page and the content is not changed in any way. City Research Online: http://openaccess.city.ac.uk/ [email protected] Brexit and the City Professor David Blake* City University of London [email protected] May 2018 [v2] (March 2017 [v1]) * I am most grateful to Kevin Dowd, Tim Congdon, Martin Howe QC, Patrick Minford, Barney Reynolds and Cormac McAuliffe for invaluable discussions and support during the preparation of this paper. Abstract ‘Brexit and the City’ reviews both the principal issues affecting the City of London following the Referendum vote to leave the EU and the key proposals that have been made for the City’s future relationship with the EU. The latter are examined in the light of the European Commission’s negotiating strategy and also what is needed to achieve the best possible outcome for the City and the UK economy. The report concludes that Brexit is a golden opportunity for the City of London to escape the protectionist clutches of the EU in order to maintain its position as a World Financial Centre leading the new digital revolution of blockchain and fintech. But to make the best of Brexit, the City needs to address the following issues. First, it should recognise that its place is to service the real financial needs of businesses and individuals in the UK, Europe and the rest of the world and that this is best done outside the EU which, because of its protectionism, its excessive regulation and the folly of the euro, is destroying growth and innovation in the EU member states. Second, it should agree a ‘consistent and forward-looking Brexit strategy’ in order to secure a ‘bold, bright, buccaneering post-Brexit future’, as demanded by the Lord Mayor of London, Jeffrey Mountevans, at the City Banquet at Mansion House on 26 October 2016. Third, it should build on the protections afforded by international law to counter the EU’s demands that providers of financial services to EU citizens and companies need to be physically located in the EU to do business. It is just as absurd to expect the City of London to move to Paris or Frankfurt after Brexit as it is to expect the French wine industry or the German car industry to move to the UK. There is more investment banking expertise on the Isle of Dogs than in the whole of continental Europe put together. Finally, it should aim to quickly recover the competitive edge that it has lost in recent years. The WTO has estimated that the City’s share of China’s imports of financial services (mainly insurance) was 3% in 2015, unchanged since 2011. Over the same period, the US share increased from 11% to 28%. Implications for the City of leaving the European Union On 23 June 2016, the British people voted to leave the EU. This is due to take place on 29 March 2019. The prime minister’s Lancaster House speech on 17 January 2017 made it clear that this meant also leaving the single market, the customs union and the European Economic Area, membership of which means accepting freedom of movement. This has powerful implications for the City: • It is unlikely that business with the EU27 will be conducted via passports in future. • Instead, and depending on the degree of co-operation from the EU27, the City should plan its future operations using either: o a third-country enhanced equivalence model with guarantees about how equivalence will be granted and removed, o mutual recognition of financial regulations with mutual market access, or o a World Financial Centre model where the City ‘goes it alone’. • The City should make the most of the transitional or implementation period between 30 March 2019 and 31 December 2020 to secure existing commercial relationships and initiate new ones, now that it will no longer be a rule taker from Brussels. • The City should encourage the government to support the development of legally binding regulatory standards at a global level free from political interference. The aim would be to promote global consistency and cooperation between regulatory authorities. • The City should encourage the government to support the overseas expansion of UK financial services in the fastest growing regions of the global economy. • The City should encourage the government to introduce a flexible system of work permits for skilled workers that covers workers who are offered a job in the UK and who are located in any country in the world outside the UK. Table of contents 1. Introduction ........................................................................................................................... 1 2. The City used to know its place ............................................................................................. 3 3. But then it began to behave very badly ................................................................................. 5 4. Joining the European Union made matters worse ................................................................ 8 5. Following the Referendum, the City was only concerned about its own interests ............... 9 6. The City’s pre-Referendum scare-mongering was soon shown up for what it was ............ 13 7. The Treasury also got it badly wrong ................................................................................... 14 8. The Bank of England overreacts .......................................................................................... 17 9. It does not take long for the EU’s deep-seated hostility to the UK and its anti-City prejudice to show its teeth ...................................................................................................... 20 10. The City’s current relationship with the EU ....................................................................... 25 10.1 Facts and figures .......................................................................................................... 25 10.2 Passports and equivalence .......................................................................................... 28 10.3 The Oliver Wyman report: The Impact of the UK’s Exit from the EU on the UK-based Financial Services Sector, October 2016 .............................................................................. 32 10.4 The Open Europe report: How the UK’s financial services sector can continue thriving after Brexit, October 2016 ................................................................................................... 37 11. What does the City want? .................................................................................................. 39 11.1 Access to the single market via passports is the preferred option ............................. 39 11.2 Regulation and compliance costs ................................................................................ 43 11.3 Access to talent ............................................................................................................ 45 11.4 Supporting support services ........................................................................................ 48 12. What do Remain politicians want? .................................................................................... 48 13. What does the UK financial regulator want?..................................................................... 50 14. The UK financial services industry’s advantages, vulnerabilities, threats and opportunities ........................................................................................................................... 53 14.1 Advantages ................................................................................................................... 53 14.2 Vulnerabilities .............................................................................................................. 57 14.3 Threats ......................................................................................................................... 59 14.4 Opportunities ............................................................................................................... 64 15. Why what the City wants won’t work and is also unnecessary ........................................ 69 16. What are the alternatives to what the City wants? ........................................................... 75 16.1 Enhanced equivalence model ...................................................................................... 75 16.2 Mutual recognition ...................................................................................................... 82 16.3 Special hybrid (Swiss insurance model) ....................................................................... 83 16.4 Dual regulatory regime (Channel
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