Brexit and the City Saying No to the Princes of Europe: The City of London as a World Financial Centre following Brexit Or Passport to Pimlico: The City of London’s post-Brexit future depending on whether it is located inside or outside Pimlico or even possibly Latvia Professor David Blake* Cass Business School City University of London [email protected] March 2017 [v10] * I am most grateful to Kevin Dowd, Tim Congdon, Daniel Corrigan, Martin Howe QC, Laurence Jones, Edgar Miller and Patrick Minford for invaluable discussions and support during the preparation of this paper. Highlights On 23 June 2016, the British people voted to leave the EU. The prime minister’s Lancaster House speech on 17 January 2017 made it very 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 dual regulatory regime, based on a third-party expanded equivalence model with guarantees about how equivalence will be granted and removed, or o the World Financial Centre model where the City ‘goes it alone’. • Transitional arrangements will also depend on the degree of co-operation from the EU27. It is in everybody’s interests that any transitional arrangements are kept as short term as possible, no longer than is needed to bridge the gap between the UK’s exit from the EU and the conclusion of any formal long-term trading agreement with the EU. If, as seems possible, the EU is not interested in such an agreement, then the UK should exit from the EU immediately this becomes apparent. • 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. The most important task for the government when it triggers Article 50 and opens negotiations with the EU is determine whether the EU is willing to co-operate on achieving the best possible outcome for both UK and EU27 citizens. The most important collective task for the City in helping to achieve this outcome is to refuse to move business to the continent. 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 has become full of whiners concerned only about their 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 ...................................................................................................................... 19 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 ............................................................................................................ 44 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 .................................................................................................................................................. 52 14.1 Advantages ................................................................................................................... 52 14.2 Vulnerabilities .............................................................................................................. 55 14.3 Threats ......................................................................................................................... 57 14.4 Opportunities ............................................................................................................... 60 15. Why what the City wants won’t work and is also unnecessary ........................................ 65 16. What are the alternatives to what the City wants? ........................................................... 71 16.1 Expanded equivalence model ...................................................................................... 71 16.2 Special hybrid (Swiss insurance model) ....................................................................... 75 16.3 Dual regulatory regime (Channel Islands model) ........................................................ 76 16.4 Multi-layered approach (Country-by-country model) ................................................. 77 16.5 Establish a fully capitalised subsidiary (Swiss banking model) .................................... 77 16.6 The World Financial Centre model .............................................................................. 78 17. How feasible are these alternatives?................................................................................. 81 18. Transitional arrangements ................................................................................................. 85 18.1 Is a transitional arrangement needed?........................................................................ 85 18.2 Types of transitional arrangements ............................................................................. 86 The accident: an almost immediate exit.......................................................................... 86 The status quo prolonged: lasting one to three years..................................................... 87 The glide path: lasting into the mid-2020s ...................................................................... 87 The basics: lasting into the mid-2020s ............................................................................ 87 Remaining in the European Economic Area: lasting into the mid-2020s ........................ 87 18.3 How long should transitional arrangements last? ....................................................... 88 18.4 What if a transitional arrangement is not offered?..................................................... 90 19. Recommendations, challenges and bargaining chips ........................................................ 91 19.1 Recommendations ....................................................................................................... 91 1. The UK financial services industry’s future relationship with the EU.......................... 91 2. Work permits ............................................................................................................... 92 3. Transitional arrangements ........................................................................................... 92 4. Encourage the development of global standards in financial regulation that are free from political interference ..............................................................................................