By Roy C. Smith
For years successive
UK governments have fought the EU to protect the freedom of the City’s
financial markets. Now they won’t have to.
Yes, we know that the unexpected Brexit vote has thrown much
into confusion, to be sorted out messily over an uncertain period of time, but
the effects on the City after the smoke clears are likely to be more beneficial
than not.
Indeed, the City has been around a lot longer than the EU,
and its generally unregulated Euromarket, born in the 1960s, has evolved into the
world’s largest capital market for global corporations, banks and governments,
generating $4 trillion of new issues of debt and equity in 2015 as compared to less
than $3 trillion in the USA.
Not much of this volume was British, of course; the markets
have evolved to what and where they are because they have attracted others to
use them. Over many generations, London, unlike any other European city, has learned
to appreciate the value of low tax rates and a light regulatory touch that favors
competitive free-market pricing of financial assets for issuers and investors
from all over the world.
It has also accumulated a large financial talent pool with an
accompanying infrastructure. London markets in securities, foreign exchange,
commodities, and derivatives are hard wired into counterparts in New York,
Toyko, Hong Kong and elsewhere to present a seamless, high-tech global trading
environment in financial instruments of all kinds. These markets also serve as
a hub for intra-European trading, where local European markets have benefitted
by increasingly being integrated into the Euromarkets.
According to a recent McKinsey report, the global value of
all outstanding securities in the world in 2015 was approximately $300 trillion,
more than 3% of world GDP. The London-based markets account for a major chunk
of this sum.
Since its beginning, the EU has been distrustful of the
power of global financial markets, and since the 2008 crisis has attempted to
impose significant limits on them. As the UK markets are the largest in Europe,
they are the most affected by these ideas.
British governments have blocked or opted out of many of
these efforts, but some still remain, in one form or another.
These include limits on bonuses paid to bankers, the
European Banking Authority’s inclusion of British banks in its oversight and
regulatory grasp, the applicability of a Financial Transaction Tax (which has
been delayed, if not undone, with help from other EU member countries), and a
proposal from the ECB to force clearing houses used by EU members to be located
in continental Europe. Other such rules could be introduced in the future.
Being Out, of course, means not having to worry about these
incursions any longer. But being Out also means the EU might enact other
anti-market regulations that might require, as an extreme example, that EU
issuers and investors only use EU regulated markets. That would be a serious self-injuring mistake that likely
would create ways around the rules, or encourage other member countries to
object, but even so, British firms should still be able to participate in such
transactions.
That is because, as American firms have realized, under the
Single Market Act, anyone can set up a subsidiary in the EU to do its business
there with all EU membership benefits. Being outside the EU has not hurt US
global capital market firms, which have a dominant share of the Euro market
business. Though this may mean some legal reorganizing and shift of personnel to
get passporting right, there is little reason for British firms to think they
might not be able to adapt effective platforms to
preserve their market shares.
In any case, it’s too early to worry. The UK has to serve
official notice of its intention to withdraw, which may take several more months
to do, and then there is a two-year negotiation period (which can be extended)
during which competent officials try to reach a sensible agreement aligned with
their own interests out of the public eye.
They will be negotiating just how Out Britain is to be. Out
like Norway with special trading rights, or like Switzerland, which has
bi-lateral trade deals with most EU countries. That kind of Out might not be so
bad.
In the meantime, Britain is still In and will l be in for
several more years.
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