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.