Capital punishment: Would a Brexit harm the City?
Mark Field, Conservative MP for the Cities of London & Westminster
‘Don’t do it!’ This was the unequivocal response of a Norwegian parliamentarian recently when I explained to her the enthusiasm of some ‘Brexit’ advocates to mimic Norway, Liechtenstein and Iceland in their trading relationships with the EU. “We have all of the rules”, she explained, “but none of the influence”.
My working assumption would be that post-Brexit, the UK would seek to continue its well-established trading relationship with the EU rather than follow the ‘Swiss model’ of countless bilateral agreements. After all, the EU’s Single Market is the biggest market around for UK exports of financial services, responsible for a third of the UK’s surplus in financial services in 2012.
This vast economic zone, larger than the combined GDPs of the US and Japan, provides a level playing field in which UK businesses can trade. This has allowed the City of London to develop a role as Europe’s offshore-onshore financial centre, supplying legal, financial and professional services with ease to our European neighbours while providing a base to foreign firms seeking access to the continent. It has been a recipe for enormous success but has been sustainable only because the UK has also vigorously fought to shape the rules of the market to its advantage, in spite of sitting outside the Eurozone.
In the event of Brexit, the City would face a stark choice between access to a Single Market over whose rules it would have no influence or regulatory autonomy with tariffs galore. Unless the City can find some way of squaring that circle, relinquishing EU membership would come without substantial short or long term benefits for our financial services industry, one of the few sectors in which we can genuinely claim to be world leaders.
Ruth Lea, Economic Adviser to the Arbuthnot Banking Group
Would the short-term costs be outweighed by longer-term benefits? Yes, in a word. Doubtless City institutions would face short-term administrative costs if there was a Brexit. But these institutions, staffed by some of Britain’s brightest and best, are used to adapting to change. And it is baseless scaremongering to suggest their trade with the EU would be seriously impaired. Citi’s UK boss James Bardrick is on the record saying: “It [Brexit] would be a less-good outcome, but we can cope if we have to cross borders between the UK and the EU.” The City would cope.
The City is a major global financial centre, frequently topping the rankings. Its global reach is unparalleled. And it is therefore unsurprising that it does considerably more trade with non-EU countries than with EU countries. In 2013 the EU’s share of UK exports of insurance and financial services was only about a third. Moreover, the share has fallen in recent years and can be expected to fall further given the superior growth prospects in non-EU markets. Growth matters more than membership of the Single Market.
Given these circumstances global competitiveness is vital to the City’s long-term prosperity. Here Brexit would score. Crucially, Britain would be able to amend/repeal current EU regulations it considers most damaging. Anti-competitive restrictions on bankers’ bonuses and the forthcoming Solvency II, about which the Prudential is so exercised, spring to mind. And Britain could ignore any future EU regulations that, if in the EU, we would be powerless to stop. This would be a huge bonus. Of course, the potential longer-term benefits would outweigh the short-term costs.
Roland Rudd, Chairman of Business for New Europe and Co-Treasurer of Britain Stronger In Europe
Businesspeople are guided by a hard-headed examination of the issues facing them, not vague visions. So I am deeply sceptical of claims that the City would prosper from a British exit from the European Union. I do not doubt that there would be costs, and that these would not be limited to the short-term.
London is the financial services capital of Europe, the home to 85% of its hedge funds and 50% of its investment banking activity. This partially reflects Britain’s openness and liberalism. But, as the Governor of the Bank of England, Mark Carney pointed out last week, this openness has a lot to do with being in Europe. The EU is our largest market for financial services exports, and foreign banks attracted by Britain’s place in the Single Market employ over 160,000 people here.
These benefits are not static; they are likely to increase. The British Commissioner, Lord Hill, is currently leading work in Brussels to create a single European capital market and cutting back on unnecessary regulations.
The damage caused by abandoning Europe would be profound. Leaving the EU but staying in the Single Market would destroy British influence over regulation. Leaving the Single Market would prevent us from selling passported services into Europe, thus alienating foreign investors. It is no wonder Goldman Sachs have said they would "transfer a substantial part of our European business from London to a eurozone location" if Britain were to leave the EU.
Nobody is arguing that the EU is perfect – no partnership is. But the City of London’s dominance has been built on our membership of the world’s largest market. We must stay in Europe, and work to reform it, rather than risk so much by leaving.
Lord Flight, Conservative peer and former shadow chief secretary to the Treasury
Complacency is dangerous but if there were a Brexit Referendum vote by the time it might be implemented it is likely the UK and the EU will have sorted out future trading arrangements, including financial services. Those marketed to the EU would need to be subject to broadly similar financial regulation, although the UK would be free to determine its own Regulation for the domestic market and other non-EU countries. The EU needs the financial expertise of the City of London – if it could manage without it, it would have done so already. Those forecasting doom and gloom sound awfully like similar predictions if we did not join the euro.
Not surprisingly, the large City institutions are strongly supportive of EU membership; they enjoy relatively oligopolistic power in what is a protected Single Market. By contrast, smaller institutions find the Compliance and other costs of marketing their services and products to the EU unaffordable and are thus much more critical of EU membership.
Some international banks may look at moving their Headquarters to within the EU if Britain left but I doubt they would actually move, largely because they would find it difficult to hire the necessary skilled individuals in sufficient numbers. London also has the advantage of the English language.
The key EU issues are political – does the UK want to be governed substantially by the EU Commission or to return law-making powers to our democratic parliamentary system? If we left the EU some City business and employment may be lost, which may or may not be made up for doing more business with the rest of the world, e.g. China, in particular. But I do not believe there would be, in practice, major changes in the business transacted by the City. Already its business is international, rather than EU dominant – the percentages are already approximately 70% international and 30% EU. As other economies grow faster than the EU, there should be scope for international business to grow faster anyway.
Vicky Pryce, Chief Economic Adviser at CEBR and former Joint Head of the UK ‘s Government Economic Service
There has been a lot of City bashing in recent years, much of it justified. But throwing the baby out with the bathwater is never a good idea. The UK financial sector remains a very important part of the economy- its proper functioning is essential for growth and prosperity. Leaving the EU would threaten that position. There are issues of regulation coming from the EU which the UK financial establishment has been fighting against – such as in the proposal for a financial transaction tax and stricter rules in asset management – and of course restrictions on bonuses which the Chancellor George Osborne has finally had to accept.
But in reality the UK has been levying its own extra penal taxes on banks and tightening financial sector regulation much faster than many other EU countries- look at capital requirements, mortgages and the whole area of personal credit. It also intends to separate retail and investment banking activities ahead of others in the EU despite fierce opposition from banks. There would be little therefore directly to gain in terms of less regulation from disengaging from the EU- and much to lose.
The sector accounts for some 10% of GDP and associated services on top for at least an extra 5%, employing some 2m people across the UK. In addition the further moves to complete the single market should add some €1.6trn to the EU economy over the next five years, of which the UK will take a share. And investment and financing opportunities will increase. The eurozone’s progress towards a banking union, if properly implemented, should reduce the chances of another banking crisis thus leading to greater financial security, and more financing of cross border of transactions. Progress towards a capital markets union will also play to the City’s and the UK’s strengths.
John Mills, entrepreneur, Labour donor and co-chair of Business for Britain
How to regulate the City divides opinions across the political spectrum. The issue is totemic. There are many who see EU regulation as having damaged our financial services sector, particularly since the financial crisis. Many on the left though believe it was the lack of regulation that got us into the economic mess we find ourselves in the first place.
Both arguments stem from the fact that we do not have control over how our financial services are regulated. Voting to leave would allow us to take back control.
Despite scare stories from some at the top of the City, outside of the EU we would remain a member of key international financial standards organisations while our relationship with several global financial bodies would be strengthened. Our voice would be restored.
Outside, the UK would continue to enjoy access to the EU’s capital markets and the UK could maintain ‘equivalence’ if it chose to, but also set rules that allow the City to prosper and that the British public agree with.
Even the leader of the Britain Stronger in Europe campaign, Lord Rose, has said that there wouldn’t be a negative effect on the economy in the aftermath of the UK leaving the EU. Scare stories against us taking back control or financial regulations are simply not credible.