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London Unbound

Britain looks to U.S., China to bolster financial services after Brexit

Victoria Craig Jul 1, 2021
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"I think what's increasingly clear is that London's future is going to be global," says Jonathan Hill. Dan Kitwood/Getty Images
London Unbound

Britain looks to U.S., China to bolster financial services after Brexit

Victoria Craig Jul 1, 2021
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"I think what's increasingly clear is that London's future is going to be global," says Jonathan Hill. Dan Kitwood/Getty Images
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Ambitious at home, confident internationally: That’s the United Kingdom’s blueprint for moving forward in the world after Brexit.

Chancellor Rishi Sunak on Thursday unveiled a comprehensive plan to protect the nation’s financial services industry, which employs 2.3 million people. The announcement comes as jobs continue to trickle out of Britain and into the European Union following Brexit.

This week, JPMorgan Chase CEO Jamie Dimon cut the ribbon on the U.S. bank’s new European hub in France. French President Emmanuel Macron was in attendance; he’s been courting big businesses that formerly had offices or even headquarters in London and may now be looking for a new European base post-Brexit.

JPMorgan had been wary of making such a move, but now aims to have 800 staff in Paris by the end of next year, a 200% increase in its current presence.

The bank isn’t alone in its decision: At least 7,000 financial services jobs have shifted away from the British capital since Brexit became official.

Sunak will outline further details about his plan to fortify Britain’s financial services later on Thursday, but he gave a preview of what to expect in a morning speech at Mansion House in London.

To “sharpen” the industry’s edge, he emphasized the importance of high-quality regulation, which he asserted would ensure “the EU will never have cause to deny the U.K. access.” Since Brexit was finalized in 2020, Britain has pursued so-called “equivalence deals” with the 27-nation bloc. Those would have recognized the U.K.’s regulatory regime and allowed continued, unfettered access to financial markets. A blanket deal, though, was never made. Sunak now insists his nation must move forward and look to other nations for future business ties instead.

At the top of the list is the U.S., where the U.K. exports $28 billion worth of financial services each year.

“Our ambition is to deepen regulatory cooperation even further with our closest ally,” Sunak said

He also acknowledged other nations of focus, including China. “China is both one of the most important economies in the world and a state with fundamentally different values to ours,” Sunak said. “We need a mature and balanced relationship … it is precisely because we’re taking steps to protect our domestic economic resilience that we can pursue with confidence an economic relationship with China in a safe, mutually beneficial way, without compromising our values or security.”

Britain’s plan has been influenced by a number of government-commissioned reports released in the first half of 2021. One was a deep dive into the financial services industry’s stock-market listing system, authored by Jonathan Hill, a former European Commissioner for Financial Stability. He spoke with the BBC’s Victoria Craig about what he sees as London’s best way forward in the post-Brexit era.

Below is an edited transcript of their conversation from the global edition of “Marketplace Morning Report.”

Jonathan Hill: For a long time, the question of the future of London’s position has been tied up with the nature of the relationship that the U.K. is going to have with the EU. And there’s been a big debate going on in the U.K. as to whether it makes more sense to try and stay close to the EU. And I think what’s increasingly clear is that London’s future is going to be global. We will look to the U.S., to Asia. The logic for the Europeans is that they have got to try and build up their own financial center. Now, personally, I think they’re going to find that a hard task. I think the most likely beneficiaries of Brexit are not Paris, or Frankfurt, or Amsterdam. I think they are the United States or Asia. Or, if it gets its act together, the U.K.

Victoria Craig: London for Europe was once a partner. Now it’s a competitor. And London, the U.K. is well-known for its investor protections and strict regulations. You argue the country needs faster, more flexible, more targeted regulation. So what could those look like?

Hill: If you think of the digital revolution that’s taking place in financial services, there are whole areas of financial service activity where the regulatory framework is not yet constructed. Or it’s, you know, emerging, or it’s changing. So if you think of questions about how do you regulate fintech? Or how do you regulate new currencies? Or how do you accommodate those changes? There, I think, that’s the area that I think is quite interesting and full of potential, because my strong sense, knowing the European system a bit, is that they’ll just take much longer to get around to it. Secondly, legislation, it just tends to be more prescriptive in the EU. They just have a different cultural approach to legal systems. And so things tend to be more detailed and then harder to adapt.

Craig: Is part of this making London more modern at the same time, too? So if we look at some of the trends that we’ve seen in financial markets, SPACs, special purpose acquisition companies, those have been a huge trend in the U.S. Do you think the U.K., London, should look to attract listings in that way, and sort of become the European hub for SPACs?

Hill: I do think for the last five years, because of the dominance that Brexit has had in British politics and in the City, it is a time where the City kind of lost its momentum. Because, firstly, people were there sitting thinking, “OK, what’s this going to mean for my business? How am I going to have to reorganize?” But there are a range of possible outcomes — we might be in the single market, we might not be, we might have passporting, we might not, we might have equivalence, we might not. So all of that meant that management time was kind of focused internally.

Then I think, from a political point of view, we had such state of paralysis that there was no direction given to the City at all in terms of, would we be global? Would we be European? What areas might we go for? How were we thinking about regulation? It was frozen. That is now over. And I think, very clearly — I was recently carrying out a review for the government into the listing rules in London to see if we can attract more IPOs. I definitely detected in the City, generally, a much more, “We’ve got to get on with it, put our best foot forward. Let’s look for the opportunities. We can’t just sit here looking backwards. We need to be out there competing.”

So I think there’s been a big shift of mood. There’s a whole sequence of further announcements likely to be coming, I think, over the summer of ways to try to make sure London remains competitive. So I think competitiveness is the name of the game. When I carried out the review into the listing rules, my starting point was, how does London measure up in how it applies its rules compared with what happens in New York, what happens in Singapore, what are they doing in Hong Kong, what are they doing in other European markets? And has London become more conservative than some of those other jurisdictions which seem able to provide competitive services, but also in a well-regulated environment? So that’s the general approach that we took on your specific point about SPACs. The recommendation we made was not to kind of be a cheerleader for SPACs, or to say SPACs are the future in their current form, and we must be part of it, but to say, do they have a part to play, well-regulated, as a route of getting companies to market? Seems that they do. Are they likely to be exactly as they are, at the moment in the U.S.? Probably not. But should you close the door to them completely? Which is, effectively what’s been the case in the U.K. That seemed to me not a sensible route, and that we should make it possible, properly regulated, for companies in the U.K. to go to market via a SPAC.

Craig: We talk about the things that could set London apart, too, and sort of get ahead of the trends. And one of the other big trends that has sort of captured investor attention again this year is cryptocurrencies. And the U.K. has been pretty cautious around rules allowing access that crypto has to capital markets. EU countries like Germany allow much deeper access. Do you think the U.K. should consider attracting cryptocurrency trading and sort of get ahead of this trend as well?

Hill: Well, I think that when you look at the reaction from the Bank of England, [the Prudential Regulation Authority] and the Financial Conduct Authority, which are our three main regulators of financial services, I think there is a mood, they’re up for trying to make sure that they are as flexible, as encouraging of competition, adaptable as they can be. Because the moment of Brexit acts as a kicker to make people hold a mirror up to themselves and ask questions which may not be particularly to do with Brexit, but they just, you know, it’s just a moment that makes you self-reflect. And I think that’s definitely happening with our regulators. But at the same time, I think the U.K. regulators will want to be thought of, as they are, of being part of a well-regulated space, you know, setting high global standards. I don’t think that we’re therefore likely to see a fundamentally more relaxed approach to some of those issues around crypto.

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