Monday, 17 July 2017

The City of London Comes Under Even More Pressure Because of Brexit: A Bind That Only Has One Winner

Here in Financial Regulation Matters we have looked at the potential landscape for British finance post-Brexit on a number of occasions. Firstly, we looked at the battle for the marquee names in the wake of the U.K.’s secession from the Union between France and Germany. Then, in a later post, we discussed the strength of one of the frontrunners in the battle for post-Brexit business – Dublin. So, in today’s post, we will look at how this issue is developing – as it will no doubt continue to – and how the City of London is being put under increased pressure. Yet, in keeping with the underlying sentiment of Financial Regulation Matters, we will conclude by looking at what effect these pressures may have upon the wider society, particularly in Britain but in Europe also.

Earlier this week, it was announced that Barclays are in talks with Irish regulators about substantially increasing its presence in the Country after Brexit, with the company noting that Ireland represents a ‘natural base’ for its European operations. Barclays are not alone however, with it appearing likely that Dublin will be the major winner with regards to the financial fallout from Brexit, with up to 12 major firms confirmed as moving to Dublin already – including U.S. giant JP Morgan – although Frankfurt has been recording some prized scalps of late, including Citibank (announced this evening), Morgan Stanley, Nomura, and Goldman Sachs making substantial moves to the German finance capital. This was presented here because the apparent exodus from the City – although it must be made clear that the firms of building bases in Europe, they are not completely abandoning London – represents just the first wave of pressure that the City is feeling. The second wave can be encapsulated by the Daily Mail’s headline ‘Exposed: French Plot to “Wreck” Britain’ which, in keeping with the newspaper’s sensationalist agenda, provides an excellent insight into the propaganda being developed by the City in anticipation of what is to come.

The newspaper, on Saturday, broke the story based on a leaked document from the City’s Brexit Envoy Jeremy Browne that French officials have been ‘boasting’ that they will use Brexit to sabotage the British economy. Whilst it is important that one rejects the Mail’s sensationalism, what is of interest is the leaked document in question, and it makes for fascinating reading. The document, headed Report of the Special Representative for the City to the E.U., Jeremy Browne, starts on an incredible footing by degrading Romania by stating that the conversation with Romanian officials was ‘amiable but unsophisticated’, whilst Browne then goes on to proclaim ‘France was the opposite in every regard’. Browne is unequivocal in his damnation of the French, stating that ‘the meeting with the French Central Bank was the worst I have had anywhere in the E.U. They are in favour of the hardest Brexit. They want disruption’. Now, it is important to note that one is not disputing Browne’s version of events because, obviously, there is little basis too – it may have happened like he says, it may have not – but the important issue for is the effect of the rhetoric in the ‘leaked’ report. Before we get to that, it is worth looking at the incredible rhetoric that Browne employs more: ‘France sees Britain and the City of London as adversaries, not partners’; ‘what we are witnessing is a whole-of-France collective endeavour’; ‘They are crystal clear about their underlying objective: the weakening of Britain’; ‘There is plenty of anxiety elsewhere in the E.U. about the French throwing their weight around so aggressively’ and so on and so on. If we look at the potential effects of this rhetoric and sentiment, then we can see there are clear winners and losers to the aftermath.

The City of London has started what may be a chain reaction. On the one hand they are actively promoting themselves as an innocent victim in the proceedings, and as with all victims it is likely that they want to be compensated. This type of propaganda is arguably the precursor to the British Government being lobbied heavily, and most likely succumbing, to the calls to ease regulations on British financial entities to allow them to ‘survive’ in the wake of Brexit – it is, however likely that a. this lobbying campaign is well under way already, and b. worth clarifying that the financial elite who are claiming to be victims are a very large component of the collection of root causes to our current societal predicament. Yet, as we know, the U.K.’s reliance upon the Financial Sector fundamentally binds the National interest to the City’s interests, which mean any concessions that are requested arguably have to be provided, based mostly on the fear, whether perceived or real, that the Country will go into freefall upon formally separating from the European Union. Yet, there is another element of a potential chain reaction that the City of London are creating. The rhetoric attempts, overtly, to sow division amongst the ranks of the European heavyweights for its own cause. Now, although one cannot foresee the future, it is likely that these attempts will be futile, simply because there are too many plans in place to relocate financial bases to European centres. However, the effect (although we can attribute this all to the City) is that the social burden that comes with being an established and leading financial centre is now being transferred to the Continent, and it is important that the European citizens brace themselves for it. Any moves by the financial elite will have been incentivised by the host nations, to beat off competition, and that is a dangerous cocktail – financial entities being incentivised to take advantage of competitive pressures. The E.U. is therefore faced with two outcomes if we proceed along those lines, and that is firstly that the risk to hosting these entities will be localised in places like Frankfurt (therefore meaning E.U. and German regulators need to be increasingly vigilant) or secondly the division of ‘sectors’ across the continent spreads the risk, meaning that either the potential for damage is reduced, or cynically it is alternatively multiplied.

What can be said at this stage is that, quite simply, nobody knows what will happen. The current environment is becoming increasingly difficult to predict by the day, but there is scope to provide warnings. The battle to host the financial elite fundamentally downplays the negative effects that the sector has and, looking at the daily headlines, it seems as if though national leaders are placing their citizens at risk in order to be rewarded in the short-term. When people look at the riches associated with London and its connection to the financial elite, they would do well to cast their minds back a decade when the country was brought to its knees by that very same sector, and who continue to pay the penalty for their venal endeavours to this very day. What is for sure, in relation to Mr Browne, is that the division he hopes to create only has one winner. 

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