Samuel Johnson famously said, 'when a man is tired of London, he is tired of life'. However, unlike S.Johnson, it seems that B.Johnson has succumbed to this, in light of the lack of news surrounding the future of our greatest financial asset, the City of London.
Whilst the recent focus has been perpetually on State Aid and fishing rights, the City of London has largely been relegated to back room talks in the negotiations. This may be for the betterment of both sides, considering the stakes are larger economically than either fishing or state aid; most notably around the act of clearing and the right to equivalence. These two cogs in the financial system play to different strengths of both sides; their resolutions may decide the negotiations and the future of Britain's financial might.
Clearing houses in London such as LCH act as middlemen between buys and sellers in the Euro market, handling €735tn and 90% of all Euro based interest rate swap transactions. Given that London isn't in the Eurozone, Brussels has long tried take this dependence on London away. But despite Brexit, the City's attractiveness as a one stop shop for banking with its deep capital pool, rule of law and language has entrenched its dominance.
This does not sit well with Brussels; it has long attempted to foster its own EU financial centres through cross border activity and fusing disparate markets. But they have failed to build up the international pools of capital like London or the US. Take for example London's dominance of 43% of the global $6.6tn-a-day market for foreign exchange trading. The City's unchallenged rule over this realm is our upper hand – for now the EU is reliant upon the functions which we have to offer their economy.
No wonder why the EU regulator (ESMA) granted London's clearing houses the right to operate in the Euro till 2022 in order to avoid catastrophe.
Yet dominance in perpetuity is never definitive. Barnier has explained more than once that it isn't in the EU's interest for it remain so in the long run. No wonder that beyond 2022 there are no provisions. The EU sees it as a significant opportunity; increased activity in the Eurozone can come from forcing firms to move from the UK. The main avenue which they seem to be seeking this through is their approach to the concept of equivalence.
Equivalence is the EU's upper hand, since the power to suspend our right to trade on the EU stock market if our regulations don't match theirs is contentious to say the least. Not to say that Brussels haven't wielded this power already; Switzerland became victim to this in 2019 via the standard 30-day notice given to any company to cease trading on the market.
In Britain's terms, not having our banking and insurance regulations deemed to be equivalent may cost businesses £30bn a year, according to the Bank of England.
Now whilst large firms may be able to swallow this cost of staffing, setting up a subsidiary and licensing, there is concern that small to medium size businesses may not be. Their concern is well justified, Sunak in June stated that 'leaving the EU means we are now free to chart our own course, driven by our innovative markets…', after signing a finance pact with Switzerland.
Being able to set our own rules and regulations must be honoured by both sides as another form of the right to sovereignty. Nevertheless, the City must also be honoured and not betrayed in Brexit negotiations, not just for jobs, but also for taxes. If we stand to lose the power of the financial centre, then it threatens our response to Covid-19 in the long run and other great 'levelling up' projects which was government agenda pre-corona virus. Because of this a principle-based equivalence regime is then far more attractive than a rules based one.
It would be in the EU's best interest to allow our clearing houses to operate in the Eurozone post 2022, because they lack the financial infrastructure – they have more to lose. Though a compromise is likely, it's in our best interest to retain the principles of the regulations. Basing any equivalence regime on principles rather than rules would still give us flexibility and sovereignty.Additionally, our clearing houses would be allowed to continue to clear euros and other instruments through a mutual trust agreement, continuing London's financial dominance. A win-win outcome for both sides.
The two more news-worthy areas of fishing or State Aid rights may come to define the perceived success of any negotiated Brexit settlement. But it's time that the government wielded the power of our greatest financial asset in these negotiations; but they should tread carefully – the Square Mile should not be betrayed for petty politics; the recriminations will be large and expensive in the long run.
