London Calling: Can the City get back on top?
March 7, 2021
3 min read
What's going on here?
In January 2021, Amsterdam eclipsed London as the largest share trading centre in Europe, upsetting a long-standing hierarchy.
What does this mean?
Throughout January, there were €9.2bn worth of shares traded every day in Amsterdam. In London, adjusting to a post-Brexit regulatory landscape, this figure was €8.6bn. This marks a drop of around €6.5bn from December when the Brexit transition period came to a close. Additionally, according to EY, around 7,500 financial services jobs and around £1.2tn of assets have moved to the EU since the June 2016 Brexit vote.
This migration is due to the current inability of EU banks and financial institutions to trade European shares on the London exchanges, significantly reducing the pool of available investors available to the City. The loss has prompted fears that the EU may try to cut London off from its financial markets. EU banks are currently unable to trade in London due to a lack of a UK-EU equivalence agreement. To gain equivalence, the EU must officially recognise that the UK’s financial regulation is sufficiently similar to its own. A March deadline for an equivalence agreement has been set by both sides, though meeting this is looking unlikely.
What's the big picture effect?
Throughout the ongoing Brexit saga, one of the great fears for Remainers has been the loss of EU passporting rights for the UK services industry. EU Membership granted UK and EU firms fundamental freedoms. Most pertinent here is the freedom for provision of services, which allows EU firms barrier-free access to provide services in other Member States. Breaking up this barrier-free access means that it is now easier for EU firms to close the deal elsewhere in the EU than in the UK. Equivalence is similar but weaker than passporting and can be unilaterally revoked by the EU at 30 days notice. Such a short notice period is an enormous issue for the UK, as financial services make up 7% of GDP, with 40% of this exported to the EU. Consequently, many were surprised to see it largely omitted from the trade deal struck in December.
The UK financial regulatory system is strong. However, the EU fears a repeat of the “Big Bang”, referring to a wave of deregulation in the 1980s which propelled the City to its position of dominance. This fear of divergence from EU regulation is the stated reason behind the EU dragging its heels in equivalence negotiations. It purportedly wants to know what the UK is doing regulation-wise before granting equivalence. A more cynical view is that the EU is hoping that more business will flow out of the UK. Andrew Bailey, Governor of the Bank of England, has said the bloc’s demands thus far have been unreasonable and would turn the UK into a “rule-taker”, a standard to which the EU does not hold other countries to whom it has granted equivalence.
Equivalence would be the best outcome for both sides, allowing for movement of capital and trading across the Channel. The UK government granted the EU equivalence in many areas in November, in the hope that the favour would be returned. Equivalence has been granted in certain areas of financial services, such as clearing. Clearing is considered vital for European exchanges and many EU firms still need London for it. It is unclear what the EU would require Britain to commit to for any equivalence deal. A deal could range from broad and acceptable goals of well-functioning markets to the wholly unacceptable dictation of regulation by the EU.
Brexit has offered opportunities to make deals with other countries, like Japan, the US and Singapore, all of which could prove lucrative. These could allow London to establish itself as a centre for fast-growing industries, such as fintech and green energy finance. However, the cost of this may be a fissure between the UK and the EU, which will be difficult to stomach.
Report written by Joshua White
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