In the seemingly endless debate around Brexit, the financial services sector is getting a surprisingly small amount of attention.
Yes, plenty has been written in specialist publications like this one, but when it comes to mainstream public debate, the City has been strangely absent.
Strange, because while responsible for just three per cent of total employment, the UK’s financial services sector represents seven per cent of economic output, and one tenth of annual tax revenues.
Last year those tax receipts amounted to £71.4bn – more than half of the budget for the entire NHS in 2017/18.
Estimates of what Brexit might cost the sector vary, but only between bad and disastrous – from 30,000 jobs and £18bn in revenues, according to Oliver Wyman, to 230,000 jobs and £38bn in revenues, according to the Treasury.
The job and revenue losses don’t just affect banks and other financial intermediaries, but also their supply chains of accountants, lawyers, and advisory services, as well as the precocious fintech sector.
Other cities make their bids
These estimates have been reinforced by a steady flow of reports about the relocation of financial sector business away from London to European financial centres. A few days ago, Frankfurt Main Finance stated its intention to attract 80,000 jobs from London.
Paris and Dublin are also trying hard. These competing centres have their own disadvantages, such as a lack of critical mass and language barriers, while London has shown itself to be resilient. But the threat is real. And our competitors will not necessarily play nice.
The size of the threat will depend on the extent and speed of Britain’s withdrawal from the EU’s Single Market, which is important to the City for two main reasons.
The first is the common rulebook for financial services, which currently provides “passporting” rights for London-based institutions to freely operate elsewhere in Europe.
The second is the mobility enabled by the free movement of labour, important not just for financial specialists but also for key support staff.
Over the summer, both Labour and the Conservatives have been belatedly trying to clarify what they mean by “Brexit”.
From the Conservatives has come some improvement on the vacuous “Brexit means Brexit” mantra. In order to avoid the potentially disastrous consequences of crashing out of the EU in 2019 with no settled trade arrangements, the party appears to have agreed that there needs to be a several year transitional period – details unspecified.
But the government remains set on leaving the Single Market in 2019, so freedom of movement will definitely end – and passporting arrangements almost certainly too. The more moderate voices, like that of the chancellor Philip Hammond, have been drowned out.
The leadership of the Labour party was also – until this weekend – fully behind hard Brexit, to the despair of the majority of its supporters and parliamentarians. Now it is committed to Single Market membership and rules during a transitional period. What happens after the transition is unclear, but it does mean that the City would get a stay of execution of several years.
I suspect, however, that kicking the can down the road will do little to allay long term business concerns.
Moreover, the current Labour party comes with ideological baggage that many City institutions will see as further reason for relocating to Europe. While there is every reason to sympathise with those who resent the excesses and recklessness which precipitated the financial crisis a decade age, no serious party can disregard the importance of financial services to the economy.
A Venezuelan approach to economic management is potentially ruinous, and not just for the City.
It is very clear that neither the Conservative nor Labour party positions are acceptable to any financial sector business wanting to safeguard its future in the UK.
Passporting rights in particular are essential to preserving the UK financial sector’s ability to seamlessly do business across Europe; indeed many major international banks base themselves in London for precisely this reason.
For the City, there is no good alternative to passporting rights. The compromise option currently being discussed is far from ideal. Known as “equivalence”, this would mean that, instead of automatically enacting EU legislation, the UK would have to actively mirror it with its own rules, increasing both ambiguity and administrative burden.
It would be at the EU’s discretion to revoke equivalence at any time (at just 30 days notice under current legislation) – a recipe for uncertainty. Given the size of our respective markets, it is obvious where negotiating power would lie.
The only way to provide certainty to our financial services sector would be a commitment to keep Britain fully within the Single Market. While it is true that continued membership is not in the UK’s hands alone, but would need to be approved by the rest of the EU, it is economic madness that neither of the main two parties is aiming for this outcome.