Now the UK and US have commenced trade negotiations, focus should turn to the benefits both parties could achieve through a deal in financial services. Connecting the UK’s and US’s financial markets, and their wider national ecosystems, would be a huge prize.
It would give US corporates and consumers the cheapest possible access to the global financial offerings available from London, sitting, as it does, astride the world’s main time zones and servicing markets from Asia to Europe, Africa and beyond. It would give the UK direct access to a US customer base without the barriers of expensively duplicative US regulation or on the ground operations.
UK financial businesses – particularly in its innovative FinTech sector – are crying out for the ability to sell more easily into the US market. In addition, firms on both sides of the Atlantic could operate through presences in the other more cheaply than now, with each side placing greater reliance on the efficacy of the other’s home state regulation.
This game-changing opportunity arises because the UK and US host the main global financial markets, London and New York, which have not hitherto been linked by a trade deal. Indeed, right now they operate at relative arm’s length.
Yet these are both places where vast numbers of market participants come together, profiting from the most deeply liquid markets, the best pricing and the widest breadth of offering. They thrive in similar ways, on a combination of talent, sophisticated regulation and the permissive common law legal framework, which allows for innovation while identifying and punishing misconduct.
When the UK was an EU member, joining the two markets was a distant, unachievable prize. The ill-fated US-EU trade negotiations (TTIP), which commenced in 2013 but fizzled out in 2016, contained a financial services chapter, but inevitably, discussions floundered, in part because of difficulties in reconciling competing interests within the EU, and the massive discrepancy in standing between the UK’s top notch regulators and those elsewhere across the EU.
There are also deep philosophical differences between the controlling civil law operational system that underpins much of the EU and the more laissez faire, yet ultimately more rigorous, regulatory approach of the US and the UK. The dangerous fragility of the Eurozone’s half-built legal structure has fed the dysfunctional and controlling instincts in the EU.
Relations between the US and UK regulators remain strong and deep, and both countries are well-positioned for a quick deal. Together, the two countries could control the global regulatory architecture, our common law approach seeing off the market-limiting, overly prescriptive, rival civil law system that is so prevalent in less successful systems around the world.
Despite these obvious upsides, some express concern that such a deal would suck jobs or liquidity from one location to another. It wouldn’t. The financial markets in both jurisdictions are already hyper-competitive, benefitting their respective customer bases, and this will not change.
The success of financial markets results from the depth of local talent and also the sophistication of the underlying operating system, which in this case both parties possess in equal measure.
After Brexit, there will be adjustments, since the UK will be organising new methods of service delivery to its EU customer base, which is likely largely to reflect the approach it successfully deploys for the rest of the world, though perhaps with enhancements reflecting the UK’s history within the EU. But those adjustments will not affect the basic model or attractions for the market.
The terms of a deal would establish a set of key financial services outcomes that keep each market safe from a systemic risk perspective, whilst leaving the other to regulate as it sees fit. The approach can be light touch, focusing only on what matters. Both countries have a long history of caveat emptor, at least in the wholesale markets. Both also have highly sophisticated court and regulatory enforcement systems that protect investors.
US investors purchasing from UK providers would be told they can expect protections from the UK’s court and regulatory enforcement system. UK and rest of world customers operating from the UK in the US’s market would be told to expect the same from the US. The remedies would arise solely from the system underpinning the market from which the sales take place. Each market would commit to treat the other’s customers equally with its own.
It is outcomes that should be the important focus, not specific methods. So long as the parties collaborate on achieving agreed regulatory results, it should be possible to allow businesses to provide extensive financial services cross-border into the other, avoiding the need to operate through local subsidiaries or for duplicative regulation or supervision. The key is systemic risk.
Other regulations could largely be ignored, since they are local to the market in question and there is every incentive to apply them properly in order to protect the reputation of the seller.
The agreement would need legislative support to clear away any doubts over the levels to which regulators could rely on each other. But the foundation would be one of trust between regulators – which would build on the already extensive cooperation that exists between the two sides.
Both the UK and US have hugely flexible financial systems – in contrast to the EU and many other parts of the world. The opportunity now arises for the UK and US to create a huge, global financial marketplace and to set the global regulatory standards, together.
The moment to do so should be seized, creating a vast capital pool, the world’s largest by far. Such a step would embed the use of competitive, free markets throughout the world and demonstrate the magnetic benefits of the UK’s and US’s tried and tested, focused, pro-market, common law approach.