At the heart of David Cameron’s hard-fought EU renegotiation, there appear to be some misconceptions about how the City views its relationship with Europe. Although many institutions in the Square Mile have voiced support for the UK’s membership of the EU, there is also widespread concern about the City’s strained relationship with Brussels, whose policy-making on financial services is often very different from what City practitioners might want.
Certainly a vote to leave would cause a headache for financial institutions in the UK, given that they currently rely on the “European Passport” to access customers throughout the Single Market. If the UK voted to leave, it could perhaps negotiate an alternative form of access, similar to Norway and Switzerland, but nevertheless its limited influence over EU policy would be reduced to zero.
Regardless of whether the UK votes in or out, how can it be that a financial centre which, according to the Bank of England, accounts for over 30 per cent of wholesale financial services carried out in the EU, has such little say on laws which are fundamentally changing the industry – and not always for the better?
The truth is that the City is not so worried by the latest big picture principles outlined in Donald Tusk’s letter; it is more concerned by the policies being implemented at a micro level. For example, the EU has recently rubber stamped laws which place limits on trading shares away from traditional stock exchanges. Caps on these venues, more commonly known as dark pools, could restrict an investment manager’s power to deliver returns for investors.
After all, the original point of these venues was to provide an alternative way to trade blocks of shares without market impact. Under the new laws, there will be caps of 4 per cent for individual dark venues and 8 per cent across all venues in Europe (with some exceptions for block trades). If these caps are breached, the stock cannot be traded on that venue for six months.
Clearly, whichever policy-maker has decided on these caps is unlikely to have traded before. The thresholds are too small, particularly for large-cap stocks. If a trader attempted to send a large order to a lit exchange, the price of the stock could be hit significantly. These caps also prove that many policy-makers fail to understand the demand among pension funds and mutual funds for dark trading – which increased in both value (by 45 per cent) and in the volume of shares traded (by 25 per cent) last year.
While very specific, these caps are symbolic of exactly what’s wrong with the City’s asymmetrical relationship with Brussels. The right approach is not to suggest watered down measures in the hope that everything will stay the same, nor is it to cut links completely between London and Brussels. A balance needs to be struck. If the City wants to shift the debate in its direction, it must start building alliances with the EU and the Commission.
This is easy to say in theory but, as the Prime Minister is currently experiencing, it’s much harder to do in practice. An initial step is for all involved to put ideological differences to one side, and to acknowledge the role each other plays. Brussels must first understand the value that London has created for the economy, and its vast contribution in taxes to the Exchequer. Conversely, there is a duty within the City to understand its place in the wider world. It is only right and proper that policy-makers now require a higher standard of governance, but the majority of people in the City also think this.
From the Big Bang of the 1980s to the dark trading boom of the past decade, history suggests that the City performs best when it is liberalised. An innovative City is imperative for Europe to remain a key global financial centre. Ideological beliefs underpinning this renegotiation so far need to be replaced by economic pragmatism. Only when the City starts having a say on policy creation commensurate with its economic importance, and Brussels stops trying to micro manage it, will we know that progress, both economic and political, has been made.