Too much of the debate about what the European Union referendum means for the City has been frustratingly narrow and short-term, confined to the immediate financial implications of leaving.
Far too little attention has been paid to the longer-term health of the City, in particular the implications of remaining inside the EU.
Inside the EU, the UK is seeing the steady erosion of its ability to safeguard the essential interests of the City against hostile and damaging regulation from Europe, and this dangerous process is only likely to accelerate.
Ever more control over rule-making is being ceded to the Eurozone with its inbuilt majority at the European Council. For many years, the UK government has tried and failed to stem the flow of EU financial regulation which has both stifled innovation and damaged the City’s global competitiveness. The EU’s priorities are clear – harmonising rules and protecting the future of the Eurozone. It views the City of London as a nuisance, not as a great European asset.
A vote to leave would enable the UK to restore a regulatory environment which cherishes the City’s natural flair for creativity, flexibility and innovation. It would relieve the City of a one-size-fits-all framework imposed by the EU. It would restore real power to the Bank of England and repatriate primacy over taxation to the UK. Over the long term, a vote to leave would make the City a more competitive, prosperous global financial centre.
The UK’s free market approach, which has been established for centuries, is frequently contrasted with the interventionist, more regulated approach favoured by the EU. It is an important reason the City has been so successful for so long compared with Paris and Frankfurt. Unfortunately, Brussels favours the prescriptive approach and it is harming the very qualities that make the City such a world-leader.
In a report I have co-authored with Michael Geoghegan, former chief executive of HSBC, we draw attention to some of these threats and detail seven reasons why the UK and the City would be better off leaving the EU.
The problem is not just the quantity, but the quality of EU regulation. In 2013, Nigel Wilson, chief executive of Legal and General, said: “the European [insurance regulatory] system is one of the worst. Pretty much everyone in this room is not investing in Europe for that reason.” The UK government’s own review in 2014 raised serious concerns about EU rule-making. But unlike the French, who have a veto over legislation relating to agriculture, the UK has failed to secure a comparable block on financial services rules.
This meant nothing could be done about the short-selling ban imposed in 2012, which was seen by the UK government as disproportionate, discriminatory and an unreasonable transfer of powers to Brussels. George Osborne tried unsuccessfully to overturn the ban in the EU courts. This type of intervention drives business away from Europe to other financial centres such as New York or Singapore.
The UK by itself is also unable to block the proposed EU Financial Transactions Tax (FTT), first mooted in 2010. It is another case of the EU’s antagonism towards the City and has been continuously opposed by almost every institution in the UK. There is little evidence that it would help financial stability, but it is likely to cost tens of thousands of jobs, with interest rate derivatives trading and repo markets hit particularly hard. Osborne called it “a bullet aimed at the heart of London” and said it was “not a tax on bankers, it’s a tax on jobs, on investment, on people’s pensions”. Sadiq Khan has described the proposed tax as “madness”. The chancellor took a case to the EU courts in 2013 to prevent the FTT’s progress, and again he lost. At the end of June, after the referendum, a group of 10 Eurozone countries will meet to discuss the next moves in imposing the tax. It remains a major risk to the City.
The City should balance carefully where its long-term interests lie. The potential costs of losing unfettered access to the Single Market are often cited as an overwhelming argument in favour of remaining. However, a report by PwC in April 2016 estimated that the longer-term impact of leaving the EU would potentially be a loss of just 0.7 per cent of total jobs in the financial sector compared to the counterfactual. This is dwarfed by the number of jobs the FTT could threaten.
In the long term, the City can only thrive in an environment which is supportive and outward-looking. The world outside the EU represents two-thirds of the UK’s financial sector exports and is growing much more rapidly than the EU market. Voting to stay in the EU is a vote to remain bound up in a slow-growth, highly regulated regime.
There is something deeply unambitious about the remain case when the best that Britain can hope for inside the EU is merely to fend off threats to the financial services industry. Taking back control from Brussels would enable the City to aim far higher, returning to its natural hunting ground of innovation and dynamism to stay ahead of the world.