The City is after all, one of the biggest capital markets in the World! What will the EU look like after the UK leaves and how is the government working with the City on a post-Brexit scenario ?
A lpresentation by the Spanish Minister for the Economy revealed that certainly prior to the vote on Brexit, over 20 years or so, UK capital markets mostly outperformed the US and were two-to-three times the size of the rest of the EU. That said, the Spanish Minister stated that capital markets development in the EU is limited and admittedly since the vote, the Financial Times has reported that investors have somewhat devalued UK assets.
Business in the EU27 (excluding the UK) is traditionally financed by banks whereas the US and the UK have highly developed capital markets. The EU will be loosening ties with one of the world’s biggest capital markets from the top financial centres of: London, New York, Hong Kong, Shanghai and Singapore as the City will no longer be within its regulatory sphere post-Brexit.
“Unemployment is down, wages are increasing, inflation is steady, nine years of consecutive growth since the financial crisis and the world’s largest trade surplus in financial services of £60 billion.” The upbeat warm-up to John Glen’s speech by the Spanish minister was supported by analysis and reporting in the Financial Times and data on the Bank of England website.
As the government has ever increasingly struggled to obtain consensus on an agreement which would be democratically acceptable in Parliament, Mr Glen, Economic Secretary to the Treasury and City Minister, reflectively quoted Churchill in that democracy is “the worst form of Government ...except for all the others” (well, actually we are going back to Plato !)
Four new areas of growth
Irrespective of the establishment of a new regulatory relationship with the EU, either before or after depending on the type of Brexit, the Minister for the City continued in establishing four new areas of growth
The first being a green finance initiative capitalising on the $26 billion raised by 16 countries in already-issued green bonds. The newly created Green Finance Institute is to lead in developing the UK’s strengths in the Green Finance Agenda.
Secondly, the Fintech strategy has resulted in five fintech bridges linking the most promising start-ups with the world as well as new concepts such as open banking as well as the regulatory sandbox. Underlining the UK’s global dominance in Fintech, the FCA has created a global sandbox to test products and services in multiple jurisdictions.
As the world’s fastest growing economy the first ever ‘masala’ bond has been issued. India invests more in the UK than in the rest of the EU. A UK India fund has been established to invest in sustainable energy on the Indian sub-continent.
Finally the relationship with China via Hong Kong continues to deepen with cooperation with the continuing internationalisation of RMB, the Great Bay area (the equivalent of five or six large EU members) and the Belt and Road Initiative. Regulation of investment and project management in China is still maturing. The UK possesses the legal and technical expertise to service major infrastructure projects as well as the capacity in financial markets to finance these projects. London is already the leading financial centre for RMB trading.
The minister concluded in a typical British pragmatic style in that success does not rest on regulatory alignment or political agreements, but on confidence and ambition.
What about the evolving role of the City of London in the global economy?
These questions were addressed by the discussion panel commencing with David Schwimmer, CEO of the London Stock Exchange Group. Key macro trends effecting the City of London are innovation and partnership. An example of how the City of London is addressing climate change and sustainability through technology and innovation is the FTSE requirement to report the carbon footprint. London is the only market that requires such environmental impact information. In addition, FTSE Russell has developed ESG (environmental, social and governance) standards and capabilities in green finance opportunities. A 300% increase in multi-asset class listed exchange traded funds (ETFs) has been recorded recently. ETFs are are units of multi-asset classes where one of the assets is listed. This is a significant trend for future years.
As regards partnership, historically London is a leader either through public authorities’ global financial partnerships or through the Financial Services Trade and Investment Board. The LSE Group is licenced in 13 jurisdictions around the world thanks to a highly constructive relationship with the London Clearing House as the global regulator. Mr Schwimmer concluded that London regulators have a very international outlook and are globally disposed to partnership.
Moving on to insurance, what about Lloyds of London a successful innovator – how will competitiveness be maintained?
The chairman of Lloyds, Bruce Carnegie-Brown underlined that the UK market represents $90 billion of premium income whether in wholesale, reinsurance, or speciality markets. The London market is three times the size of the next market, which is Bermuda. To give an example of opportunities of underinsurance in both developed and developing economies is to consider recent economic damage due to hurricanes in the US. Only 25% of the economic losses which hit the US in 2017 were insured.
The nature of risk continues to change. Historically, insurance was good at protecting tangible assets. Corporations are increasing intangibles on their balance sheets which drives an associated insurance market. Cyber risk is the biggest growing risk to companies around the world and also a constantly growing source of insurance premiums. Other insurance markets are reputation risk, data loss, artificial intelligence and climate change.
Lloyds is a massively international institution with 86% of revenue premiums coming externally to the UK.
According to the chairman of Lloyds, protectionism is a huge threat to the economic model of insurance, and Brexit is a manifestation of this protectionism. Challenges between the US and China pose risks for the insurance industry. If capital is trapped geographically then the economic model in insurance breaks down.
Innovation for which talent is required is also a challenge for the industry. Harmonisation of global regulation can only help the insurance industry. Fundamentally, the contract in insurance is underpinned in the confidence of the rule of law.
Macro trends in the City over 40 years
John McFarlane, chairman of the CityUK, whose long career spans huge changes in the City, reflected on European dominance in 70s, the Big Bang in 80s, the global financial crisis and the explosive growth of China and India and the emerging markets. The City has thrived on freedom and innovation thanks to the entrepreneurship of firms operating in London, and it exists because of the competitive advantage which makes it successful.
Mr McFarlane expressed some concern on Brexit as significant international firms moved to UK to access European markets from the UK and they may leave the UK. Mr McFarlane underlined that European capital markets must stay open, and this is a massive priority.
“The EU cannot see its capital markets as a closed circuit. If the EU wants to create capital markets successfully and a securitised industry it must remain open to the rest of the world and to London because the capability exists in the City. “
The chairman of CityUK continued in that “Money goes where activity is”. The opportunity is not only in the EU, but in places further away. Of course, opportunity exists in Europe but greater opportunity exists elsewhere. Mr McFarlane mentioned remembering when European banks were dominant in the City, ” Lloyds was once one of the biggest banks in the world by market capitalisation, whereas now Lloyds is only 15% of the size of the largest bank in the world.
Massive changes have taken place since the 1970s when European and UK banks were dominant and the 1980s when Japanese banks were dominant together with European banks and the 1990s when only one American bank was in the Top 20.
Today only one British bank and one continental European Bank are in the Top 20 and there is no Japanese bank present. The world has changed so the opportunity is outside the European economy. The government has provided support by the creation of low corporate tax rates and effective regulation as a foundation for safety.
Mr McFarlane concluded that it is important to separate activities from the domestic economy (which is 80% services) and the international aspect which must be supported by different economic policies.
The UK financial equity model contrasts starkly with the rest of the EU, particularly as western continental banks have found it difficult to bounce back post-financial crisis, unlike the UK which has itself appeared to be more resilient.