October 2017 newsletter – Brexit and the City

The 34th Symposium Money, Banking and Finance was held at Paris Nanterre University on 5th July 2017 on behalf of the UK's Money, Macro and Finance (MMF) research group. This is a report by Andy Mullineux1 on a ‘Roundtable’ arranged by the Organising Committee.2

Andy Mullineux chaired the session. The three panellists were: Patrick Artus (Chief Economist and member of the Executive Committee NATIXIS); Paul Mizen (Professor of Monetary Economics and Director of the Centre for Finance and Credit Markets at the University of Nottingham) who is Chair of the MMF, and Pierre Bollon (Director General of the Association, Française de la Gestion Financière, AFG).

Andy welcomed the delegates to the plenary panel session; explaining that the GdRE (Groupement de Recherche Européen) in Money, Banking and Finance (MBF) is a French international thematic network that collaborates with the MMF. For a number of years now, the MMF has organised a special panel session at the annual international symposium of the GdRE (MBF) and reciprocally, the MMF has hosted a special GdRE (MBF) session at its annual conference.

Andy noted that because The City is a truly international (European and Global) financial centre, it could not expect to be regulated and supervised solely by its domestic authorities. Indeed, whose City is it anyway? Hence, a regulatory and supervisory agreement involving cooperative and mutual arrangements between a ‘college of supervisors’ seems to be called for.

Following his introductory remarks, Andy introduced the speakers.

Brexit and UK financial services
Patrick had forecast disastrous consequences for the UK as a result of Brexit after the June 2016 referendum. Andy wondered if his views had altered over the past year and particularly in light of the outcome of the UK’s general election in June 2017? This had weakened the government and arguably increased the chances of a ‘soft’ Brexit, with closer trading links and better access to European financial markets. Paul Mizen had been working with colleagues at the Bank of England and Stanford University on a survey aimed at gauging the changing views of the non-financial corporate sector in the UK to the likely outcome of the Brexit negotiations. Pierre Bollon was representing the French financial asset management sector. Pierre was alert to the opportunity presented to Paris as a financial centre from damaging effects if Brexit in the City of London.

Speaking first, Patrick explored whether Brexit would cause serious damage to the financial services sector in the UK. He assessed the importance of the UK financial sector compared to France and Germany and the UK’s share of financial activities across a range of EU financial markets. In the light of which, what would be the likely effects of Brexit on The City?

The UK hosts 2250 firms using MFID (Market of Financial Instruments Directive) passports covering investment banking, trading and fund management, and 212 firms using AIFMD (Alternative Investment Fund Managers Directive) passports to conduct hedge and private equity fund-management business, inter alia. Additionally, London hosts three major credit rating agencies and conducts 80 per cent of the clearing of euro denominated OTC derivatives; which is ‘passported’ under the aegis of the EMIR (European Market Infrastructure Regulations). Further, the EU’s ‘single passport’ regime involves numerous rules and ‘issuing authorities’, in addition to forthcoming MFID II, AIFMD and EMIR (e.g. UCITS, Undertakings for Collective Investments in Transferable Securities).

‘Third country rules’ could apply to the UK, if the EU were to recognise that the legal regulatory and supervisory regimes in the UK as equivalent to the corresponding ones in the EU. However, existing third country agreements (e.g. Switzerland) do not grant full access to the single market in financial services. There is limited access for brokers, no access for investment funds and clearing and rating agencies require an assessment of the equivalence of their regulation by the ESMA (European Securities Markets Association).

Hence, the UK faces potential losses as firms and jobs move to financial centres within the EU in order to maintain ‘passporting’ privileges. Patrick attempted to gauge the likely impact on revenues and jobs in the UK financial sector, noting that much domestically oriented and retail business would be unaffected. The share of the UK's financial sector business linked to the EU is approximately 25 per cent, whilst its international business not directly linked to the EU is approximately 30 per cent and is domestic business is 45 per cent.

Where might UK financial services business re-locate? The competitiveness of the Dublin, Frankfurt, London, Luxembourg, New York and Paris financial centres was compared. London remained most competitive overall, with New York second and so at least some international business might be displaced to New York; especially in the investment-banking sphere.

The overall impact would be proportionate to the size of the UK financial sector and the proportion of it linked to EU business (25 per cent). Patrick felt that the impact of the UK’s net post Brexit and general election devaluation and the consequent rise in the UK inflation and fall in real wages, and resulting lower economic activity was likely to be five times larger than Brexit in its impact on job losses for the City. There is an assumption that the devaluation will not significantly boost export activity during a period of heightened uncertainty about future trading arrangements. It is notable that the post GFC depreciation of sterling had not significantly boosted exports.

Opinion in the UK
Collaborating with Nick Bloom (Stanford) and the Bank of England, Paul Mizen had been conducting a monthly survey of Chief Financial Officers (CFOs) in UK (non-financial) businesses (the ‘Decision Maker Panel’, DMP). The panel was polled regularly about their perceptions of business conditions (including sales, prices and costs) and consequent decisions concerning hiring, investment and borrowing. They were asked what impact withdrawing from the EU would have on their UK business. Brexit is seen as a major source of uncertainty and likely to reduce sales and investment whilst raising unit labour costs. It is likely to lead to some re-location abroad with some tendency to bring segments of their business back to the UK. On balance, firms tended to be more negative about Brexit than the general public.

Since the 2017 general election there had been speculation in the financial market that a softer Brexit (with a more favourable trade agreement) is more likely. The post-election views of the DMP indicated that there was an increase in uncertainty over investment levels. 

To the extent that Brexit reduces UK trade, economic growth and investment in the non-financial sector, it would have negative consequences for the business the financial sector conducts with the non-financial sector (and consumers). Hence domestic and retail financial services businesses would be negatively impacted through this channel.

Asset management
The final speaker, Pierre Bollon, first outlined the scale and scope of the French asset management industry, noting its importance in the fund management sphere and assessing its competitiveness. Its depth (as host to banking, insurance and financial management groups); talent pool (drawing on an internationally recognised higher education sector); and its innovative contributions in creating new financial instruments were highlighted; along with the speed with which the French regulator (AMF, Autorité de Marchés Financier) can approve a new EU compliant product in France (in 17 days, ‘the fastest trade record in the world’).

What would be the consequences of a Brexit for the asset management industry? The simple ‘passports’ for UCITS and AIFM products and management companies would be lost. Hence, there would no longer be a possibility to automatically ‘passport’ UK funds and mandates in the EU (and EU funds in the UK!). The need to set up fund management companies in EU countries to gain access to ‘passporting’ would lead the job losses in London.

UCITS business might be attracted to Luxembourg, a traditionally strong base, and Dublin seems to be favoured by insurance companies; whilst France was clearly making a pitch for asset management business and Frankfurt is stronger in banking, given the location of the ECB. There will be keen interest in hosting the EBA (to be re-located form London) and Amsterdam is another contender.

The ESMA issued a general opinion on relocation and delegation at the end of May 2017. There would be no automatic recognition of existing authorisations. Authorisations granted by EU27 NCAs (National Competent Authorities, NCAs) should be rigorous and efficient. Special attention should be given to avoiding the establishment of letterbox entities, and outsourcing and delegations to third countries (such as the UK) will only be possible under strict conditions. NCAs should ensure that ‘substance requirements’ are met. These require that activities and functions that are key to the proper functioning of the regulated entity should be present in the EU27 (and not outsourced or delegated outside the EU27). NCAs should ensure sound governance of EU27 entities and must be in a position to effectively supervise and enforce EU law coordination to underpin effective monitoring by ESMA. This has raised the question of whether the conduct of euro clearing can remain in London.

In Pierre Bollon’s view, the French asset management industry was large enough to create a viable eco-system and the relocation of the EBA from London to Paris would strengthen Paris’s position. For the UK, achieving equivalence will prove difficult given the multiplicity of ‘single’ passports. There would need to be a transition period perhaps extending beyond two years, but it should not be too long, as that would engender uncertainty. Pierre emphasised that the EU needs a good deal too because The City is very efficient, but special attention needs to be paid to the management of mutual funds and UCITS. In the absence of free trade with common rules, or a single market for financial services, a level playing field needs to be in place without any cherry picking on behalf of The City. In achieving an equivalence arrangement, it is important that the ESMA and the EBA coordinate their approaches, he concluded.

After the question and answer session that followed the panellists’ presentations, Andy took a ‘straw poll’ of the audience. More expected a ‘soft’ Brexit, with more trade access and less restriction on the movements of people, than a ‘hard’ Brexit, with less beneficial trade access and more restrictions on immigration from the EU27; but the largest show of hands was for the possibility of ‘no-Brexit’ in the end!


1. University of Birmingham

2. Christophe Boucher (Université Paris Nanterre), Michelle Boutillier, (Université Paris Nanterre), Jean-Bernard Chatelain (Université de Paris 1), and Alexis Direr (Université d' Orleans).