The writer chairs the sustainable finance committee at UBS
What will Brexit mean for the City of London and UK finance? With the appointment of the new chancellor, Rishi Sunak, it’s a question that financiers are asking with renewed urgency.
Financial services account for 11 per cent of the UK tax take and more than 1m jobs, two-thirds of which are outside Greater London — a fact often overlooked. While the City will adjust to whatever is thrown at it, giving up these opportunities and tax income should be weighed up carefully.
The Brexit debate largely revolves around the type of access to European financial markets the UK will have and how much it will be able to diverge from EU rules. As Mark Carney, Bank of England governor, said: “It is not desirable at all to tie our hands and outsource regulation and effectively the supervision of the world’s leading complex financial system to another jurisdiction.”
But the more the UK diverges, the less likely its access to the EU’s financial markets may become. Firms have already set up hubs in the bloc as a contingency, moving almost £1tn of assets.
What could smart divergence look like? One possibility is a more proportionate regime for smaller banks. The EU currently has tough rules irrespective of size, partly because of concerns lenders could operate across borders without impediment. However, the UK could consider a proportional scheme for smaller lenders to reduce the cost of finance to domestic UK customers, as in Canada and the US.
Now consider regulation. Much has been made of Britain’s potential destiny as a low-regulation “Singapore on Thames”. But in fact Singapore learnt a hard lesson from the Asian financial crisis of 1997. The tough regulatory regime it adopted subsequently is one of the reasons it fared so well in the 2008 crisis.
The real lesson of Singapore may be its concerted effort to make the system less bureaucratic. Singaporean regulators have embraced digital regulation and made a commitment to only ask firms for data once.
There is huge scope for the UK to be a world leader in digital regulation, too. Reporting for UK banks alone costs the industry £2bn-£4.5bn per year, according to McKinsey. In January, the BoE and the Financial Conduct Authority announced proposals for data reforms based on the Future of Finance report. The Treasury should back these plans and also consider adding “support of the government’s economic policy” as a secondary objective of the FCA.
More broadly, the government should weigh up carefully the right balance of divergence sector by sector. Domestic insurers, for example, would like to make tweaks to EU rules known as “Solvency II”. But asset managers would like to remain aligned.
The UK could champion green finance more quickly outside the EU. Investors, regulators and companies need high-quality data to manage the transition to a lower carbon economy. Britain could become the first European country to mandate climate-related disclosures for all companies.
Divergence will not work everywhere. Proposals should be weighed carefully. The EU is currently considering allowing firms to count technology investments towards their regulatory capital — as they do in Switzerland and the US. Sam Woods, deputy governor of the BoE, told parliament last week that this is an area in which the UK may wish to diverge. However given the central importance of digital transformation to customers and competitiveness, it would be odd to disadvantage UK firms relative to most of their international peers.
Last, the chancellor should ensure finance works for everyone. The transition from cash to digital payments is accelerating, but to do this without leaving anyone behind will require significant upgrades to broadband and mobile telephony networks. A national payments strategy should be a priority too.