Warning that passporting between the U.K. and the U.S. could be bad for London banking jobs
When Theresa May meets Donald Trump this Friday, an olive branch may be extended to the City of London. Trump is reportedly contemplating offering the UK a new trade deal, under which U.K. and U.S. banks will be able to operate on each other's territories with, "minimum regulatory hurdles." Sounds good? City of London veterans caution that it could be a big mistake.
"The U.K. is far more vulnerable to losing business to New York than it is to losing business to the European Union," says David Buik, market commentator at independent bank Panmure Gordon in London. Buik voted in favour of Brexit, but says May should think twice before accepting Trump's offer: "The combination of New York's trading prowess and the possible softening of regulatory controls are going to make New York an attractive place to do business."
Christopher Wheeler, U.S. banks analyst at Atlantic Equities in London has spent 37 years working in the City. He echoes Buik's warning. "U.S. bank CEOs have already indicated they're more likely to relocate staff to New York than to the EU after Brexit and this could be Trump's attempt to facilitate that." Wheeler says that what May might see as a victory for the City of London could therefore easily backfire: "If it's easier to do business in New York, why not just move people to New York and save costs?"
Of course, there could also be upsides to a U.K-U.S. arrangement. David Mortlock, global head of equities at Berenberg and head of the German bank's London office, says a transatlantic passporting arrangement would be a good thing: "The U.S. has the deepest and most profitable capital markets in the world and it would be helpful for U.K. companies to have easy access to those markets for debt and equity-raising." Any agreement would also be a good bargaining chip in discussions with the EU," says Mortlock. "If the EU wants to achieve capital markets union, I don't think they will want the U.K. looking in the direction of the U.S."
What about 'equivalence' - the notion that U.K.-based banks should still be able to access European markets after Brexit, so long as U.K. and EU finance regulations remain the same? If the City of London aligns more closely with U.S. regulations, won't EU equivalence become an impossibility? Mortlock agrees that this could be an issue, but says both equivalence and passporting are overrated. "Passporting is the wrong debate in wholesale markets," he says, citing a recent article in the Financial Times by Stanislas Yassukovich, former CEO of the European Banking Group in which Yassukovich argued that. "There is no passport requirement to have orders executed on the City’s exchanges, any more than for orders on those in New York, Chicago or Tokyo." Mortlock agrees: "Wholesale clients already buy financial services products all around the world irrespective of passporting. And they will still buy those products in the U.K. after Brexit."
The other upside to a transatlantic agreement is the possibility of strengthening London's position as a bridge between the U.S. and Asia. "The City of London has timezone and geographical advantages over New York. We have 70 years of infrastructure and an excellent track record and are nothing near as insular as they are," says Buik. However, he also cautions against complacency: the rise of Shanghai could detract from the need for an offshore Chinese financial base in the decade to come.
Wheeler says hopes of a post-Brexit City becoming China's offshore hub are overdone: "Chinese banks are already moving to Luxembourg in order that they have a base in the EU." Most of all, in negotiating with the new U.S. administration, Wheeler says the British government needs to be cognisant of the fact that it will be acting mostly in the U.S. interest: "The helping hand won't be offered for free."