Policy Chairman Catherine McGuinness Speech - European Financial Forum, Cumberland Lodge Conference
Speaking at the European Financial Forum Cumberland Lodge conference today, Policy Chairman of the City of London Corporation, Catherine McGuinness, has urged for a swift resolution on the negotiations over the Brexit divorce bill.
She has highlighted that the likely cost of a ‘no-deal’ Brexit to the economy, while difficult to forecast, is likely to dwarf any payment to the EU and that the tax revenues the financial services sector paid last year, £71.4 billion, is considerably higher than the £53 billion which the EU is reportedly asking for.
She has urged the Government to consider not just how much it is willing to pay, but also the cost of not paying.
Finally, she adds on market access that an equivalence regime would be too patchy and too uncertain to provide what the financial services sector needs, and the UK needs a deep free trade agreement with the EU covering financial services.
As well as promoting London as the world’s leading financial centre, the City of London Corporation works to support the financial services industry of the whole country.
Financial and professional services contribute more revenue to the UK economy than any other sector - more than manufacturing, more than construction.
It is also the largest generator of tax revenue and provides the UK's largest trade surplus.
I have been asked to talk about the future, but I cannot talk about the future without first addressing the present. And I make no apology for repeating what others may have said before.
But the cloud on the horizon for the sector is Brexit, which is creating uncertainty and poses the risk of reduced access to our main export markets. What the industry really craves is certainty. This is needed in three broad areas: transition, trade and talent.
I will briefly touch on each of those.
On transition, the message is clear. Business needs certainty as soon as possible.
Imagine a hypothetical American or Japanese bank which has chosen to locate in London for a host of reasons, one of which is market access to 400million customers across the EU.
Having built up relationships with customers across the EU, all served from the bank’s London hub – the bank simply does not know if it will be able to serve these customers from London the day after Brexit.
If the UK financial services sector is left without access to the EU market, this bank would need to establish a subsidiary in an EU member state and receive authorisation from that country’s regulator.
And they would need to have the people, premises, capital and liquidity in place to run operations in that country – and to satisfy the regulator. This would take time.
Firms have consistently told me that a year is the bare minimum they would need to execute plans of this magnitude.
This means that if they do not have certainty on what is coming next at least a year before the UK’s planned exit in March 2019, they will have no choice but to act on the basis of a worst-case scenario.
These actions will not just be costly to the firms involved, but also to their customers.
So we need firm agreement from both the UK and the EU sides that there will be proper transition period with clear arrangements while the new relationship is negotiated.
Firms should not have to transition twice in quick succession, so arrangements in the transition need to reflect the status quo as closely as possible.
This must be agreed as soon as possible to avoid unnecessary costs being loaded on to consumers and businesses across Europe.
If transition is not agreed until later on when a future trade agreement is being discussed, this will be so late it will be like closing the stable door once the horse has bolted.
I would like to emphasise that this really is urgent.
We cannot afford to risk the UK crashing out of the EU without a deal because of disagreements over the size of the UK’s ‘divorce bill’.
At the moment, the EU will not move on to the next stage of the negotiations until the UK sets out how much it is willing to pay.
The cost of a no-deal Brexit is difficult to forecast, but it is likely to dwarf any payment to the EU.
The annual tax take from the financial services industry alone – just one industry - is over £70 billion.
This is much bigger than the £53 billion which the EU is asking for.
So when the Government considers how much it is willing to pay, it needs to consider the cost of not paying.
Trade – beyond the transition, we need to know what we are transitioning to.
An equivalence regime would be too patchy and too uncertain to provide what the sector needs. Instead, we need a deep free trade agreement which covers financial services, as recently proposed by the International Regulatory Strategy Group.
Given how the UK starts from a position of regulatory alignment with the EU, we can achieve a structure where mutual market access continues while alignment is maintained.
Access can fall away in specific areas if one side decides to materially diverge, without the whole structure coming down.
This needs to be a partnership arrangement rather than one where decisions on access are unilaterally made by one side.
Of course, this is an ambitious approach that goes beyond what existing free trade agreements provide for financial services. But we need to be ambitious.
The UK and the EU have deeply intertwined financial markets and many years of regulatory alignment.
It would be folly to needlessly tear this down and start again.
The financial services hub in the City is important for the whole of Europe. Anything which damages this would be harmful to both sides.
This area has so far received less airtime than the other two, but I can assure you that firms see it as just as important.
This is a global industry, providing global services and global benefits. It relies on access to the best talent from around the world, including the EU. It is vital that these people – both those already here in the UK, and those who may come in the future – remain welcome in the UK.
We want them to continue making their contribution here.
Future of UK regulation
We will also need to think about what the UK’s regulatory set up looks like post-Brexit. We are lucky to have a regulatory and supervisory system that is among the best in the world.
But our regulators will experience a real gear shift in their scope and role after Brexit. We need to make sure that they have the right resources, powers and mechanisms to deal with this.
The IRSG is preparing a paper on this topic, which it expects to publish before the end of the year. We also need to ensure our regulators take the right approach to the industry after Brexit, and to consider whether we need to look again at focusing on the competitiveness of the sector.
Future of international regulation
Looking beyond Brexit, engagement at the global level and with non-EU countries will become even more important.
And between myself, the Lord Mayor, and our special adviser for Asia, we are engaging more widely than ever before. It is in all our interests to protect and champion global standards, which promote open and flexible markets.
Enhanced international cooperation is important for maintaining the long-term competitiveness and capabilities of the City and its place in the global economy.
Any weakening of global regulatory coherence would lead to a much more unpredictable operating environment for firms and could damage trust between regulators.
I have just returned from the United States, where I had a number of meetings on how we can coordinate our work with international organisations and global standards bodies. The commitment to working together for high standards was notable.
And of course we are operating against a rapidly changing technological background. The UK has proved quite adept so far.
We are the world leaders in fintech, for example, and we would like to see a focused sector deal for fintech. Artificial Intelligence and automation will pose further challenges and opportunities.
The UK needs to be well placed to navigate these.
So there are reasons to be hopeful. London has been a key financial centre for hundreds of years. Many of the attributes that have driven this will endure.
But the global financial services industry is more competitive than ever before. Losing the slightest edge can be significant. That is why it is vital that we get Brexit right.
And it is essential that the UK has the right relationships and environment to keep seizing the opportunities of the future.
The UK’s financial services sector can still have a bright future, if we make the right decisions now.
Notes to editors
- Further details on the European Financial Forum can be found here - https://www.epfltd.org/european-financial-forum-
- About the City of London Corporation
The City of London Corporation provides local government and policing services for the financial and commercial heart of Britain, the 'Square Mile'. In addition, the City Corporation has three roles:
- We support London’s communities by working in partnership with neighbouring boroughs on economic regeneration, education and skills. In addition, the City of London Corporation’s charitable funder, City Bridge Trust, makes grants of around £20 million annually to tackle disadvantage across London.
- We also help look after key London heritage and green spaces including Tower Bridge, the Museum of London, Barbican Arts Centre, City gardens, Hampstead Heath, Epping Forest, Burnham Beeches, and important commons in London.
- We also support and promote the ‘City’ as a world-leading financial and business hub, with outward and inward business delegations, high-profile civic events and research-driven policies, all reflecting a long-term approach.
See www.cityoflondon.gov.uk for more details.