One last big trade-off left and the quota on fish got the spotlight. It had to be some sort of trade-off – the British accepted smaller reductions in the European quota for fish, in exchange for something called rules of origin for the car park – and so it came to pass. On Christmas Eve, in the middle of a global pandemic, a trade and security agreement, on what has been a long and tense journey between the United Kingdom and the European Union has been reached. In an interview with the Sunday Telegraph, Britain’s prime minister, Boris Johnson said he had secured “free trade with the EU without being drawn into their regulatory or legislative orbit”. The 1,255- page document published on December 26th does offer a deal, but people are still wondering about the details.
One of the overlooked areas was services. Critics say that Mr Johnson has wrongly prioritized fisheries and goods over the biggest export sector, services. The services economy makes up for about 80% of the British economy, with far more services to the EU than import and conversely, import far more goods from the EU than export. Described by many as thin, the deal on services will mainly affect how businesses are conducted, but the ramifications are much wider. For example, the qualifications earned in the UK as an accountant, doctor, architect, etc will no longer be recognized in the EU. But the one hit the hardest, it is without a doubt the financial sector and more precisely, the city of London.
For four years, Brexiteers have promised that London will flourish once it left the financial regulations of the EU, but the political uncertainty made almost every major company consider relocating and open offices in different parts of the continent. After the referendum result, the city regulators got all the firms in the city to prepare for the worst and a lot of work was spent ensuring they will be able to continue trading.
What does the deal essentially mean for London and the financial sector?
The City UK lobby group argues that the financial services sector is, in fact, the biggest taxpayer in the country and their report revealed financial services made up 10% of GDP, with 2.3 million people employed across Britain. In 2019, financial services exports amounted to 60 billion – almost as much as the US and Switzerland, the next two big exporters combined. Two and a half times as many US dollars are traded in London as they are in the US, and 75% of all Euro trading goes through the city.
Some things that happened in London can no longer happen. If you traded shares in London in one of the EU27 countries, after January 1st, that had to move back to the EU. The EU brought in something called share trade obligation, and what it basically means is that people in the EU, trading in EU shares securities are legally obliged to trade them in the EU. As a result, 6 billion of EU share trading has moved away from London into other sites overnight. London’s success as the financial centre for the trading of European equities has partly been attributed to passporting, which is the right to operate around the EU27 nations. That passport is now gone.
There has already been seen the trading of some EU companies moving from London to Europe. The European Banking authority moved its headquarters from London. The European Central Bank estimated that about 1.1 trillion of assets have moved back in the EU. A report by think tank New Financial revealed that about 300 firms have set up new legal entities or moved staff in the EU.
In an interview with Stories of our times, founder and CEO of Aquis Exchange, Alastair Haynes, who in preparation for Brexit opened an office in Paris one year ago, said he was shocked at how things changed overnight: “Dramatic shift of liquidity from one place to another overnight. Up till now 75-80% of our businesses was European share trading done in London, and what happened yesterday is that that 75-80 %, 95% of it moved over to our Paris office overnight and that meant 1.4 billion Euros of business moved out of the UK into the EU. Suddenly 80% of our revenues are being derived in France. That means that that will get taxed in France and that is a tax that is lost to the UK.”
Crucial to the future of financial services sector is whether or not, the UK will be granted equivalence and for that to happen, Britain needs to convince the EU, that it will operate under the same rigorous regulations as the EU. The government is yet to decide on where it stands on the issue, but many experts agree that will probably not work in London’s best interest. In an overregulated jurisdiction, the city will struggle. London needs to find ways to be innovative, to reduce the cost of regulations while maintaining high standards that allow for a low tax environment. Major players like the US, China or Japan, are also the ones who set the rules. Where they decide to do business is essential. Also, additional terms might be negotiated in the agreement. And there is always the question of how technology will change the ways in which businesses are being done.