Brexit is work in progress and I can’t sit here and say that I know exactly what is going to happen. What is clear, is that the banking industry will be affected. According to the Prime Minister’s speech, we are going to leave the single market and therefore, the access which UK based banks have had into the rest of the EU will change. How that is going to be done remains to be seen.
The tension relates to what comes out of the negotiations. From a British point of view, the importance of the City and the contribution it makes to the employment and to tax revenue is unquestioned. It is a vital industry and it must be protected as well as possible. By the same token, the City of London doesn’t just operate as the capital market for Great Britain, it operates as a capital market for continental Europe.
It is THE prime capital market in the time zone, and provides capital for all European countries. Access to that is going to continue to be an absolute requirement for people who operate outside the UK, but within EU. So there is a common desire to see the City of London continue to prosper. Inevitably, there will be some impact, and jobs will go, because they will need to accommodate changes, but the central question is whether this is going to lead to a collapse of the City of London. I doubt that, if only because the installed base, the ecosphere which is the City of London, is so complex and so well established that it is too difficult to reproduce. It is a little bit like trying to cut down the rainforest and recreate it somewhere else. Theoretically, it is possible but it is actually very, very difficult to do.
But I don’t think there should ever be grounds for complacency and I say that because I have seen a couple of regulatory revolutions in my time. While they are quite different from each other and quite different from Brexit, it is interesting to study their impact. One would of course be the Big Bang in the City of London in 1987, where there was deregulation and increased competition. In the early stages the City of London was like a battlefield, with banks who failed to adapt and could not compete suffering mightily. Ultimately, the City prospered, but the short term cost was enormous.
The second example I have in mind is the aftermath of the Enron scandal. The US authorities introduced the Sarbanes-Oxley Act to prevent further abuses by making sure that regulation was far more rigorous and far reaching. This impacted, but didn’t destroy Wall Street, but it did lead to a dramatic and, never since reversed, change in the relative size of the City of London and Wall Street. Business moved to London, which wouldn’t have moved if it hadn’t been for the regulation. So these big changes are seldom terminal but they are relatively impactful.