The City is getting on with Brexit

One of the City’s top bankers slammed her fists down on her desk when we met for coffee this week, let out a huge sigh and exclaimed: “I’m so bored by Brexit. Can we all just get on with business please?”

The banker – an openly agnostic Remainer – went on to say that the bickering at Westminster, and the persistent panic flowing from the national press, is not helping blood pressure rates in the City. More pertinently, she says the constant doom and gloom is distracting the City from going about its daily business. Which, she claims, is simply not being  affected one jot by Brexit, while the fresh warnings from the US banks over a potential exodus of jobs has now become boring and a rehash of Project Fear.

As my banker friend put it, and remember, she’s a Remainer at heart: “It didn’t work last time and its not going to work now. It’s all hot air and arbitrage. Has Jamie Dimon (JP Morgan) actually moved any jobs yet? And what about Michael Bloomberg who has just opened up vast offices in the City? Is he upping sticks and moving? To Frankfurt maybe?

And she added: “To be frank, most City financiers have far more important things to worry about such as the latest EU regulations on Prips and Open Banking- regulations brought in by the British.”

It’s a sentiment that I’ve been hearing repeatedly over the last few days after all the huffing and puffing over the leaked Treasury documents warning about Armageddon under whatever Brexit scenario we exit the EU. City financiers are blaming both sides for creating a sense of panic – the rabid Brexiteers for reacting with such faux outrage over Philip Hammond’s promise to business leaders at Davos that there will be only ‘modest’ changes to the UK’s relations with the EU.

But there are also less dogmatic Remainers who blame Hammond for having such a tin ear to the mood, and failing to keep everyone on side during the next stage of these delicate negotiations. If only Hammond had been a little cleverer, they say, he could have got his message across to business without alienating the Brexiteers.

But there’s a more profound reason why so many in the City are so bored by Brexit, and fed up with the tediously low level of detailed debate.
And that’s because, surprisingly enough, there appears to be a consensus emerging across the financial services industry that behind the scenes both sides could moving towards putting together a decent deal that suits the UK and the EU.

From what I can gather, it’s a deal which more or less mirrors the proposals outlined last year by the International Regulatory Strategy Group, a cross-industry body which has taken soundings from all the various trade associations including banking, investment banking, legal firms, investment and asset managers, retail and insurance. Although it is sponsored by the City of London Corporation and the lobbying body TheCityUK, both unashamedly Remainers, the IRSG prides itself on having broad consensus from firms across the spectrum of the financial sector.

The IRSG’s report – drafted by a group chaired by former City minister Mark Hoban – came up with its proposals last year for a ‘bespoke’ free trade agreement which, it is claimed, would be relatively straightforward to set up since the EU and UK regulatory regimes which are essentially the same.

At the heart of the deal is “ mutual access,” a move which can be achieved by agreeing on regulatory alignment.  Rachel Kent, a partner at Hogan Lovells and one of the authors of the report, explained to me that the proposal builds on the free trade area agreement between Canada and the EU, and centres on giving financial companies mutual access to each other’s markets.

So, if a UK FinTech group wants to set up in Germany, it could continue to do so. Or, if a German bank wants to open a branch in London, it can do so following the existing regulations and vice versa. There are differences between this and passporting, not least the fact that access can be withdrawn if the parties cease to be aligned.

Indeed, Kent says the starting point for the IRSG’s model is that both the EU and the UK will benefit from future arrangements for free trade in financial services. “Both sides have an economic interest in maintaining as much as possible of the current regulation. They both accept that keeping us together as close as possible will avoid fragmentation and provide a bigger pie. “
She adds that an enhanced FTA [free trade agreement]  is entirely possible to achieve within the current technical and legal framework, and would form ‘a financial services ‘chapter’ of a wider EU-UK agreement.’  The model should work for other sectors too.

There are bits and pieces that need to be changed. And it may even be that the UK will have to make political compromises to achieve this arrangement. But that’s part of the negotiations still to be had.

For example, if regulatory alignment were to be agreed, there would still need to be – as David Davis has already alluded to – a new joint “dispute resolution body,” made up of judges and independent experts would rule on breaches of the agreement. Such a group of regulators would come up with a joint regulatory response when new global standards need to be implemented.

Paradoxically, Kent also claims that the arguments over the desire by some Brexiteers for more  ‘divergence’ are not particularly applicable to the industry. “In truth, there really are not many issues which the City would want to do differently. One of the ironies of these negotiations is that the UK has been one of the main drivers for much of the financial services regulation in the EU and, of course, we often gold plate them do.”

And the City will continue to do. You could say that it’s the way the UK gold-plates itself that has helped turn the City into such a great global centre. And why would we want to change that now? Whether such a bespoke deal will be struck will, of course, depends now on the politics.