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Dublin-on-Thames? City leaders debate the post-Brexit future

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This is the final article in a series on the Future of the City of London

In the mid-1980s, Goldman Sachs was choosing between London and Paris for its new European headquarters.

When the US bank weighed their respective merits — infrastructure, financial rule book, immigration policy, labour laws and taxes — London “clearly won”, says Richard Gnodde, now head of Goldman’s international arm.

What clinched it for the UK capital was Big Bang, Margaret Thatcher’s sweeping deregulation of the City of London, which began in 1983. From then on, most international financial services companies came to the same conclusion. The UK capital was seen as a launch pad to Europe, heralding the explosive growth of London as a global financial centre.

Now, on the eve of Britain’s departure from the EU, Mr Gnodde says policymakers should remember that “it wasn’t preordained in 1980” that the UK would enjoy the success it has. If it is to continue to thrive, “London has to get that playbook out from 1980-85.”

In London’s favour remain several immutable advantages: its language, timezone and rule of law. It also benefits from the agglomeration effect of its wide array of financial services and related industries, which makes the City one of the most desirable places for ambitious graduates.

Bar chart of Share by region in 2018 (%) showing Global financial activity

But Brexit brings a new challenge and the City must find new ways to thrive. Top finance executives suggest simplifying regulation, targeting new sectors such as green finance, cutting taxes and paying more attention to emerging markets outside Europe.

The City’s new chapter has also been complicated by the coronavirus pandemic, which has raised fundamental questions about how and where we work, and threatened city centre ecosystems. Meanwhile a record £2,076bn deficit casts a shadow over the UK government’s policy response.

Protect the golden goose

Three days after the Brexit vote in June 2016, Barclays chief executive Jes Staley summoned his top lieutenants to its private bank headquarters off Park Lane. 

Over the course of that overcast Sunday afternoon — followed by drinks at The Dorchester — they concluded the issue was so intensely politicised that a deal could not be expected before midnight on deadline day. They began planning for the worst.

Mr Staley says London’s position as “one of the great financial centres” relies on retaining its £8.5tn fund management industry. The main battle with Brussels will be over delegated authority, which allows UK managers to manage EU clients’ money out of London.

Bar chart of Average daily traded value ($bn) showing Exchange volumes around the world

“Don’t look at where the banks are. Look at where the people managing these extraordinary pools of assets are,” Mr Staley said. “The users of capital find the providers of capital, not the other way around. Unless a portfolio manager at Legal & General or Fidelity relocates, we are not going to have the exodus some predicted.”

Bernard Mensah, international president of Bank of America, said: “The EU has been less successful so far in attracting the money. The holy grail is removing delegated authority of fund management. That would really tighten the grip . . . London maintaining that industry here really helps it maintain a critical mass.”

Jes Staley, chief executive officer of Barclays, says the real threat to London is not Paris, Frankfurt or Milan, but New York, Singapore and Hong Kong. © Simon Dawson/Bloomberg

To remain attractive to those investors — in the face of growing competition from other European cities — London should take advantage of its new regulatory freedom, said Mr Staley. The real threat, he contends, is not Paris, Frankfurt or Milan, but New York, Singapore and Hong Kong.

Paul Marshall, co-founder of $50bn hedge fund Marshall Wace and an ardent Brexit supporter, puts it more bluntly. “The starting statement has to be that the UK and Europe are now backwaters in global financial terms,” he said. “In a global context, even the discussion of Brexit is parochial.”

Line chart of Value traded ($tn) showing Electronic trading volumes have risen strongly in China

Simplify regulation

Britain’s membership of the EU brought the financial sector two big benefits: access to skilled migrant workers and a free passport to sell their products and services across the region’s single market.

Both are under threat from Brexit. The UK had been hoping its regulations would be recognised as equivalent to the EU’s, which would enable UK-based institutions to maintain access to EU customers. However, Brussels has so far refused to reciprocate.

Bernard Mensah, international president of Bank of America, says that London’s fund management industry ‘really helps it maintain a critical mass’ © Charlie Bibby/FT

On the other hand, diverging from the EU rule book is seen as an opportunity for the UK and a threat in Brussels.

Sam Woods, deputy governor of the Bank of England, said in a recent speech that Brexit means the UK will no longer be “shackled in lockstep” with the EU. It can pursue “a more British style of regulation” based around “openness” and “dynamism” in the “rough-and-tumble” financial sector.

Wary of that, Mairead McGuinness, the EU’s financial services commissioner, warned earlier this week that the EU cannot permit itself to be “captured” by the City of London, saying: “Our interest is making sure that we are not captured by a system that we don’t regulate, or controlled by it.”

People including Mr Staley and former BoE governor Mervyn King told the FT they would rather see the UK gravitate towards American rules.

“The biggest threat to the City comes from New York,” Lord King said in an interview. “If we are to pursue regulatory equivalence with anyone, it should be the US. The key thing is to not be too out of step with them in the areas of capital and liquidity.”

“Being free from EU rules is an important step forward. We can make regulations simpler, but more effective in making the system safe,” he added.

Richard Gnodde, chief executive of Goldman Sachs International: “it wasn’t preordained in 1980” that the UK would enjoy the success it has. © Charlie Bibby/FT

He also criticised Europe’s wide-ranging Mifid II reform of financial markets, which “has simply increased costs while doing absolutely nothing to give useful information to investors”.

The UK has also been a longstanding opponent of the EU bonus cap, which was introduced in 2014 in response to the financial crisis and limits year-end payouts to twice a bankers’ salary.

Goldman Sachs’ Mr Gnodde said removing the bonus cap would “put the UK on the same footing, aside from the EU, with every other major financial centre”.

Line chart of Market capitalisation of listed stocks ($tn)  showing US exchanges are the largest by far

“Removing that ratio makes London a more attractive place for sure,” he added. “If I move a senior person between New York and London I am driving up the fixed cost of our operations. If that rule doesn’t exist, I don’t have to think about that.”

‘Dublin-on-Thames’

The City is also already lobbying on taxation. Sir Paul of Marshall Wace said that London should position itself as “Dublin-on-Thames”, matching Ireland’s 12.5 per cent corporate tax rate to attract more multinationals.

William Jackson, managing partner of €26bn private equity firm Bridgepoint, concurred: “If we really wanted to steal a march on our European friends, you’d make us the offshore [centre], a more favourable place to be based from a tax perspective.”

“The EU is looking at this very closely as well, because they don’t want Singapore sitting across the English Channel, being a massive competitor,” said Mr Jackson. “I don’t think we’ll see the true colours of this government until we get through this Brexit negotiation, but the mood music is very positive.”

Sir Paul Marshall, co-founder of $48bn hedge fund Marshall Wace and an ardent Brexit supporter: ‘The UK and Europe are now backwaters in global financial terms’ © Anna Gordon/FT

Yet the UK government is also considering reforms of capital gains tax that could hurt the private equity industry’s lucrative carried interest tax break. And while Britain has tightened its regime for UK residents with non-domicile tax status — historically a big draw for foreigners to come to London — countries such as France and Italy have been offering non-dom tax breaks of their own. 

As the government weighs up a tax overhaul, it is also working on initiatives to develop new sectors. Last month prime minister Boris Johnson outlined plans for a UK “green industrial revolution” focused on nuclear, hydrogen, electric cars and offshore wind power, all of which will require tens of billions in financing.

“The opportunity is to double down on green finance,” said Huw van Steenis, chair of sustainable finance at UBS and a former adviser to the BoE. “We need to be relevant [and] it’s probably more about whether we have expertise than [EU] access. But the risk is that Brexit has distracted from innovation.”

Future of the City

In a series of articles, the FT examines how London’s financial centre will fare in the decades ahead as Brexit negotiations reach their climax

Receive alerts when a new part of this series is published by adding ‘London fights for its future’ to myFT

The City has some catching up to do in its ambition to become a global centre for the near-$1tn market for green bonds. Sixteen countries including Germany, France, and Sweden have already sold green sovereign debt, while the UK’s intention to start a green gilts programme was only announced last month.

Another area marked for expansion is fintech. The UK has nine fintech “unicorns” — private companies valued at more than $1bn — such as app-based neobanks Monzo and Revolut. The rest of Europe has just six, according to CBInsights. However, that trails the 37 based in the US. And the two most successful European fintechs are Sweden’s Klarna and Dutch payments giant Adyen.

Looming over all of this is the fallout from coronavirus. The pandemic has forced a shift to remote working and financial services firms have coped better than any of them expected. That has caused executives to mull whether expensive offices with thousands of staff are necessary. Mr Staley said: “That may ultimately be a bigger issue than Brexit.”

Additional reporting by Nicholas Megaw and Owen Walker in London



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Europe

FT 1000: Europe’s Fastest Growing Companies

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The latest annual ranking of businesses by revenue growth. Explore the 2021 list here — the full report including in-depth analysis and case studies will be published on March 22



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EU plans digital vaccine passports to boost travel

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Brussels is to propose a personal electronic coronavirus vaccination certificate in an effort to boost travel around the EU once the bloc’s sluggish immunisation drive gathers pace.

Ursula von der Leyen, European Commission president, said on Monday the planned “Digital Green Pass” would provide proof of inoculation, test results of those not yet jabbed, and information on the holder’s recovery if they had previously had the disease.

“The Digital Green Pass should facilitate Europeans‘ lives,” von der Leyen wrote in a tweet on Monday. “The aim is to gradually enable them to move safely in the European Union or abroad — for work or tourism.”

The plan, expected to be outlined this month, is a response to a push by Greece and some other EU member states to introduce EU “vaccination passports” to help revive the region’s devastated travel industry and wider economy. 

But the commission’s proposed measures will be closely scrutinised over concerns including privacy, the chance that even inoculated people can spread Covid-19, and possible discrimination against those who have not had the opportunity to be immunised.

In an immediate sign of potential opposition, Sophie Wilmès, Belgium’s foreign minister, raised concerns about the plan. She said that while the idea of a standardised European digital document to gather the details outlined by von der Leyen was a good one, the decision to style it a “pass” was “confusing”. 

“For Belgium, there is no question of linking vaccination to the freedom of movement around Europe,” Wilmès wrote in a tweet. “Respect for the principle of non-discrimination is more fundamental than ever since vaccination is not compulsory and access to the vaccine is not yet generalised.”

The travel sector tentatively welcomed the news of Europe-wide vaccine certification as a way to rebuild confidence ahead of the crucial summer season, but warned that regular and rapid testing was a more efficient and immediate way to allow the industry to restart.

Fritz Joussen, chief executive of Tui, Europe’s largest tour operator, said “with a uniform EU certificate, politicians can now create an important basis for summer travel”. But he added that testing remained “the second important building block for safe holidays” while large numbers of Europeans awaited a jab.

Marco Corradino, chief executive of online travel agent Lastminute.com, said he feared the infrastructure needed would not be ready in time for the summer season: “It will not work . . . at EU level because it is too complicated and would not be in place by June.”

He suggested that bilateral deals, such as the one agreed between Greece and Israel in February to allow vaccinated citizens to travel without the need to show a negative test result, had more potential.

Vaccine passport sceptics argue it would be unfair to restrict people’s travel rights simply because they are still waiting for their turn to be jabbed. 

Gloria Guevara, CEO of the World Travel and Tourism Council, said it was important not to discriminate against less advanced countries and younger travellers, or those who simply cannot or choose not to be vaccinated. “Future travel is about a combination of measures such as comprehensive testing, mask-wearing, enhanced health and hygiene protocols as well as digital passes for specific journeys,” she added.

A European Commission target to vaccinate 70 per cent of the bloc’s 446m residents by September means many people are likely to go through summer unimmunised.

While some countries around the world have long required visitors to be vaccinated against infectious diseases such as yellow fever, a crucial difference with coronavirus is that those inoculations are available to travellers on demand. 

Questions also remain about the risk of people who have already been vaccinated passing on coronavirus if they contract the disease.

 





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EU must prepare for ‘era of pandemics’, von der Leyen says

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Europe must prepare its medical sector to cope with an “era of pandemics”, the European Commission president said, as she warned the bloc was still in its most difficult period for Covid-19 vaccine deliveries. 

Ursula von der Leyen told the Financial Times that the EU could not afford to sit still even once Covid-19 has been overcome, as she described her plans for a Europewide fast-reaction system designed to respond more quickly to emerging medical threats. 

“Europe is determined to enlarge its strength in vaccine production,” she said in a telephone interview. “It’s an era of pandemics we are entering. If you look at what has been happening over the past few years, I mean from HIV to Ebola to MERS to SARS, these were all epidemics which could be contained, but we should not think it is all over when we’ve overcome Covid-19. The risk is still there.” 

Von der Leyen last month unveiled plans for a biodefence preparedness plan called the HERA Incubator, which will combine researchers, biotech companies, manufacturers and public authorities to monitor emerging threats and work on adapting vaccines. This will become part of a Health Emergency Preparedness and Response Authority (HERA). 

The concept is an attempt to mirror some of the benefits conferred by America’s Biomedical Advanced Research and Development Authority, which is charged with the job of responding rapidly to new health threats.

“The US has a strong advantage by having BARDA . . . this is an infrastructure Europe did not have,” von der Leyen said. “But Europe has to build up to be prepared for whatever comes, and also for the next possible pandemics. This is the HERA incubator.” 

The EU remains within its “most difficult quarter without any question” for vaccine deliveries, she said, cautioning “many, many problems” could always occur within the production process.

Looking towards the second quarter, she pointed out that a second EU contract with BioNTech/Pfizer for their vaccine would kick in, alongside the new jab from Johnson & Johnson, which is expected to be authorised in March.

In an EU summit on Thursday, von der Leyen addressed vaccine production and the threat of virus mutations after a rocky start to the year, when she was hit by complaints from politicians in member states, including Germany, about supply shortfalls. 

Von der Leyen acknowledged to the European Parliament in early February that mistakes had been made in the EU’s vaccination effort, and the campaign remains behind those of the US and UK. Among the difficulties are continued production problems at AstraZeneca’s European facilities. 

Von der Leyen said she was sticking with the EU’s target for the delivery of 300m doses in the second quarter, saying the challenge will shift from vaccine production to national rollouts. As for AstraZeneca’s shipments, she said: “I need to see the proof of the pudding . . . It’s very good that they also delivered from the rest of the world, but they have to honour their contract and we want our fair share.”

Ursula Von der Leyen says she is sticking with the EU’s target for the delivery of 300m doses of the AstraZeneca vaccine in the second quarter © Remo Casilli/Reuters

The good news for the EU is its access to mRNA technology, which is used in the BioNTech/Pfizer vaccine and which scientists believe can be used to rapidly adapt to mutations, said von der Leyen. 

But she also supported French president Emmanuel Macron’s proposal to share up to 5 per cent of supplies to permit the vaccination of healthcare workers in developing countries.

“We all suffer from the fact that the scaling up was not and is not as rapid as we thought at the beginning. This has a general effect all over the world,” she said. “With production picking up I think we should never forget that only if everybody has access to vaccines will we overcome this virus.”

Von der Leyen added that the EU needed to be particularly concerned about developments in its immediate area. 

“The mutant story is worrying me the most,” she said. “When the virus is still raging in the neighbourhood, the probability that mutants will occur, that will come back, for example, to Europe, is only rising.”



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