If you know your hard and soft Brexit, you probably also know your hard and soft Brexit-related banking job losses in the City of London. Oliver Wyman thinks up to 100,000 City jobs could be affected in a hard Brexit scenario whereby a trading agreement with the EU is either absent or negligible. By comparison, if the Brexit is soft and we’re still in the European Economic Area and passporting continues gently unabated, Oliver Wyman says that number could be 8,000, or less.
Not everyone’s afraid of a hard Brexit though. Barnabas Reynolds isn’t, and if anyone’s well placed to judge the Brexit effect, it’s probably him.
Reynolds is head of the global financial institutions advisory & financial regulatory group at U.S. law firm Shearman & Sterling in London. He’s also global co-head of financial institutions for the firm. And he’s a self-appointed bulwark against claims that the City of London stands to disintegrate if the UK crashes out of the European Union without a decent alternative trade agreement in place.
“A “no deal” situation wouldn’t necessarily be a bad thing for the City,” Reynolds tells us. “To suggest that it would is to misunderstand the nature of the financial services business. Clients come to the City of London to do business of their own volition. This is how the City has operated for centuries. There is nothing in European law to say that people could not come to London to do business after Brexit if they so chose. Nor is there anything to prevent European banks from setting up London subsidiaries from which to do that business. After all, this is where the liquidity and the expertise are.”
In Reynolds’ eyes, therefore, the loss of the passporting arrangement which has allowed banks regulated in London to operate branch offices in the EU would be a pin-prick rather than a dismemberment. Without branch offices, Reynolds admits that banks in London might be compelled to set up newly-regulated operations in Europe, but he argues that these will be mostly marketing entities. He says the actual business of trading and the management of risk will still take place in the UK, under new UK-regulated subsidiaries of EU banks if necessary..
“There are an awful lot of reasons why people come to the City of London to do business,” says Reynolds. “These aren’t going to disappear overnight.”
From Reynolds’ perspective, passporting is overrated. “Passporting expanded the conceptual perimeter of the City,” he says. “It made it possible for banks based in London to service customers in their home countries, but that came at a price and the price was legislation that was harmonized with the European Union.”
The way Reynolds sees it, the EU’s approach to financial services legislation is misguided. “The European Union makes rules,” he says. “They have a very Cartesian approach – they want to map their ideal environment out in an intellectual way, but this comes at the cost of a mass of red tape and a regime that’s not very market friendly.”
Distinct from the EU, Reynolds argues that the City of London can revert to its historic “standards-based” approach to regulation, which he claims is both safer for tax-payers and friendlier for businesses.
Of course, this won’t happen if the UK opts for an equivalence deal in which London banks are given access to EU markets if and only if EU regulations are emulated exactly. In fact, Reynolds says this would be the worst of all worlds. “The UK doesn’t want to be in a gilded EU cage as a rule taker,” he says. “In this case, we would be better off walking away.”
For Reynolds, the best outcome for the UK post-Brexit is a form of equivalence based upon adherence by the UK and the EU to mutually agreed international principles rather than submission to EU-prescribed rules. “Instead of the status quo whereby the EU legislates for the City, we would work on high level principles at an international level and would ensure that neither jurisdiction is polluting the other in terms of systemic risk.”
Without this, Reynolds says London shouldn’t be fearful of doing its own thing: “A third of the City was destroyed in World War Two,” he says. “It recovered from that and the City can recover from Brexit.”