Since the pandemic forced thousands of employees to work from home, the City of London has resembled something of a ghost town © John Sibley/Reuters

The City of London has had little to celebrate in recent months. The pandemic, and now renewed fears of a second spike of the virus, has forced thousands of employees to work from home and turned the Square Mile into something of a ghost town. Covid-19 may have pushed the threat of Brexit down the agenda, but with negotiations on Britain’s departure from the EU entering a critical phase, the future of the country’s financial services industry should not be forgotten. While the headlines from the trade talks have been about fisheries and state aid, the City of London is one of Britain’s few global success stories — and an almost indispensable source of tax revenues.

Already, however, decisions that will have far-reaching effects on the City are being taken. On Monday the EU’s markets regulator said it would label UK-based clearing houses as critical to the stability of its financial system. The decision will allow the European Securities and Markets Authority to draft opinions on what demands should be placed on clearing houses based outside the EU, including potentially forcing them to relocate their activities into the bloc in order to keep serving European customers.

London has long dominated the prized market for clearing euro-denominated trades. Brussels has repeatedly sought to reduce this dominance so the latest move is no surprise. The European Central Bank too has pushed to gain oversight of euro clearing, worried about the financial stability risk of a critical part of the currency area’s financial system being outside the bloc’s control. A European Court of Justice ruling in 2015 on this issue came down in favour of London. Brexit has now provided another opportunity for Brussels to make a grab for the business as it seeks to expand its own capital markets

For the City, losing its dominance in euro clearing would be a blow but it would not be fatal. The capital can also take heart in the fact that despite European politicians urging banks to move their business since the Brexit referendum, the bulk of it has so far remained in London. The City’s attraction as a one-stop shop for transactions with the benefits of a deep capital pool, the rule of law and the English language, have helped it to retain its competitive edge. The pandemic is also playing into the capital’s hands with several banks delaying the move of key staff to European cities before December’s end of the Brexit transition period, potentially clashing with regulatory demands.

Yet, even without the loss of euro clearing, other EU business is insecure. Recent suggestions that Brussels may withhold the permission to “delegate” fund management outside the EU — to London and elsewhere — are disturbing. Without that anchor, swaths of the City’s core operations in asset management and the investment banking units that service them could be forced to relocate. As such, the UK government must be alert to the wider implications of a loss. The prime minister has made “levelling up” the country one of his central ambitions. Ministers should recognise that financial services have a key role to play in making this a reality; the beneficial impact of finance on Britain’s economy is far wider than just the capital.

The government’s other much-cited ambition, to foster homegrown technology champions, would also be helped by enabling start-ups access to the biggest possible capital market. London’s competitive advantage comes from its decades-old role as a global financial hub. The debate about the future of the City must therefore be a part of Britain’s trade strategy.

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