When veteran City dealmaker Rich Ricci returned to work on Monday, the consequences of a Brexit deal that largely excluded financial services were immediately felt across his different businesses.
Panmure Gordon, the UK-focused stockbroker he runs, was faced with restrictions on dealing with EU clients from London, while the stock exchange he part owns saw almost all euro-linked share dealing move to Paris on the first trading day since the UK left the EU single market.
“Clearly that has been an impact, a bit of a day one shock,” said Mr Ricci, the largest individual investor in pan-European exchange Aquis. “While that isn't encouraging, it’s just an immediate reaction. [But] there is no question there is a lot for the UK to do” to retain its primacy in trading.
Like executives across the financial services industry, he has needed to digest what a 1,250 page trade agreement hastily published over Christmas meant for the sector.
The changes triggered by Britain’s departure from the EU are the most sweeping for the City of London since the Big Bang deregulation turned it into one of the world’s financial capitals more than 30 years ago. Yet for many in the City there is little to reassure them that the Square Mile was given much thought in the protracted negotiations.
“Let’s not forget that for financial services this is a no-deal Brexit,” said one brokerage chief executive, referring to the lack of an agreement around regulatory equivalence, which has stopped UK-based firms from operating freely in the EU.
As London woke up to the fact that it had lost €6bn in euro-denominated daily trading to venues in Amsterdam and Paris, finance executives said the main impact was more the absence of work that would normally be carried out by their London-based offices.
“We can do China, Australia, New Zealand and Brazil, but as of Monday we can’t sell our research and execution services to France and Germany. Which seems crazy,” said one City boss. “They have given zero prominence to financial services in the agreement.”
Bernard Mensah, head of the international operations at Bank of America, one of the City’s largest foreign investment banks, said the biggest beneficiaries so far had been the EU main exchanges, “and UK venues have seen the most impact.”
“But it will settle, things still have a ways to play,” he added.
For many in the Square Mile — including BofA, which set up a new 1,000-person capacity trading floor in Paris and established a new EU headquarters in Dublin in 2018 — the impact of Brexit was more keenly felt months or even years ago.
Most banks, insurers and other financial institutions had shifted EU-focused operations from London to offices in Frankfurt, Paris or Dublin, long before this week. EY estimated that £1.2tn in assets had been transferred to the EU, and some 7,500 jobs, before the end of the transition arrangement on December 31.
One banker likened the situation to the Y2K bug, where there had been plenty of concern about potential computer coding glitches in the run-up to January 1 2000.
“We, along with other banks, have long had a no-deal scenario as our base case for Brexit, so we were well prepared,” he added.
But for some bankers, investors and brokers — turning on their computers on Monday mostly at home after the recent strengthening of lockdown restrictions in the UK — the City nonetheless felt like a different place.
“The hardest thing is the day-to-day communication. I can't speak to EU-based clients without one of my EU-based traders also on the phone or in the chatroom,” said one trader at a London-based bank.
City executives are now resigned to an indefinite period of working without the seamless access to EU markets they had enjoyed for decades.
“We can hang on for the equivalence deal but what we learnt last year is the deadlines only move in one direction,” said one broker with a sigh of resignation.
Brussels and UK officials are working towards a regulatory equivalence deal, but there is no certainty of an agreement.
Bank of England governor Andrew Bailey told the Treasury Committee on Wednesday that financial services in the UK must not become an EU “rule taker”.
“If the price of [equivalence] is too high then we can’t just go for it whatever,” he told MPs.
Others see an advantage in the divergence from Brussels’ rulemaking. Mr Ricci agreed that the UK should not pursue equivalence “at any cost”, adding: “As we saw in 2008-9 it is important to have your own approach. Look how the US came out of the crisis so much faster, the UK too, but Europe came out much slower.”
For the flamboyant banker — best known for his time at Barclays alongside Bob Diamond through the financial crisis — London’s prospects look good. “We have seen no short term liquidity issues in the UK. There is a big pipeline for IPOs, the perception and feeling we have taken back control, the malaise and hand wringing over Brexit has dissipated and changed into optimism for deals.”
UK chancellor Rishi Sunak has also sought to calm criticism over the lack of a financial services equivalence deal, telling a video call of 250 executives this week that Britain's departure from the EU was “an opportunity” for the industry.
Some firms are already finding ways around the lack of EU access, such as exploiting a loophole to continue providing financial services to EU clients known as reverse solicitation.
But executives said this could only be used with caution — any suggestion they were seen to be marketing or selling directly into Europe would concur heavy penalties. “We are seeing clients come to us,” said one broker. “But we are being careful that we don’t engineer the situation.”
Many still worry about the longer term effects of leaving the EU.
The head of one international investment bank in London said the City had retained its dominant position in the asset management industry, which acts as the counterparty for “the other side of most European risk trades”. But he warned the danger would come if more traders moved to the continent over time, “with the [associated] jobs, property and tax revenues lost in the UK”.
“There is a real danger that as more traders move you could get to a tipping point where preponderance of activity is there”, then more and more start to follow, he added. “It’s that old dictum, people go broke gradually, then suddenly.”
Additional reporting by Philip Stafford
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