Lex letter from London: City’s alternative futures, from cowboy capital to green oasis

{"text":[[{"start":13.72,"text":"Dear readers, "}],[{"start":15.98,"text":"The City of London has been many things. "},{"start":19.022,"text":"Roman trading outpost. "},{"start":21.189,"text":"Financier to the British empire. "},{"start":23.657,"text":"Deregulated yuppie playground. "},{"start":26.012,"text":"Now it needs another reinvention. "},{"start":28.529,"text":"Brexit is eroding its position as Europe’s main financial hub. "},{"start":32.672,"text":"Alternative futures are prophesied. "}],[{"start":35.69,"text":"This article offers a reality check for four of the main scenarios, giving odds on each. "},{"start":41.919,"text":"Readers’ thoughts are welcome via email at Lexfeedback$1 or in the comments field at the end of this piece. "}],[{"start":49.9,"text":"The first scenario is the easiest to prejudge — it already looks dead in the water: "}],[{"start":56.4,"text":"

Repressed rule taker (odds 20:1

"}],[{"start":59.839999999999996,"text":"Incumbent businesses benefit from the status quo. "},{"start":63.482,"text":"Most City bosses therefore hoped Brexit would bring little disruption. "},{"start":67.887,"text":"The UK would mirror EU financial regulation to the delight of co-operative EU politicians and regulators, they imagined. "},{"start":75.61699999999999,"text":"The capital and capacity of banks, brokerages and exchange groups would stay in London, yielding economies of scale. "}],[{"start":84.22,"text":"The EU has shot that optimistic fox using ammunition supplied by Boris Johnson. "},{"start":90.137,"text":"The UK focused on fishing — economically trivial at a national level — in striking a trade deal. "},{"start":96.617,"text":"It ignored finance, one of the few industries in which the UK has national advantage. "}],[{"start":103.37,"text":"The EU did not grant “equivalence” for City businesses to operate on an equal footing with locals in its continental markets. "},{"start":111.149,"text":"It is now unlikely to do so. "},{"start":113.504,"text":"Keeping the UK out in the cold helps EU financial centres — for the moment. "},{"start":118.584,"text":"By requiring EU investors to progressively move trading and clearing to the EU, the EU can ensure wodges of non-EU capital switches too. "},{"start":128.139,"text":"Liquidity attracts liquidity. "}],[{"start":131.45,"text":"Consider trading in EU equities. "},{"start":134.47899999999998,"text":"Before, more than half of this business was transacted on London platforms. "},{"start":139.60899999999998,"text":"In the past five days, less than a fifth was, according to CBOE data. "}],[{"start":145.67999999999998,"text":"The measly benefit of sticking to EU rules can be summarised as “do no further harm”. "},{"start":151.47199999999998,"text":"Instead, the UK hopes to reap benefits by diverging from the EU pattern. "},{"start":156.652,"text":"One brighter vision this inspires is: "}],[{"start":160.26999999999998,"text":"

Singapore-on-Thames (odds 3:1

"}],[{"start":164.13,"text":"The south-east Asian financial hub is in some respects an appealing model. "},{"start":169.172,"text":"It is an offshore centre for an entire region where the rule of law applies in commercial transactions. "},{"start":175.214,"text":"London’s analogous hinterland would be Emea countries, with extra zing provided by US-Asia transactions brokered in London. "}],[{"start":184.31,"text":"Singaporean regulation is seen as flexible but reasonably robust. "},{"start":189.464,"text":"Blow-ups among commodities groups such as Hin Leong and Noble have not improved the financial centre’s reputation. "},{"start":196.494,"text":"But London has plenty of meltdowns too — supply chain financier Greensill, for example. "}],[{"start":203.53,"text":"Singapore is also a liveable city state where many expatriate financial folk are happy to stay for a few years. "},{"start":210.75900000000001,"text":"One reason is that top rate personal income tax is 22 per cent. "},{"start":215.25900000000001,"text":"Corporate income tax is 17 per cent. "}],[{"start":219.09,"text":"That would not work in the UK. "},{"start":221.669,"text":"The government, which wants to “level up” is raising corporation tax to 25 per cent. "},{"start":227.337,"text":"But rock-bottom tax rates need not be a deal breaker for the Singaporean model any more than authoritarianism, another habit the UK should not copy. "}],[{"start":237.4,"text":"A bigger problem is the competence of the Financial Conduct Authority to pursue the agile, economically driven style of regulation characteristic of the Monetary Authority of Singapore. "},{"start":248.454,"text":"This combines activity as a quasi-central bank with policing financial markets. "}],[{"start":254.66,"text":"The slow-moving UK watchdog has reductively focused on consumer rights since its inception. "},{"start":260.902,"text":"There is pressure in government for the FCA to take fuller account of UK economic interests. "},{"start":266.594,"text":"That would require deep reform of the organisation by the Treasury. "}],[{"start":271.63,"text":"The phrase “Singapore-on-Thames” has a dual meaning, incidentally. "},{"start":276.259,"text":"It suggests shady foreign practices to some Britons. "},{"start":280.002,"text":"That is not borne out in surveys from the likes of consultancy Z/Yen, which rate Singapore highly. "},{"start":286.719,"text":"However, a regulatory race to the bottom is a real danger for the UK, conjuring this nightmare: "}],[{"start":294.21,"text":"

The cowboy capital (odds 7:1

"}],[{"start":297.64,"text":"The UK is planning to deregulate. "},{"start":300.60699999999997,"text":"Possible moves include: permitting premium-listed companies to give founders shares with extra votes; dismantling parts of Mifid II reforms; and reworking Solvency II capital buffer requirements for insurers. "}],[{"start":314.65999999999997,"text":"On their own, none of these are particularly objectionable. "},{"start":318.739,"text":"The danger is that the UK will deregulate too hard. "},{"start":322.25699999999995,"text":"Bad money would then drive out good as shysters replaced honest brokers. "},{"start":326.88699999999994,"text":"The City would suffer a net loss of business. "},{"start":329.717,"text":"That phenomenon was exemplified by the Vancouver Stock Exchange, described in 1989 by Forbes as “the scam capital of the world”. "},{"start":338.722,"text":"The VSE’s lax standards and lousy reputation meant it was shunned by serious investors. "},{"start":344.727,"text":"It was eventually absorbed by another exchanges group. "}],[{"start":348.7,"text":"The UK already has form for laxity. "},{"start":351.917,"text":"Wall Streeters smugly pointed to a “London problem” of light regulation in the wake of the financial crash, although the cause of this was homegrown US mortgage-backed securities. "},{"start":362.04699999999997,"text":"Subsequently, London lured listings for Kazakh and Indonesian miners whose compliance with UK-style corporate governance rules was poor. "}],[{"start":371.15999999999997,"text":"These days, London aims to pivot away from the carbon-intense resources groups that flocked here for financing. "},{"start":378.352,"text":"Instead, pundits hope for a: "}],[{"start":381.96,"text":"

Lean, green funding machine (odds 5:1

"}],[{"start":386.28,"text":"Raising money for renewable energy businesses is no harder than doing it for polluters. "},{"start":391.88399999999996,"text":"You just need a critical mass of capital and expertise. "},{"start":395.702,"text":"Carbon transition is a good trend for London to embrace because it is complex, involves large sums and will take a long time. "}],[{"start":404.61999999999995,"text":"There are some obstacles. "},{"start":406.59899999999993,"text":"The biggest is that the UK at present has limited international credibility in green finance. "},{"start":412.50399999999996,"text":"The government has not even issued green bonds yet, unlike France, Germany, Italy, the Netherlands and Sweden. "},{"start":420.13399999999996,"text":"Total issuance in that asset class, including corporate bonds, stands at $58bn for Germany. "},{"start":427.81399999999996,"text":"The UK brings up the rear with $13.7bn, according to the Climate Bonds Initiative. "}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":435.35999999999996,"text":"The UK stock market lacks big renewables companies. "},{"start":439.27699999999993,"text":"Orsted, Europe’s standout renewables group, is listed in Copenhagen. "},{"start":444.49399999999997,"text":"Wind turbine maker Vestas is quoted in Denmark too. "},{"start":448.412,"text":"Shares in its rivals, Siemens Gamesa and Nordex, trade primarily in Madrid and Frankfurt. "}],[{"start":455.47999999999996,"text":"London does have plenty of legacy hydrocarbons businesses such as BP and Shell, which its financiers could help re-engineer. "}],[{"start":464.84,"text":"London also boasts a trade in carbon derivatives. "},{"start":468.544,"text":"Intercontinental Exchange operates a futures market in European emissions permits, which dealt in the equivalent of 12.2 gigatons of carbon last year. "}],[{"start":479.26,"text":"In May, ICE will start auctions of UK permits and a parallel futures market. "},{"start":485.014,"text":"But this will be smaller than the European equivalent. "},{"start":488.257,"text":"ICE is moving the latter to Amsterdam in June, partly because of the EU’s refusal to grant equivalence. "}],[{"start":495.82,"text":"

If wishes were horses, beggars would ride

"}],[{"start":498.82,"text":"The mismatch between the UK’s green finance aspirations and its credentials is pretty painful. "},{"start":505.174,"text":"You might say the same for hopes of turning the City into a world fintech hub. "},{"start":509.842,"text":"There are great fintechs in the UK. "},{"start":512.422,"text":"But the US will attract more listings as long as valuations are higher and liquidity is greater. "},{"start":518.377,"text":"This is why Irish-rooted payments group Stripe plans to float in New York. "}],[{"start":524.23,"text":"If the City is to thrive in any of the new métiers proposed for it (apart from “cowboy capital” with its obligatory saloon pianos and shoot-outs), the UK government will have to do more than commission think-pieces from Conservative peers. "},{"start":538.409,"text":"The UK needs a financial strategy as much as an industrial one. "},{"start":542.727,"text":"The government of Margaret Thatcher had a plan for the City in 1986. "},{"start":547.419,"text":"It was called the Big Bang. "},{"start":549.337,"text":"Her successors need to rethink London’s financial cluster again. "}],[{"start":554.33,"text":"The EU’s refusal to grant equivalence could prove to be its biggest mistake. "},{"start":559.197,"text":"If it continues on its exclusionary way, it may, through heavy regulation, build walls that keep foreign capital out as well as keeping EU capital in. "},{"start":569.239,"text":"That could be very helpful to the City. "}],[{"start":572.1700000000001,"text":"Enjoy the rest of your week, "}],[{"start":574.6400000000001,"text":"Jonathan Guthrie\nHead of Lex "}],[{"start":576.8000000000001,"text":""}]],"url":"https://creatives.ftacademy.cn/album/36262-1616603924.mp3"}