Can the City ever fully recover after Brexit?

“The City’s what I’m least worried about,” a savvy CEO of my acquaintance told me after the Brexit vote. “Its full of sharks. They’re smart, they’re greedy, and they’ll find a way to make money. They always do.”

On the face of it, they were right. London’s financial centre would seem to offer Britain’s beleaguered Brexiteers – those who still retain some contact with reality – a comfort blanket to wrap around themselves if the much-feared blackouts turn the cold snap into a deep freeze.

There it is, still second only to New York in the most recent GFCI rankings of the world’s financial centres. Phew: At least there’s something that hasn’t fallen apart.

Fears that a brutal cull would leave tens of thousands of people out of work failed to materialise. Nor has long-time pretender Frankfurt risen up to steal the crown. (The latter was always something of a fever dream. Infamously dull and provincial, it’s just not an attractive sea for wealthy sharks to swim in.)

Meanwhile, the City even improved its rating by five points. But wait just one moment: London may have improved its rating by five points, but the next 13 centres all improved theirs by more.

If Singapore or perhaps even San Francisco keep it up, London may lose its coveted number two spot next time around. Meanwhile Paris, not Frankfurt, is posing the real threat from the continent. Its rating has been rising a fair clip, as has its ranking (10th place in the most recent assessment).

Paris overtook London as the host of Europe’s biggest stockmarket by market value for a while. The pound’s recovery restored its position, but let’s be honest – the mere thought that Paris could even challenge, let alone overtake, would have been all but unthinkable a few short years ago.

A recent report from capital markets think tank New Financial also highlights the “mystery of the disappearing jobs in UK banking and finance”. The number has “fallen to its lowest level since shortly after Big Bang 1.0 more than 35 years ago”.

Needless to say, Margaret Thatcher’s deregulatory charge was far more consequential than the fantasies of today’s sad tribute act, which still claims to be delivering a repeat.

The UK financial services industry still employs more than a million people – nearly 3 per cent of the workforce – but that is 76,000 fewer than as recently as September 2019, and 61,000 fewer than when the UK left the EU at the end of 2020. Today’s number is also 51,000 lower than in June 2016 when the UK voted for Brexit.

Offshoring, automation, efficiency-based branch closures and Covid have all played their part too. But Brexit is a major contributor. When New Financial looked a basket of rival centres, none of them had experienced the same sort of decline. In fact, they’d all added jobs.

What’s the difference between them and Britain? While London suffered no big Brexit crunch, it’s been suffering from a slow puncture with business and jobs slowly leaking away. All the arguments that the EU would play nice because “it’s in their interests” have fallen away, too. Can this be addressed? Should we even try?

The City is a decidedly mixed blessing. It sucks talent into its gaping maw. People who might become engineers working in Germany’s powerhouse industries are often, in Britain, to be found welded to the screens of London’s trading floors.

However, it pays a lot of tax and its well-remunerated employees also pay a lot of tax. The investment (not to mention the imagination) needed to power up replacements just isn’t there.

It should be said that most of the people to whom I spoke through the course of researching this piece were of the view that there are fixes. Some come from within. One industry source I spoke to highlighted the problem with dividend-fixated UK institutional investors, which need to change tack if London is to lure back home-grown tech companies that head straight to the Nasdaq when they’re ready to list.

“We think the public policy community gets it at last,” is what I heard from one lobby group. “The Treasury, the regulatory community they get it now. But we need to act swiftly to prevent the UK moving from a global to a regional hub. The UK can be whatever it wants, as long as it has the will and to listen and to understand how markets function.”

A smart economist who has been on both the commercial and the public policy side says growth companies need to be “actively courted”, but also talked of the need to work out an “end game” for the frosty UK/EU relationship, both from the political and regulatory perspective. Which is something I heard a lot.

(An interesting side note: they called for action to “get the household savings sector to pivot away from real estate towards capital markets. The former is a £7.2 trillion asset class and massively unproductive use of capital”. This is very true. But it is, once again, something which would take real imagination.)

“The potential is there to get the City moving again,” said another source after I expressed some doubt. They spoke highly of some of Rishi Sunak’s ideas, and talked up the possibility of the UK as a centre for green finance. “We really could be a world leader. The thing is, after the recent policy paralysis, they just need to get on and do it.”

Well, they have started, but it’s by no means clear that doing things like scrapping the banking reforms instituted after the financial crisis will help in the way the government hoped.

The industry wasn’t calling for an end to the ringfencing of retail banks to protect depositors from the risks that traders expose their investment banking arms to; not after they spent billions complying with those eminently sensible rules.

What it wants, and needs, is consistent, sensible regulation. The Tories seem to favour flights of fancy designed to generate headlines. Thoughtful, long-term policymaking is for the birds.