Smart move by the Bank of England. While Michel Barnier, the European Union’s chief Brexit negotiator, is warning about UK banks losing their passporting rights to operate in the single market, Threadneedle Street is trying to position itself as a model of sweet reasonableness. All being well, EU investment banks operating in the City will be able to carry on after Brexit almost as if nothing has changed.
EU wholesale banks will still have to fill out a form shifting the status of their current UK branches from “passported” to “authorised,” but the process sounds straightforward. The Bank doesn’t want to be heavy-handed and insist that EU banks’ lightly-regulated branches in the UK are changed into subsidiaries, which are costlier to operate since capital has to be ring-fenced.
The one big condition is that the Bank assumes “an appropriate degree of supervisory co-operation” from EU countries and regulators. If the Brexit negotiations turn out horribly, expensive subsidiaries will be back on the table.
Is this a case of the Bank taking the moral high ground, or is it just acting in the UK’s interests? Actually, both.
Self-interest lies in the fact the City’s chief attraction is its openness to global capital. At this stage in the negotiations, it would be absurd to tell EU wholesale banks that they will be treated more harshly than counterparts from the US, Japan and Switzerland, all of which are allowed to operate branches in the UK. And it would even sillier to tell EU banks to erect subsidiaries, just in case, and then, if the Brexit negotiations proceed happily, allow them to dismantle their new vehicles. That would waste everybody’s time.
The moral high ground factor is this: the Bank is saying it wants to co-operate with EU regulators on data-sharing and supervision and so on, and is inviting a return in kind. This carrot comes with a stick, naturally. Carney, in front of the Treasury select committee, repeated his line about the UK being “the banker for Europe,” meaning there are cost benefits for EU companies and governments in having bond-clearing, equity-underwriting and currency-trading concentrated in London.
What happens if EU negotiators and politicians decide the UK’s stance is weak, as opposed to co-operative? What if they would be rather clobber the City and create rival financial centres in Frankfurt, Paris, Dublin and Luxembourg? What if technical squabbles – over the EU cap on bankers’ bonuses, for example – are inflated into deal-breakers that make even loose agreement on regulatory equivalence impossible?
At that point, all bets would be off. But, from a negotiating perspective, the Bank’s position on “branch status” is surely correct. Start by assuming co-operation and openness, and advertise the advantages of keeping things orderly.
The strategy certainly doesn’t guarantee a free-trade deal that includes financial services – far from it, given Barnier’s comments – but it costs nothing at the outset and increases the chances of getting arrangements the City can live with. If the Bank had a free hand, we would probably have seen Wednesday’s announcement six months ago. Our technocrats are better at this stuff than the politicians.
It ain’t how it used to be for BT
Here’s another sign that BT’s standing with government is falling fast. Only a few months ago, ministers’ big idea to get fast broadband to 1.1m hard-to-reach homes in rural areas was to put BT’s Openreach subsidiary on the job. This, supposedly, was quickest way to deliver a Tory manifesto pledge. The company submitted its proposal and all seemed set fair.
Now BT’s plans have been rejected. Instead, the government will create a legal right for consumers to request a decent broadband connection, defined as 10Mbps or better, by 2020.
Matt Hancock, minister for digital policy, did a terrible job of explaining on the Today programme who customers are supposed to make their demands to, and how the funding mechanism for this new universal service obligation will work. One assumes those details will follow. The main point is that government clearly wants to get other providers into the market. Over-dependence on BT and Openreach is seen as dangerous for the economy.
You can see the same process at the regulator, Ofcom. The chief executive, Sharon White, made a stinging speech this month that called on BT to “act in the interest of all of its customers who rely on it, as well as its shareholders” when rolling out full-fibre broadband. She sounded more impressed by the efforts of Virgin Media and Vodafone, and more convinced that real competition in full-fibre is materialising.
BT, and its new chairman Jan du Plessis, have a problem: the company’s lobbying power is not what it used to be.