Boris Johnson's triumphant UK election victory makes Brexit a near certainty next month. For the City of London, Britain's split from its biggest trading partner is a huge leap into the unknown; one that will test its cohesion like never before.
Banks, insurers and asset managers have spent billions preparing for their departure from the European Union and have moved as much as 1 trillion pounds ($1.3 trillion) in assets overseas since the Brexit referendum in 2016. The threat of a disorderly departure from the bloc encouraged the UK finance industry to speak largely with one voice to try to avoid — or at least prepare for — that cataclysmic outcome.
But now the no-deal Brexit threat has abated there are signs that this unity is cracking. Some in the City would like Britain to take advantage of the split and forge its own regulatory path; others want it to hew closer to the EU to make the transition as smooth as possible. With the Brexit process entering its most critical phase, the UK-EU trade deal, it's far from ideal that divisions are starting to appear.
About one-quarter of UK financial services' 200 billion pounds of yearly revenue comes from EU-related business, according to government reports. So there's a vast amount at stake here.
At the core of the debate is whether the UK will continue to conform to EU standards. Under Johnson's current agreement with Brussels, British financiers will in 2021 lose their so-called EU "passporting" rights (which allow them to work anywhere in the bloc). The UK and the EU have agreed instead on the principle of "equivalence," which will give the City access to the EU for many financial services as long as Britain adheres to Brussels rules.
The problem for some British financiers is that the EU can revoke equivalence any time, leaving it with the whip hand. It has used this as a weapon to try to bring Switzerland into line on broader agreements around immigration and the like. Given the systemic importance of London's financial markets, Brussels will demand even closer regulatory alignment than it asks of other trading partners.
That's why many in the City would prefer to break entirely from the continent's regulation, severing almost five decades of integration, a move that would see a low-tax, low-regulation Britain become a competitor to the single market. They point to London's global strength as a reason not to fear an EU rupture: In one example, the UK's share of foreign-exchange trading — which turns over $6.6 trillion a day — has risen by 6 percentage points to 43% in three years, data compiled by the Bank for International Settlements show. And that's despite Brexit.
The Investment Association, representing the UK's 9 trillion-pound asset management and hedge fund industry favors an overhaul of the regulatory framework to prioritize the competitiveness of the UK over keeping the EU onside. But not all of the industry's leaders agree. Many British insurers would also rather jettison EU-friendly capital rules, which they say penalize their businesses.
Meanwhile, Wall Street banks such as JPMorgan Chase & Co and Goldman Sachs Group Inc. provide lucrative services to the continent and have so far championed regulatory alignment. But if they have to operate two hubs in the UK and EU after Brexit anyway, then they too might be persuaded of the advantages of the an unchained City of London.
While Johnson finally has a government team that's united on Brexit, the same cannot be said for the City. Some disagreements on which way to go are happening within firms too. The danger is that this splintering means London might come away from the crucial trade negotiations with much less than it bargained for.