Cut taxes to keep banks in London? Do it now
Brexit has been a slow-burning problem for the City of London, but burning it is. Financial markets are regulated. With worse access to Europe, the UK must make itself attractive to financial firms in other ways.
Reports that US banks are trying to extract tax cuts from the UK government as the price of staying in London after Brexit should come as no surprise.
The future relationship between the City and the European Union is shrouded in a Channel mist, and is likely to remain so for months to come.
Two things are certain. London’s financial market is in large part a European one; and banks face elevated costs for operating in the UK.
Dependent on Europe
The Financial Times, which reported the tax cut calls on Tuesday, quotes an Oliver Wyman estimate that just over half the revenues of the UK financial services sector come from serving overseas clients. About 20% is earned from European clients and a third from those elsewhere in the world.
But when it comes to the capital markets, the foreign share is much higher.
London is the main hub for large scale capital raising right across the EMEA region.
Yes, banks like Intesa Sanpaolo, ING, UniCredit, DZ, Nordea and Investec maintain syndicate desks, sales forces and capital markets teams in cities such as Milan, Brussels, Munich and Johannesburg.
But the vast majority of benchmark size transactions touch London at some point. Most big deals are run from the City, where all the largest UK, US, Japanese and European banks have their main desks.
And most of this is not UK business. Looking only at deals over €200m, in 2017 UK issuers supplied 23% of syndicated loans, 15% of bond issuance and 14% of equity issuance, according to Dealogic’s database.
Issuers outside the EU produced 20% of the loans, 16% of the bonds and 19% of the equities business.
The average capital markets specialist working in London is therefore likely to spend at least three-quarters of her or his time serving non-UK clients and well over half working for those in the continental EU.
If you throw in the need to be able to interact with continental European investors, wherever the issuer comes from, access to the EU market is clearly crucial for investment banks.
Bankers can travel
Brexit is therefore an existential threat to London’s attractiveness for the likes of JP Morgan, Citigroup and Bank of America Merrill Lynch.
Boris Johnsonesque claims that “Europe needs the City” are, as everyone who works in finance knows, risible.
Europe needs the services provided by investment banks, and it needs the money managed by asset managers. But these benefits are highly mobile. Banks — even UK ones such as Barclays — are not under threat. They will go where they have to, to keep supplying their services to EU clients.
Moving large numbers of staff to other cities and potentially setting up new branches and gaining regulatory approvals may be a costly nuisance, but if that is the cost of doing business, they will accept it. So will asset managers.
The danger is to London, and to the UK as a financial ecosystem.
In that context, the US banks’ sabre-rattling about the tax and regulatory burdens of staying in London are not idle threats.
From 2011 to 2016, the UK responded to the financial crisis with a series of measures that were not penal or grossly damaging to banks, but nevertheless leant against them, recognising their central role in having caused the crisis, and the risks they pose to the economy.
To the extent that foreign banks have UK-resident entities, they have to pay a Bank Levy on their UK equity and liabilities. This has already begun to fall, under a plan to halve it between 2015 and 2021, when the two rates will hit 10bp and 5bp.
But that will be offset by an 8% corporation tax surcharge on banks’ profits, which began in 2016, so that the public purse will make a net gain.
These came on top of the tightening and vast increase in detail of bank regulation, which the UK pursued as vigorously as any country, with the possible exception of Switzerland.
Paying taxes is important, and companies that avoid paying their due share deserve to be condemned and pursued.
But charging banks higher taxes than other companies was always a blunt and awkward way to reflect the risks they pose to the economy. It does little or nothing to guide their behaviour away from pernicious gambling, and the sums raised will be peanuts if it ever comes to bailing out banks again.
Swallow your pride
The way Brexit is going, the UK is likely to seek a more distant relationship with Europe on services — including financial services — than on goods. It has little choice about this, given the political realities and the need to avoid a hard border in Ireland.
And what the UK gets from Europe will be less than it wants.
Since London’s financial importance is now mainly as Europe’s financial capital, Brexit is bound to be bad for London.
To preserve as much as possible of Britain’s remarkable financial services industry, the government should listen to those heavy hints from US banks.
There are definitely times when banks’ lobbying for concessions should be resisted. But this time, and this case, are not among them.
Scrapping special taxes for banks would be an excellent way for the UK to show that it remains market-friendly, and would remove one piece of ammunition from the mayors of Paris, Frankfurt and Dublin, who are eagerly courting the banks.
This is also much better than having to fight to keep banks here on the field of regulation, by easing operating conditions for them — something they are also starting to angle for.
That is fraught with danger and risks a worse political backlash.
However galling it might be to politicians, especially on the left, to be threatened by big hitters from Wall Street, the balance of power has changed profoundly since early this decade.
Then, the banks could grumble, but had to suck it up — the UK was still the only game in town.
Now, the UK needs the banks more than they need it. It is politicians that will have to do the sucking up.