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The European Central Bank may be grappling with two types of inflation: that of prices — and also, allegedly, of job titles. In December, a former Morgan Stanley banker claimed that he was instructed by seniors to take a “head of loan trading” designation, in name only, to trick the regulator into believing the bank had moved top staff to the EU to comply with post-Brexit rules. The bank disputes the claim, but analysts suspect there are other such cases among global investment banks.
Prior to Britain’s departure from the EU, international banks used London as a base for their pan-European operations. Now they have had to open or build up operations in the bloc due to the end of so-called passporting rights. Additionally, the ECB wants balance sheet risk taken inside the EU to be managed by senior staff there, not by directors back in the UK. It has conducted a desk-mapping exercise to improve compliance. But, for many banks, adding or shifting senior employees to the bloc makes little business sense when the bulk of their cross-asset and international activity remains in London.
It is just one of several regulations that financial services businesses with cross-Channel operations have been trying to navigate after Brexit. The industry has mostly resisted change through lobbying, though there may have been examples of creative avoidance attempts, too. Earlier this month, it scored a victory when the EU announced new provisions that would allow the bloc’s traders to continue engaging with UK clearing houses. This has raised hopes that a 2025 deadline for traders to shift trillions of euros of activity to the EU to be cleared may be extended again. Splitting clearing between London and continental Europe would ultimately harm liquidity, increase risk, and raise costs.
Following the UK-EU Memorandum of Understanding on regulatory co-operation in financial services last June, the decision on clearing is a welcome sign of pragmatism and improving relations between London and Brussels. Both sides are beginning to realise that fragmenting their highly interconnected cross-border financial services trade is neither easy nor desirable.
Britain is learning that the gains from diverging from EU financial regulations — which it helped to shape — are not as great as politicians initially thought. One of the few notable moves has been its scrapping of an EU-originated cap on bankers’ bonuses. There have been some reasonable efforts to assess where divergence could make sense, including in wholesale markets, fintech and crypto regulation. But elsewhere, the EU has come to similar conclusions following its own reviews. For instance, both are easing Solvency II rules on insurers to provide funding for capital investments.
The EU, meanwhile, has found that taking business from London is not straightforward. Britain remains a leading global finance hub. Of the £11tn of assets managed there, just under half is on behalf of international investors including the EU. The bloc is competing against London’s entrenched advantages, including its language, legal system and timezone. The city has lost some business and jobs to Amsterdam, Paris and Frankfurt, but the hit has not been as high as forecast nor as damaging to its profile. It remains a global leader for currency trading and derivatives.
After attempts from both sides to steal a march on the other, to little avail, the UK and EU should now build upon efforts to collaborate more on financial regulation. The City of London’s access to European markets supports its standing as an international financial centre. And the EU, in turn, benefits from its proximity to it. A more stable relationship, with minimal restrictions on the free flow of finance, is better for both. Freed from their games, they can perhaps focus on other matters — such as boosting the domestic role of their capital markets — where the economic prize is far greater.
This editorial has been amended to clarify that Morgan Stanley disputes the claim of a former banker regarding his job title
