Banking on Brexit? London's Square Mile is divided over the EU debate

As the EU debate rages the City is divided — hedge funders want to leave, establishment figures are keen to remain, and some are seeking a ‘Flexcit’. James Ashton reports on the Square Mile’s civil war
Inners and Outers: from far left to right, City big-hitters Richard Gnodde, Shriti Vadera, Helena Morrissey, Mark Carney, Peter Cruddas, Inga Beale and Michael Sherwood
James Ashton10 March 2016

Under the watchful eye of Admiral Lord Nelson and Sir Winston Churchill, City elders gathered in the Guildhall last Thursday. Nine times a year, in the medieval Great Hall replete with monuments to national heroes, the City of London Corporation holds its Court of Common Council, the main decision-making body for the Square Mile’s local authority.

Over more than three hours, agenda items unfurled that were unlikely to trouble the go-go investment bankers in the gleaming towers of Canary Wharf to the east: a report from the Lord Mayor, delivered in ceremonial dress, on his recent overseas trips, and whether operatic baritone Sir Thomas Boaz Allen should be granted the Freedom of the City. But the reason last week’s gathering gained such attention is that the council’s 125 aldermen and councillors voted, by a show of hands of roughly five-to-one, to back the UK remaining in the European Union.

At first glance the battle lines over Brexit are clearly drawn down the middle of the City. On one side, the self-made hedge fund and trading chiefs, who thrive on market mayhem and are tired of Euro-meddling in their businesses. On the other, the investment bankers who mostly report to American paymasters. They want to keep the UK in the EU because London is the most convenient place to locate their headquarters for the entire region.

It is not so simple, however. There are views being advanced by organisations such as the corporation that some critics thought should have stayed neutral. Risk-averse chiefs have taken one look at the John Longworth episode — the British Chambers of Commerce director-general had to resign for making pro-Brexit comments — and decided it pays to stay shtum. And occasionally, different opinions emanate from a single company, which promises to muddy the complicated debate even more.

Take Barclays, whose economic analysis predicted that the UK could become a safe haven for investors if a Leave verdict prompted the disintegration of the EU. Meanwhile, the bank’s chairman John McFarlane — who is also chairman of TheCityUK lobbying group — has warned that the City of London would end up in a “significantly worse” position if the UK went its own way.

What is true is that the district has thrived over the past decade or so because of the advent of the single currency and access to the single market. Almost half of all euros traded every day change hands in London. The capital has a commanding lead in derivatives trading too, even though many of those contracts are euro-denominated.

Acting as the region’s capital of finance has created a flagship industry, one in which the UK enjoys a rare trade surplus. No wonder that last year it had to fight hard to see off a European Central Bank attempt to relocate part of those transactions into the eurozone. Now the City is involved in a multi-billion-pound battle over its future: to prevent decline or unleash even greater potential, depending on whose side you are on.

Bankers backing Remain believe in the former. Wall Street investment banking giants J PMorgan and Goldman Sachs have sunk cash into the Britain Stronger in Europe campaign. Prime movers, including Goldman’s double act of Michael Sherwood and Richard Gnodde, have warned regularly of the risks of a Brexit, especially if it hits banks’ ability to “passport” their services into other markets within the EU from a hub in London.

Michael Sherwood, Vice Chairman Goldman Sachs & Co

Goldman’s economists chimed in last month by saying such a move would precipitate a 15 to 20 per cent collapse in the value of sterling. Morgan Stanley also did its bit for Project Fear, claiming that FTSE100 shares could underperform by 20 per cent if we head for the exit.

Most lenders have drawn up contingency plans to move jobs onto the Continent in that event. In the case of HSBC, which has only just decided against moving its headquarters away from London, that means 1,000 of its 5,000 investment banking staff could transfer to Paris.

For Remainers such as Inga Beale, boss of the Lloyd’s of London insurance market, open trade and being part of a bigger community rates highly. “We believe Brexit would be bad for business,” she told the annual meeting of trade body Insurance Europe last year. The same is true for Bill Winters of Standard Chartered, even though his London-headquartered bank has most of its trading activities much further afield.

Those business leaders who last month signed the letter to The Times, including Baroness Vadera, chairman of Santander UK, buy the Prime Minister’s deal to reduce regulation.

Even Bank of England Governor Mark Carney, who tries to take fewer political stances than the Queen, appeared on Tuesday to support the outcome of David Cameron’s renegotiation. He declared it would now be easier to maintain financial stability while members of the eurozone integrate further and that Brexit would “without question” erode the City’s pre-eminence.

Governor of the Bank of England Mark Carney
PA

All of this gives the Remain campaign an establishment air. But that has not put off the enthusiasm and deep pockets of the Leavers. Change and uncertainty can be good for hedgies because they have more to trade against. However, idiosyncratic hedge fund manager Crispin Odey insists that the low opinion his Mayfair set have of Brussels predates the flood of new regulation to hit them.

Believed to be by his side is Sir Michael Hintze, a big donor to the Natural History Museum as well as the Tory party. Other definite Leavers include Oliver Hemsley, chief executive of the stockbroker Numis, and Peter Cruddas, the former Conservative fundraiser who has just floated his spreadbetting firm, CMC Markets and has pledged £1 million to the Vote Leave campaign.

Not all City entrepreneurs have fallen into line, though. David Harding of Winton Capital Management supports staying in the EU, saying when he declared his hand late last year that: “I’m a physicist and a mathematician so I look at the numbers.”

The asset management groups appear more laid-back. Martin Gilbert, boss of Aberdeen Asset Management, said recently that Brexit “would be inconvenient, but it would not be too disastrous” because so many of his peers already use tax-efficient Luxembourg as a hub for some operations.

Some are keeping the situation under review. Insurer Legal & General says the economic case for Brexit is unproven, even though its own operations would not be hit by such a move. Others are more pragmatic.

Stephen Hester, the former Royal Bank of Scotland boss who now runs insurance giant RSA, said recently that the UK would be fine if it comes out. He said: “I think the UK can do well in time both in and outside the EU — but it would do better inside.” Much depends on the nature of any exit.

“I believe the UK could thrive, not just survive, outside the EU as long as we don’t flounce out of the door never to talk to anybody again,” says Helena Morrissey, chief executive of Newton Investment Management, speaking in a personal capacity. She is fan of the Flexcit model, set out in a 400-page report by prominent Eurosceptic Richard North, which shows how the UK can extract itself gradually but carry on trading with EU members within the European Economic Area. But wouldn’t the Square Mile be weakened, with floods of professionals transferred onto the Continent? “I think that has been exaggerated,” says Morrissey. “The City has been successful through many centuries, before, during and, I think, after the EU.”

Follow James Ashton on Twitter: @mrjamesashton

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