On the campaign trail, Donald Trump argued for so many terrible ideas that it was easy to overlook the few good ones. But for the UK, the president-elect’s promise to repeal much of the financial regulation of the last eight years may well have the greatest impact of any of his policies – and may well prove the greatest opportunity for the City as well.
Why? Because once Trump’s promise is combined with Brexit, it means that London, along with Wall Street, can reinvent itself as a freewheeling, lightly regulated hub for global finance. The City and Wall Street have always been natural partners – they have similar cultures, similar legal and political systems, and are increasingly staffed by the same firms.
It looks like Wall Street is about to be liberated from an era of excessive state control. If the City can achieve the same, it will prosper. Sure, it will lose some business to Europe as a result of Brexit. But it will more than make up for that on the global stage. How should it go about achieving this?
First, City leaders should stop campaigning to keep the EU’s “passport” that allows financial services to be sold across the continent. It may not happen anyway, given the EU is likely to demand free movement of workers as the price, and there is not much sign the electorate will accept that. But even if it does, it will mean accepting rules written in Brussels, such as bonus caps, and potentially a financial transactions tax too.
Indeed, once Britain has left, EU rules are likely to get ever more restrictive – few European governments have much time for the financial markets. It would be far better for the City to resolve to give up the passport, and, in exchange, have a lot more freedom. Some jobs will be lost to Paris and Frankfurt. But a lot more will be gained if the City opens up to the rest of the world – and remember that a lot of French and German companies will come to London to do the deals they are not allowed to do at home.
Next, persuade the government and the Bank of England that is has to match the reforms Trump is looking to make on Wall Street. If the Dodd-Frank legislation is repealed, or replaced with something far simpler, then Wall Street firms will have a lot more freedom to innovate. Capital requirements will be lower, bureaucratic oversight will be far less onerous, and distinctions between types of investments and trading will be far less rigorously enforced.
The City should go further. For small, innovative banks and fund managers, capital buffers imposed in the wake of the crisis could be lowered so long as it is made clear there will be no bail-outs. The stock exchange could be allowed far more relaxed reporting requirements, and bankers could be allowed to earn what they liked so long as the money was coming from private shareholders and not the taxpayer.
Between them, Wall Street and the City could well become the financial centres for the world, rather than just for the US and Europe. They would be offering much the same mix of innovation, expertise and clear legal standards to enforce contracts, but doing so in different time zones. It could well prove a very successful mix and more than make up for whatever business is inevitably lost in the eurozone as we pull out of the EU.
It requires a choice, however. The lobbyists for the City banks and fund managers should make it clear that they would rather keep in step with Wall Street than stay locked into the EU financial system at any cost. Trump and Brexit are an opportunity. But the City can only take that if it deregulates fast – and does so at the same time as the US.