LONDON – Key figures in the City of London are marginally more optimistic about the financial centre’s future on Monday as expectations rise that Britain could be heading towards a softer Brexit after last week’s election.
Prime Minister Theresa May’s gamble to call a general election in order to boost her majority ahead of Brexit negotiations backfired spectacularly last week, weakening the prime minister’s hand both domestically, and in Europe, and City figures believe this could lead to a more beneficial deal for the UK’s financial services sector.
The effective rationale behind this thinking is that without a working Conservative majority in parliament – and only a tiny majority when votes from the Tories’ muted alliance with the Northern Irish Democratic Unionist Party are included – May will be forced to appeal to all corners of the party for support, or risk being unable to pass legislation.
The prospect of a “soft Brexit” – leaving the EU with, pretty much, a similar deal that UK has right now with the bloc, access to the Single Market along with adhering to the Freedom of Movement – looks even more likely when one considers that one of the DUP’s key demands is likely to be a completely open border with the Republic of Ireland. That would necessitate a softer Brexit outcome.
“Membership of the EU customs union could be seen as a minimum requirement if a deal is to be struck with the DUP and, in turn therefore, the probability of a softer Brexit outcome has risen,” Neil Woodford, perhaps Britain’s most famous fund manager, wrote in a note to clients on Friday.
“If anything, with its implications for looser fiscal policy and a softer Brexit, the election result has made me even more optimistic about the UK economic outlook.”
Remaining in the European Economic Area could pave the way for Britain to retain its financial passport, addressing what has been one of the biggest worries for the UK’s financiers since the Brexit vote last year.
With the prospect of losing the passport banks and other financial services firms are preparing plans to move staff away from London and form new EU subsidiaries after Brexit in response to the impending loss of Britain’s financial passport.
Executives from HSBC, UBS, JPMorgan, and Goldman Sachs have all publically suggested that jobs will be moved away from Britain as a result of Brexit.
The passport is a system of common financial rules that allow UK based financial firms to access customers and carry out activities across Europe. The Financial Conduct Authority (FCA) said last year that 5,500 UK companies rely on passporting rights, with a combined revenue of £9 billion.
Without it, doing business in the EU from London will be very tricky, so plans are being put in place for establishing or extending European offices to cope with the looming rule changes. Those plans may now change, although it remains to be seen if Britain will maintain its passport.
Regardless, the evidence is already there that the PM’s Brexit stance is softening, with May on Sunday appointing several strongly pro-EU MPs to senior positions in her cabinet. Chief among those was the appointment of Damian Green to the post of Cabinet Office Minister, and First Secretary of State.
That second position effectively makes Green May’s deputy prime minister, giving him a great deal of influence within government.
May has also appointed David Gauke and David Liddington to be Secretary of State for Work and Pensions and Justice Secretary respectively. Both were strong supporters of the remain campaign in 2016.
- Stefan Rousseau/PA Wire/PA Images
It is also believed that Chancellor Philip Hammond – another remainer – has told the prime minister that she must look to strike a more business friendly Brexit deal than previously planned, or risk losing support from the cabinet.
Hammond and May have clashed frequently over policy disagreements, it has been reported, and he would likely have been sacked had the PM managed to grow her majority after the election.
May has also been told by senior ministers that she must govern in a more collaborative manner going forward.
“We’re going to see more collective government,” Defence Secretary Michael Fallon told the BBC’s Andrew Marr on Sunday morning.
“I and other colleagues have made that clear to her.”
This also increases the chance of a softer Brexit given that three out of the five most senior ministers in government – Home Secretary Amber Rudd, Hammond, and Fallon – backed remain in 2016.