How banks lost the ear of Britain's government over #Brexit

Published Mar 24, 2017

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London - One afternoon in mid-January,

Prime Minister Theresa May walked into a meeting room in the

Swiss resort of Davos to face Wall Street's most powerful

bankers.

May had delivered her vision two days earlier for pulling

Britain out of the European Union's single market. Now the Wall

Street banks, fearing Britain was headed for trouble, wanted to

hear more about her strategy.

At stake was London's future as a global financial centre.

Among those present were Lloyd Blankfein, chief executive of

Goldman Sachs, Jamie Dimon, chief executive of JPMorgan Chase,

and James Gorman, chief executive of Morgan Stanley.

Blankfein, a former gold trader raised in the Bronx who

worked his way up to lead one of the world's most powerful

investment banks, was the most direct during the talks,

according to two bankers and a government official with

knowledge of the meeting.

"Lloyd asked where does the financial services industry

stand in her list of priorities," according to one senior

banking executive briefed on the discussion by his boss. "We

contribute a double-digit percentage to Britain's GDP. We're the

biggest taxpayer in the country."

May gave a reply about the importance of financial services

but declined to answer the question directly, the sources said.

Some of the bankers left questioning her commitment.

May and the banks declined to comment on the meeting.

Over the past two decades, Goldman, like many of the other

250 foreign-owned banks in Britain, has consolidated its

European operations in London to take advantage of the EU's

$16.5 trillion-a-year single market.

They are set to lose this wide-open access to a market of

500 million people after May signalled her main priority is to

restrict immigration, which can only be achieved by leaving the

trading bloc.

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Senior bankers expected special treatment from the

government after Britain voted to leave the EU. They expected

ministers to champion their cause, above other industries, to

retain unrestricted access to the single market for financial

services. It isn't working out that way. A series of other

meetings between bankers and government ministers have also

ended badly, Reuters has learned.

Bankers say May's ministers don't understand the industry

and what is at stake, and don't want to hear negative news about

Brexit. "We have entered a period of severe danger," said a Wall

Street executive who runs the European operations of a global

investment bank. "Parts of the government are being way too

complacent."

May's office, in a statement responding to the findings of

this article, said the government didn't "recognise this version

of events." The government is engaging intensively with the

financial services industry, the statement said.

Politicians say the bankers are exaggerating the threat.

Some rebalancing of the economy away from financial services –

which accounts for about 12 percent of Britain's economic output

- will be good in the long run, they say.

"It is all just lobbying. They make a brouhaha," said Peter

Lilley, a pro-Brexit Conservative politician and former

financier, who sits on the parliamentary committee examining

Britain's exit from the EU. "They always massively exaggerate."

The rift is in marked contrast to what's happening in the

United States. There the populist backlash that made Donald

Trump president has brought at least four former Goldman Sachs

executives into senior positions in the new administration. But

in Britain, the nationalist drive that produced Brexit delivered

a prime minister determined not to be in thrall to bankers.

The result is that banks are preparing to move large numbers

of staff from London, and Germany and France are trying to lure

jobs to their financial capitals.

Some bankers believe the big winner from Brexit will be New

York because some business currently carried out in London would

naturally revert to U.S. headquarters.

HSBC, UBS and Morgan Stanley have decided to move about

1,000 staff each from London in the next two years, according to

sources familiar with their plans. This week Goldman Sachs said

it would begin moving hundreds of people out of London as part

of contingency plans for Britain leaving the EU.

Not crying wolf

Since Prime Minister Margaret Thatcher's "Big Bang"

financial deregulation triggered a massive expansion of the

industry 31 years ago, bankers have relied on being a powerhouse

of Britain's economy to find a receptive ear in government.

But in the aftermath of the vote to leave the EU, the sector

is grappling with a new reality. Last year's vote triggered a

change in leadership and tone at the heart of Britain's

government. May pledged an industrial revival and to build an

economy that works for everyone, not just the elite.

Reuters spoke to more than 40 senior bankers from big

British and international banks, politicians, government

officials and lobbyists to piece together how the relationship

between these pillars of Britain's establishment became

strained.

Those people say there are conflicting opinions about what

the long-term results of Brexit will be for the world's fifth

largest economy and whether finance should remain the biggest

driver of its wealth.

Read also:  Brexit already having a negative effect in UK

The government is making two calculations, these people say.

The first is that bank executives are bluffing over moving jobs.

The second: The EU is so dependent on London to service its debt

that EU negotiators will give UK financial services a special

deal to continue to operate unrestricted across the single

market. EU officials counter that finance is mobile and business

will move to other locations.

Britain's finance industry contributed a record 71.4 billion

pounds ($88.7 billion) in corporate and employee taxes to the

government last year, according to the City of London

Corporation. That is an amount equal to Britain's annual

spending on primary education, the police, and the army. Put

another way, finance contributes almost as much in tax as all

taxpayers in Scotland and Wales combined.

Nevertheless, May's ministers began telling bankers in the

autumn they would not get any special treatment in the Brexit

negotiations.

The second most powerful executive at one of Britain's

biggest banks said he and his colleagues felt wrong-footed. The

executive said that he no longer receives phone calls from

British cabinet ministers or invitations to Downing Street

receptions as he did under previous governments.

"With May there is almost no interest or affection. She is

keeping us at arm's length," the executive said. "I will

probably never meet May."

Brexit minister David Davis, who will decide the industry

priorities in the upcoming Brexit talks, rammed home the message

that the government's relationship with the financial sector was

changing in his first few meetings with bankers.

Davis, a Eurosceptic from a working class background,

bristles at being told what to do by bankers, according to

colleagues and people who interact with him. Davis declined to

comment.

In an early phone conversation, he told one executive that

the finance industry had damaged its relationship with the

government by saying the economy would suffer from reduced

immigration. The EU vote had delivered a clear message that

immigration must be curbed, he said.

Davis publicly attacked banks in October in parliament. He

accused them of "an extraordinary outpouring almost of grief, a

'blame Brexit' festival," and of lying that they were going to

fire staff because of Brexit. Davis's aides also warned

executives they need to be more positive about the opportunities

of Brexit if the government is going to listen to them, two

banking sources said.

Bank executives complain they feel they can't speak freely.

"Everyone is worried about stoking up the Brexiteers, fuelling

the flames," said the chairman of one of Britain's biggest

insurance companies.

A government official said the bankers' portrayal of the

relationship doesn't accurately reflect the character of the

meetings or the tone of the Davis team's engagement with

financial services firms. The official declined to go into

specifics.

The appointment of Simon Kirby as minister responsible for

financial services further raised concerns among some bankers.

They doubted that Kirby, who founded a radio station and a chain

of nightclubs before going into politics, was suitable to be the

main government liaison to the industry, these bankers said.

In November, many of the most senior executives and chairmen

of Britain's finance companies met him for the first time. Kirby

failed to answer basic questions about the government's policy

towards financial services, according to people who attended.

"It was almost like he didn't know what a bank is or what it

does," said one of the people present.

Kirby declined to comment.

A few weeks ago Kirby was quietly removed from his Brexit

role. He will continue to work in the finance ministry, with

responsibility for areas including regulation. The Treasury said

it wanted a new minister to focus on assessing Brexit's impact

on financial services.

Masters of the universe

Jacob Rees-Mogg, a Conservative lawmaker and financier, says

the government is relaxed about bankers' threats because the

vote was a rejection of an economic system that benefited the

banks.

"It's condescension from the clever people, the masters of

the universe," he said. "They don't like the fact that they've

been overruled by the people who voted for Brexit."

He said banks historically don't follow through on their

threats.

At the turn of the century, some financial sector executives

warned the failure to join the euro would lead to a withering in

London's role as a hub for business. And after the 2007-09

financial crisis many banks also threatened to move operations

overseas. On both occasions, Britain's finance sector expanded.

Shanker Singham, a trade expert who has held meetings with

the Brexit department, told Reuters the government has also been

frustrated with the banks because they exaggerated how much they

depended on EU "passporting," a set of regulatory agreements

that allowed them to sell services across Europe.

Yet earlier this year, the industry quietly ditched its

insistence on passporting. Instead, it made a plea for time to

adapt to a post-Brexit world after the two-year divorce talks

end in March 2019 and proposed an alternative idea, known as

"enhanced equivalence."

This would give firms from a non-EU country access to the

bloc if their home rules are similar.

"If you ask your chief trade negotiator, May in this case,

to ask for something you can't live without, and it turns out

you can live without it, that's very bad negotiating tactics,"

Singham said.

Anthony Browne, chief executive of the British Bankers'

Association, dismissed accusations the sector, which largely

wanted to stay in the EU, was being alarmist. He reminds people

of the ending of a well-known parable.

"Crying wolf? When people say that I say, how does the story

end? At some point, the wolf does eat the boy," he said.

No divine right

A decade ago, things were far simpler. Bankers were courted

by both main political parties who wanted to spend the tax

revenues generated by the sector.

One government official working under Prime Minister Gordon

Brown in 2007 remembers the banks were invited into Downing

Street every six months to be asked what the government could do

to make their lives easier.

Then came the financial crisis. As in the United States,

many Britons began to accuse the financial services sector of

benefiting more from the nation than it contributes.

A minister in the government of former prime minister David

Cameron said that the cosy relationship between financial

services and British governments appears to be temporarily over

under May.

"There has been a bit of a revolution, an end to the old

world order," he said.

Junior finance minister Lucy Neville-Rolfe has sought to

calm tensions, telling Reuters that banks will be one of the

priorities in the EU divorce talks.

"People rightly speak up and express their concerns, and the

banks have always been quite fast to do that," she said. "But I

think we have a very strong relationship. They know that we are

huge supporters."

But the banks in Britain are planning for the worst. They

are working on contingencies to move staff and business lines

from London, assuming the negotiations with the EU end without

an adequate trade deal that will give them full access to the

single market.

A potential problem for Britain is that after Thatcher's

deregulation, many financial companies were bought up by U.S. or

European rivals. These firms lack national loyalty to Britain.

Neil Dwane, a global strategist at Allianz Global Investors,

said most of the big decision makers in London, outside of

insurance, are American or Swiss.

"So what concerns me is who is going to fight thinking as a

Brit for London rather than thinking it is easier to take it to

New York or easier to go back to Zurich," he said.

The risk for London is a gradual leaching away of business

and a withering of London's role as Europe's financial capital

and the influence it brings.

"London doesn't have a divine right to continue being a

world leading financial centre," said Mark Boleat, chair of

policy at the City of London Corporation. "We shouldn't be

complacent about it. It all depends on whether we maintain the

right environment."

REUTERS

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