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.
Read also: What the #Brexit ruling means
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."