Ultra-remainers are wrong: the City of London is going from strength to strength

The late Peter Meinerzthagen was one of the City’s most feared and revered corporate brokers. For more than 40 years, he was at the centre of more bids and mergers than any other financier in the City, having advised at least a third of the FTSE 100 industrialists in his time from Rolls-Royce to BAe.

When companies heard that Meinertzhagen was on the other side of a deal, they would get the attack dogs ready. He could sniff out a dud deal a mile away or come up with genius solutions in seconds: as one industrialist said of him, “Peter had the best nose in the business.” He was behind the break-up of Hanson, the giant buildings to brick conglomerate, the spin-off of the telecoms giant Vodafone and the merger between Glaxo Wellcome and Smith Kline Beecham merger to create Glaxo Smith Kline.

Meinerzthagen also adored the City, believing utterly in its reputation for integrity, certainly until the American banks scaled up post-Big Bang bringing with them their conflicts of interest and big money. But that’s another story.

His nose also gave him an unorthodox scent for why London had become so powerful as one of the world’s great financial centres for a century or more. Apart from the glaringly obvious factors such as the favourable time zone, the spread of empire after the industrial revolution and the development of merchant banking, the English rule of law and English language, he sussed another less tangible reason essential to the City’s success.

For him, London’s financiers have been so brilliant with their deal-making because they are pirates and hustlers by nature and magpies by behaviour. Over the last century, the City’s finest have begged, stolen and borrowed other people’s inventions and financial instruments from overseas and often reinvented them as their own. And improved them.

There are many examples of how the City has rustled up new business from shipping to the commodity markets and from insurance to FinTech which back up his view. The first modern international foreign exchange market kicked off in the UK in the early 1900s when dealers started using the nascent telephone system to trade currencies and London is still the world’s biggest. In the early 1960s, traders adapted the currency-dealing system to deposits, leading to the money markets, which, by the end of the 1960s, led to the London inter-bank rate. When the US brought in its interest equalisation tax, bond traders in London invented the Eurobond market.

In the 1980s, London traders went to Chicago to learn about exchange traded futures, coming back to set up the Liffe market, which went on to become one of the world’s biggest futures exchanges. (Tragically, Liffe is also a rare example of how London – and specifically the London Stock Exchange – temporarily lost its ability to hustle, allowing this prize asset to be taken over.)

Fortunately, lessons were learnt and the LSE under Xavier Rolet has gone from strength to strength. It’s now the main overseas capital market for Chinese and Indian corporates and governments to raise money and is working with the Shanghai Exchange on links between the two exchanges. At the same time, it’s the biggest market for African companies outside of the continent.

There’s more. London is still the biggest over-the-counter derivatives market, home to most cross-border lending and syndicated loans. We were told that the City would lose out if the UK did not join the euro, yet London is the biggest centre for euro-denominated securities and clearing. Add in insurance at Lloyd’s of London, metals at the LME and oil trading at ICE. More than 80 per cent of all Europe’s hedge-fund business is based in the capital.

Which is why London has come out top again in the latest ranking of global financial centres and the gap with New York, which is in second place, has widened. The report, from the Global Financial Centres Index, also shows that London’s tally has only lost two points since the previous report, the smallest fall of any of the world’s top ten financial centres.
So where’s the Brexit impact? The exodus of US banks and other overseas institutions to the promised continent, the stampede to up sticks and set up in Frankfurt or Paris ? It’s true the report shows a slight lift in the index for potential rivals such as Frankfurt, Dublin, Paris and Amsterdam.

By contrast, more traditional financial centres such as Geneva, Zurich and Luxembourg fell. It’s always dangerous to get too carried away with such reports as they never tell the full story. But this index – the 22nd edition – is a solid bit of work as it takes into account the temperature of the current business environment, the human capital, infrastructure, financial sector development and reputation of a centre in which financial institutions operate.

If overseas institutions were seriously worried about the Brexit precipice, you can be sure this would have found its way into the findings.
But not yet. For now, London is not only the world’s biggest financial centre but it is also Europe’s. Despite what the most ferocious Remainers in the UK or the most vocal anti-Brexiteers in the EU argue, it is likely to remain so for sometime to come for several reasons. With Europe’s banks still on the edge and unwilling or unable to lend, European companies will be looking to access London’s deep capital markets for access to finance.

There’s another factor that might play into the City’s hands: the EU, which is inherently nervous of Anglo-Saxon finance, is still intent on introducing some form of financial transactions tax or Robin Hood tax. If Brussels were to make life more difficult for EU-wide financial institutions across the EU after the UK leaves, it’s entirely possible that they would find ways to circumvent the new rules and be here in London instead.

Markets move quickly, in ways it is difficult if not impossible to predict. Undoubtedly, there will be some US banks and financial institutions that will shift some of their business to the continent in the run-up to Brexit as a contingency.

If Meinertzhagen was right about London’s secret being the piratical spirit of it’s financiers – and I think he was on to something- then Brexit could be just the ticket to keep them hustling.