16 December 2015

Leaving the EU is not easy, but at least it would give the UK options

By Jon Moulton

Britain has now entered the run-up to what will be a pretty major decision – to stay in the EU, or leave. As yet, we don’t even know what we are comparing a potential exit with. What exactly (or even inexactly) our prime minister is seeking from Europe to persuade Brits to stay in is unknown at the time of writing. Even less knowable is what he will extract from the very varied souls in the EU.

Sometime soon, David Cameron will be seen climbing out of a plane. Hopefully he will be holding a more substantial, and enduring, message than the one Neville Chamberlain, came home with in September 1938 – “peace for our time”. That should serve as a reminder of how fragile and temporary political promises can be.

While I don’t know what our government’s demands from the EU are likely to be, I’m pretty sure the effects on our corporate finance world will not be top of the list.

I live in Guernsey, which is not part of the EU but does have a very important financial services industry. Some of the issues about operating outside the EU are familiar to me. Guernsey bends to some EU rules but, importantly, not to all of them. Obviously, Guernsey operating outside the EU is not the same as if the UK were to – but Guernsey does well nonetheless.

London has prospered, and still dominates the European financial services scene, for several reasons: law, history, critical mass, talent concentration and relatively sensible regulation all help. Be in no doubt: we are the envy of Paris and Frankfurt, which goes some way to explaining the voluminous and ill-justified regulation that is poured upon us. The threat of a European Financial Transaction tax remains. This alone could greatly weaken the international competitiveness of the UK financial services world.

The AIFMD, MIFIDs, EU-based IFRS, the EBA, ESMA, EIOPA and quite a few other lumps of process, direction and regulation oversee activity, in many instances, by reducing it. Don’t worry if you don’t know what they all are – hardly anyone does.

Staying in Europe offers no options. We will work in a highly complex political framework, with unknown, mostly unelected souls in bodies, and where the vote of Latvia carries the same weight as the UK’s. Over time, it is not unreasonable to expect a relative decline in UK financial services business if we stay in.

Coming out is very much harder, but we would have options. Do we continue to copy and go along with whatever comes out of Europe, on the basis that this will facilitate doing business with the EU? Do we decide to row our own boat, with friendlier and easier regulation and taxation, on the theory that the advantages will outweigh any loss of trade with the EU? Or do we try to do a bit of both?

The damage to the UK would be severe – a lot of GDP, and many high-priced jobs depend on the financial services sector.

As someone who seeks a world where a few clear principles are enough to control us, you can readily guess where my heart is. However, and as ever, this is a vain wish given the available options. The result of an out vote would be tortured discussion and debate as to how to continue in a complex maze of regulatory options.

Staying in at least saves agonising over what to do. Simple resignation to more of the same suffices.

An ‘out’ vote means lots of decisions, and plenty of both opportunity and risk. I think I would enjoy it more.

This article first appeared in the December 2015 issue of ICAEW’s Corporate Financier magazine.

Jon Moulton is founder and chairman of Better Capital.