The View from England: Brexit threat to London’s finance sector

We are into a new year, and in the U.K. we face a near-perfect storm. On top of the depressing weather, Brexit has finally come into effect (after the 11-month transition period) just as we face a new variant of Covid-19.

Yes, we have a post-Brexit trading deal with the European Union (E.U.), but the U.K. faces a difficult start to 2021 because of additional border bureaucracy and uncertainty about the status of our important service sector. The latter was not included in the E.U. trade deal, and the rules governing the relationship of London’s financing sector with E.U. member nations has yet to be determined.

We have a long history of fraught politics at this dark time of the year. For example, the end of January marks the 360th anniversary of the beheading of Oliver Cromwell, who was leader of the English Commonwealth after the execution of King Charles I. Cromwell’s fate was hardly surprising given the return to power of the Royalists in 1660 (under King Charles II), but Cromwell had actually died (from natural causes) in 1658. Nevertheless, Cromwell’s corpse was dug up, beheaded and his head put on a spike above Westminster Hall (where it stayed for 30 years).

On top of our all-new Brexit and Covid-19 woes, the third week in January is commonly regarded in England as the most depressing time of the year. It combines the end of the festive season, bad weather and the widespread breaking of New Year resolutions.

Fairy stories are one way of relieving the gloom. Charles Perrault was the first of the great recorded fairy tale authors. Writing in the 18th century, his romantic stories included “Cinderella,” “Sleeping Beauty” and “Beauty and the Beast.” The brothers Grimm collected folk stories in the 19th century, including “The Elves and the Shoemaker” and “Hansel and Gretel.” Hans Christian Andersen poked fun at vanity with “The Little Mermaid,” “The Emperor’s new Clothes” and “The ugly duckling.”

Such tales have been keeping us Europeans sane for millennia. Academics have linked “Rumpelstiltskin” to stories being told in the Bronze Age 4,000 years ago, while “Jack and the Beanstalk” can be traced back 5,000 years, and “The Smith and the Devil” is thought to be at least 6,000 years old.

Mining companies seeking financial services in the U.K. might need the comfort of these tales as we navigate our changed circumstances. Nevertheless, it is still a sector that employs more than one million people, generates 7% of the U.K.’s economic output and accounts for almost 11% of the government’s tax revenue. As well as being Europe’s financial hub, London had been catching up with New York according to the latest Global Financial Centres Index.

The London Stock Exchange (LSE), and the junior Alternative Investment Market, accounted for over 25% of the mining industry’s total financing of US$12.9 billion in the three months to end-September (the TSX accounted for 23%), according to S&P Global Market Intelligence.

Almost all of the mining funds raised in London were senior debt financing. With interest rates so low, the current focus of fund raising is through debt, which fortunately is a U.K. speciality. The Mining Intelligence database calculates equity funds raised during Q3 as totalling only US$2.5 billion globally.

Companies listed in London include over 360 in the extractive sector (a group that comprises 128 in the mining category, plus energy and industrial minerals companies). This sector has a combined market capitalisation of over US$1.6 trillion, which represents 18% of the global total. Although there are more extractive-sector companies listed on the TSX and far more in Vancouver, only New York can beat the market value of London’s extractive sector.

Since the June 2016 Brexit vote, however, financial firms in London have set up new offices in the E.U., and an estimated 7,500 financial-services jobs have been lost to bloc members.

Our financial firms have now lost blanket E.U. access. They had hoped to retain so-called ‘passporting’ rights (the foundation of the E.U. single market for financial services), but this perk is only available to firms based in member countries.

The E.U.’s “equivalence” regime is a poor shadow of passporting as it only covers a narrow range of services, can be withdrawn at short notice and means that the U.K. will have to accept rules over which it has no influence. To maintain links anything like the pre-Brexit arrangement, the U.K. is reliant on the E.U. granting permanent regulatory equivalence.

Nevertheless, London has a towering lead over rivals Frankfurt, Milan and Paris when it comes to trading stocks, currencies and derivatives, and in playing host to asset managers (only one-third of the institutional investors on the LSE are actually British). While London will almost certainly decline in significance, it will not slip into irrelevance. There are few other cities in the world that have the same depth of infrastructure, talent pool and networks to sustain a buzzing financial-services centre.

Classic fairy tales are where frogs are kissed by princesses, wolves huff and puff, and gingerbread men run away. The analogies with mining companies seeking finance are not hard to find; at least it is something to smile about in these dark times.

— Dr. Chris Hinde is a mining engineer and the director of Pick and Pen Ltd., a U.K.-based consulting firm he set up in 2018 specializing in mining industry trends. He previously worked for S&P Global Market Intelligence’s Metals and Mining division.