Don’t Panic! Labour Heavyweight Engages City as London Prepares for Brexit
Once admired for stability, British politics is enduring its most turbulent period in living memory and has left the capital markets on edge. Radar meets Shadow City Minister Jonathan Reynolds, the man hoping to instil some calm into London’s financial services sector.
The thought of a British government potentially run by a radical (in some eyes) Labour leader, Jeremy Corbyn, has sent cold shivers up the spines of Britain’s banking executives, but with the Conservatives seemingly imploding as they pursue a Brexit path that threatens London’s global standing, the icey relationship between the Left and the City is showing distinct signs of a thaw.
Former lawyer Jonathan Reynolds, Member of Parliament for Stalybridge and Hyde, is the man in the middle, as Shadow City Minister and Labour’s liaison to London’s financial sector, he tells Radar that the luminaries of Canary Wharf like what they are hearing from the opposition party.
Radar met to talk about Labour’s long-term vision for the Square Mile’s financial industry, its view on the effectiveness of the UK Financial Conduct Authority (FCA) and regulation in general, whistleblowing protection and Labour’s position on taxing banks.
But given what is at stake, and how much it is driving banks towards Labour for advice on future planning, Britain’s impending exit from the European Union, and the connected loss of regulatory clout, represent the most immediate concerns.
“Brexit is the big issue, it’s helped in terms of our engagement as frankly, people are quite unhappy about what the government has done putting us in this position,” Reynolds says.
“A very wide range of financial institutions and firms have been very interested in discussing all aspects of the brief with us.”
Should Britain crash out of the EU with no deal, it would end the regulatory passporting regime that allows banks to set up in London and serve the bloc’s 300 million consumers. London is also the main European home for every Wall Street giant or Asian multinational operating in the EU.
Recent resignations by Brexit secretary David Davis and Foreign Secretary Boris Johnson indicate Britain is hurtling towards the “nightmare” no-deal scenario.
Firms have started moving operations out of London into EU bases such as Frankfurt, Amsterdam, Paris, Dublin and Luxembourg. In the case of euro-denominated clearing, should Brussels win a fight to have the majority of operations moved to within the EU after Brexit, the London Stock Exchange has said that hundreds of thousands of jobs in auxiliary services could leave London.
It has also cast a cloud over trillions of dollars in insurance contracts and uncleared derivatives, which if no agreement is struck could result in a huge regulatory vacuum.
“The volume at stake is so big, it’s not the type of thing people voting will typically be aware of, but it’s an issue that urgently needs addressing,” says Reynolds. “We are trying to understand what supervisory arrangement would work, and it’s a big concern for us that we have had nothing from the government in terms of a blueprint of what new oversight will be in place, for things like clearing particularly.”
Oversight and regulation after Brexit is a huge issue for Reynolds, who voted to Remain, and one he has challenged the government to properly reveal. He says that London-based firms need more certainty about who is going to be writing the rules with which they have to adhere.
The UK had a significant influence on the formation of MiFID II, the onerous new rulebook for financial products, but no one seems to know how it will apply, or if it can be watered down for domestic firms, when London has exited the single market.
The FCA, the Bank of England and the Treasury all declined to offer comment when approached by Radar for their own views on post-Brexit regulatory alignment.
Labour has pledged to move the Bank of England from its home in Threadneedle Street if elected, and there will also be questions over the future of the FCA under opposition control; Reynolds says members of the public are still not convinced that the banking sector has shed its reputation for abuse and poor behavior.
“Unsurprisingly, there were profoundly negative perceptions of the financial sector throughout the financial crisis,” he says. “This has not been helped by scandals around conduct issues, such as LIBOR manipulation and the Royal Bank of Scotland Global Restructuring Group (GRG).”
He believes the public “don’t always know what is going on” inside Canary Wharf. “Many people do think investment banking is just pure gambling and they don’t make the link to its role in helping our economy function,” he says.
Labour will attempt to address some of the issues that have caused such a negative impression, he says.
“On banking misconduct it’s not just about the specifics of something like GRG and who was running it, we have to look at the culture, the incentives, and why we have had a situation like this arise,” he tells Radar.
An investigation into the RBS restructuring group is ongoing after the bank was accused of wrecking the failing businesses entered into it for profit. Several probes by the regulator and an independent monitor found widespread issues, but with 10 years of hindsight, public and political anger remains strong that no individuals have been held to account for the thousands of businesses that were subject to serious mismanagement.
“The sector does need to face up to conduct issues,” the City Minister says. “We need to collectively understand whether conduct, culture and working practices are contributing to things like GRG, or whether that was just bad apples. What’s worrying is the scale of that case, and the existence of similar cases in other banks.”
Britain’s whistleblowing process could also be in line for a shake-up under Reynolds and his fellow ministers if Labour takes power.
The FCA has been criticized for its recent handling of the attempt by Barclays CEO, Jes Staley, to unmask an internal whistleblower, resulting in a fine for the American under the first test of the new Senior Manager’s Regime, a new system of individual responsibility (and potential liability) that British banks must uphold.
Many felt that this was a missed opportunity for the FCA to set the right starting precedent, now that the regulator has finally been given flexible power to chase cases such as this. Staley has come out of the ruling with nothing more than a financial penalty (plus some sleepless nights pre-ruling and some hefty legal bills) that represents a small percentage of his overall remuneration, while the whistleblower has been made an outcast.
Meanwhile in the US, the Securities and Exchange Commission recently awarded a record $83m to three whistleblowers tied to a 2016 settlement with Bank of America Corp’s Merrill Lynch brokerage unit.
“If you compare our whistleblowing regime to that of the US, they are more advanced, and that can contribute to public confidence,” says Reynolds.
“Does our regime on whistleblowing work as well as we want it to? Does it provide adequate protection? There is a lot more we can do, and I think the industry and public would support that.”
Another area with which Labour wants to help the banking sector is skilled foreign talent, and ensuring the brightest and best can still work in London’s world-leading financial services sector after EU membership ends.
The UK’s immigration policy right now is “legitimately a disaster”, he said, citing recent examples of where skilled migrants have not been allowed to enter, or have been wrongly deported.
“You need a policy based on the needs of the economy, not to please certain sentiments out there,” Reynolds says. “If the objective is an arbitrary number without reference to what else is going on, we will end up turning away people we need. The only future for the UK after Brexit is a globally engaged, welcoming country that is a major part of the world economy, sending out a message that foreign people are welcome.”
During his years as an MP, Reynolds, a dog-loving father-of-four, has earned a reputation as a man who listens and keeps an open door, and on taking the portfolio in October 2016 he has been quietly taming the crowd not naturally aligned with Labour, chairing business forums and attending as many industry roundtables as his schedule allows.
“We’ve tried to have a comprehensive conversation on what financial services needs to be effective in the future,” he said. “Over the past 10 years so much work has gone into strengthening market infrastructure across the EU, Britain included in that, to now move to an approach where you put barriers up, doesn’t make any sense.”