City could benefit from softer Brexit and government mess – Financial Times

City could benefit from softer Brexit and government mess – Financial Times

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The UK’s new political environment is not obvious cause for joy in the City of London. The leadership is a long way from the “strong and stable” government Theresa May promised ahead of last week’s surprising general election. The uneasy alliance struck with Northern Ireland’s Democratic Unionist party gives the prime minister a tiny working majority. Financiers fret about uncertainty. And yet the City does not appear laden down with gloom. Here are five reasons why.

1. Softer Brexit (part 1). On the face of it, the biggest challenge facing Britain just got more complicated. Mrs May’s weakened position makes her a less credible leader as Brexit negotiations with the EU begin. And before they can start, she will have to go through another tricky period of recasting her position to make sure it reflects the new political reality. There are plenty of voices in politics and finance who see this as horrible. But the benign reading of the situation would suggest that if a deal is negotiable at all, it may now be less of a “hard” Brexit. Brexit hardliners in Mrs May’s party had emboldened her “no deal is better than a bad deal” mantra before the election, rattling the City in the process. Business lobby groups have been quick to campaign against keeping the hardline position.

There will be pressure in parliament, too. A strengthened Labour party, which has argued for a far more conciliatory Brexit, should be a more effective force. Newly elected Tories in Scottish constituencies are Remainers. Although the DUP is pro-Brexit, some believe that their keenness on a “soft” border between Northern Ireland and the Republic may lead the Tories to ditch plans for an unequivocal withdrawal from the European customs union. This could help mitigate the impact of Brexit on the City.

At best, there could be scope for the kind of deal that would allow the UK to replicate Norway’s status, which Labour has argued for. That would give the UK and its financial services industry all-important access to the EU single market.

Already there has been more compromising language about allowing EU nationals living in the UK to stay after Brexit. About 11 per cent of the City’s 400,000 or so workers are non-UK EU nationals.

2. Softer Brexit (part 2). A softer Brexit would bring indirect benefits for the City, too. Most obviously the economic outlook, at least in the short to medium-term, would be brighter. That should mean lower losses on banks’ loan books from customer defaults.

3. Philip Hammond. Regarded by many in the City as their only friend in the cabinet, Mr Hammond had been at risk of losing his role as chancellor. If Mrs May had secured the enlarged majority she was seeking, the prime minister had apparently planned to use her strengthened position to drop Mr Hammond and replace him with a less troublesome, harder-Brexit finance chief. There had also been talk of splitting the Treasury in two — hiving off its responsibility for financial services from its budgetary role — to emasculate a department seen to have outsized power. The retention of Mr Hammond secures “the only sane voice in a sea of caterwauling”, according to one City boss.

4. David Davis. The Brexit minister started out in the May government as a hardline Brexiter with little obvious interest in the UK’s financial services industry. He has clearly softened his line over the past year. And the election result seems to have added further emollience. In a radio interview on Monday he cited the interests of the City and of the aviation sector as priorities for Brexit negotiations.

5. Business opportunity. For some in banking and insurance, there is even cause for optimism in the messy — and politically damaging — row about social care provision.

After the controversial Tory manifesto pledge to force elderly people to pay more for their social care, and then Mrs May’s rapid U-turn, it is now unclear what the government’s policy will be and at what level a cap on costs to individuals might be set. However, as the fight pans out, though, financiers reckon there is a business opportunity in helping people prepare for old age with products that release the equity in their homes.

Such silver linings do not shine bright. And the clouds themselves are pretty dark — even as Brexit talks loom, Mrs May and her government both look weaker. But at least from a City perspective, it is possible to take a more optimistic view of prospects now than a week ago.

patrick.jenkins@ft.com

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