From a corner conference room overlooking the Thames, Michael Sherwood, a vice chairman of Goldman Sachs Group Inc., has the guts to voice publicly what many in London’s centuries-old financial district are increasingly worried about behind closed doors: that threats to Britain’s membership in the European Union are threats to British business.
Over the past 15 years, Goldman, like many of the other 250 foreign-owned banks in the City, has consolidated its European operations in London to take advantage of the EU’s $16.6 trillion–a-year single market, Bloomberg Markets magazine reports in its May issue. Wide-open access to that market is now in doubt because of U.K. Prime Minister David Cameron’s promise to hold a referendum on EU membership by the end of 2017.
If Britain votes to quit the EU, Sherwood says, parts of London’s banking business would inevitably drift to Frankfurt and Paris.
“We want the U.K. to stay in Europe,” the 48-year-old banker says. “The U.K. leaving the EU would lead to some sort of fragmentation of our business. The City would definitely be impacted.”
Sherwood is not alone in opposing a Brexit, as a British departure from the EU is known. A 2013 survey by TheCityUK, a bank lobby group, found that 84 percent of finance industry leaders want the U.K. to remain a member of the EU.
While London bankers recoil at the raft of regulations from Brussels -- a cap on their bonuses being the cause celebre -- the overwhelming majority in the City is far more worried about losing the constitutionally established advantages of the EU: the free movement of labor, capital, goods and services.
“London is really the most important financial center in Europe, and we benefit enormously by being part of Europe,” says Win Bischoff, who stepped down as chairman of Lloyds Banking Group Plc on April 3. An exit from Europe, he says, “wouldn’t be a cliff event, but over a period of time, market share will go to other centers.”
The City’s priorities put it on a collision course with wide swaths of the British public and Cameron’s Conservative Party. More than half of the party’s 22.5 million pounds ($37.4 million) in political contributions in the election year of 2010 came from donors working in the financial services industry, according to a 2011 Bureau of Investigative Journalism analysis.
Yet all that financial support doesn’t necessarily buy the City what it wants from the Tories. Cameron’s referendum pledge, made in January 2013, was a concession to his party’s euroskeptic wing, which gathered strength as anti-immigration and anti-EU sentiment rose in the aftermath of the financial crisis.
An April 7 YouGov Plc poll found that 42 percent of Britons surveyed would vote to stay in and 37 percent to get out; the rest were undecided.
Bankers are all but absent from the public debate. Scorned by Britons in the wake of the financial crisis, they’ve generally let lobbying groups such as TheCityUK do the talking. Most of the senior bank executives contacted by Bloomberg Markets declined to speak on the record about the in-out conundrum.
“They’re in a Catch-22,” says Sharon Bowles, a U.K. Liberal Democrat member of the European Parliament, or MEP, who’s leaving office this year. “Bankers are so hated by the public at large that saying the bankers want us to stay in Europe might lead the public to say, ‘Well then, I’m coming out.’”
The question of Britain’s membership will be put to the test repeatedly over the next three years. In May, voters across Europe will elect a new, 751-member European Parliament. In the U.K., the vote is shaping up as a dry run for the promised referendum.
The U.K. Independence Party, or UKIP, which wants Britain out of the EU, will come in first in the election, with 34 percent of those certain to vote, according to an April 7 YouGov poll. Labour will come in second, at 27 percent, with the Tories heading for third place in a nationwide election for the first time in their history, according to the poll.
In between the European Parliament vote and any referendum on the EU in the U.K. comes a general election on May 7, 2015, that has Cameron currying support among euroskeptic voters. On March 12, Labour Party leader Ed Miliband said in a speech that if his party came in first in the 2015 election, it would hold a referendum only in the event of “a further transfer of powers away from Britain and toward the EU.”
With MEPs flexing their muscles on financial regulation, Britain and its largest industry -- finance -- have a lot riding on the outcome of the elections this May, says Mark Hoban, a Conservative MP who served as a U.K. Treasury minister in charge of financial services policy from 2010 to 2012. He says Britain can’t afford to write off the European Parliament as UKIP leader and MEP Nigel Farage has done.
“It is a serious legislative body, and you can’t afford to have a protest vote,” Hoban says. “You want to see British MEPs engage with the process in Brussels, and I don’t think UKIP MEPs do that. And so you’re fighting with diminished resources.”
As an MEP, Farage racked up the 10th-worst attendance rate over the past five years.
“My attendance is lower because I am leading a national party in the U.K., which is time-consuming,” he says.
Farage scored a victory for his anti-EU campaign in two debates over Europe with Liberal Democrat leader and Deputy Prime Minister Nick Clegg on March 26 and April 3. After the last debate, 69 percent of people who watched it thought Farage won by arguing that the U.K. should quit the EU. Clegg warned that the economic consequences of leaving the EU would be disastrous and could put 3 million jobs at risk.
The debates barely touched on the impact a Brexit might have on the City given its reliance on the single market. The financial services industry and related professions employ 2 million people in the U.K. and accounted for 12.6 percent of gross domestic product in 2012, according to TheCityUK. Financial services alone contribute 12 percent of tax receipts.
In November, the Confederation of British Industry, which represents more than 240,000 companies, said that having unfettered access to the EU’s 500 million consumers is worth from 4 to 5 percent of U.K. GDP, or as much as 78 billion pounds a year.
Pall of Uncertainty
In toying with departure, the U.K. risks unsettling foreign investors by casting a pall of uncertainty over the future of the financial district, says Chris Cummings, chief executive officer of TheCityUK.
“The possibility of an exit is the No. 1 issue on everyone’s desk,” he says. “Businesses are drawing up contingency plans, and people are asking if the U.K. is still investable.”
He says the prospect of Scotland’s voting for independence from the U.K. in a September referendum -- however unlikely that looks in the latest polling -- compounds the climate of indecision, further putting off investors.
U.S. banks seeking a gateway to Europe are major players in the City, and Washington has expressed concern over Britain’s increasingly strained relations with Brussels. In January 2013, President Barack Obama phoned Cameron and told him the U.S. values a strong U.K. in a strong European Union, according to the White House.
In a rebuff to Obama, Cameron days later set out his referendum pledge in a speech, prompting UKIP’S Farage to say, “The genie is out of the bottle.” In his speech, Cameron vowed to claw back U.K. powers that he said had been usurped by Brussels.
“There is a growing frustration that the EU is seen as something that is done to people rather than acting on their behalf,” he said.
Cameron, who has said he wants to renegotiate the terms of Britain’s EU membership, got a boost from the German government on March 28. Together with U.K. Chancellor of the Exchequer George Osborne, German Finance Minister Wolfgang Schauble wrote an article in the Financial Times saying future treaty changes must guarantee fairness to EU countries outside the eurozone such as the U.K.
Cameron’s stand on Europe is temperate compared with many Tories’. Brooks Newmark, a Conservative MP and a former partner at private-equity firm Apollo Management LP, says the U.K. should leave the 28-nation club.
“It’s a sclerotic, flat-lining EU with an aging population, and I don’t want to be a part of it,” he says. “We’re a global financial center.”
There are City executives who agree with him. Helena Morrissey, CEO of Newton Asset Management Ltd., says being in the EU is like being in a bad marriage.
“You don’t need to know who your next husband is,” she said at a conference at Bloomberg LP’s London office in February. “You just have to leave.”
Not so fast, says Mark Boleat, chairman of policy at the City of London Corporation, which governs the so-called Square Mile, in which many banks are based. He says a Brexit could make it harder to attract talent.
About a quarter of the financial workforce in London is non-British, according to a 2012 estimate by the Cambridge Journal of Regions, Economy and Society. Boleat says financial firms like being able to move their employees around hassle-free in a borderless Europe.
“If that didn’t happen, it would affect an awful lot of businesses,” he says.
Like Cameron and bankers themselves, U.K. Chancellor Osborne is weighing the advantages of EU membership against the disadvantages of Brussels regulations that irk the City.
“There’s a very real risk that badly thought-through legislation will be imposed on the U.K.,” Osborne said in a speech in January. “As the chancellor of a country where financial services represent a 10th of the economy and employ more than a million people, I could not let that happen.”
In that spirit, Osborne’s Treasury has taken the EU to court several times. In September, the ministry sued the EU at the European Court of Justice in Luxembourg over bonus cap legislation approved six months earlier.
The measure limits bonuses to 100 percent of base salary for employees earning more than 500,000 euros ($697,000) a year. The rules apply to all staff at institutions that have headquarters in the EU, even if the employees are based outside the bloc.
Last year, the Treasury filed a suit to overturn EU powers to ban short selling in market emergencies. On Jan. 22, the European Court of Justice rejected the U.K.’s claim.
In 2011, the U.K. sued the Frankfurt-based European Central Bank, claiming clearing rules for derivatives discriminated against companies based in Britain.
The U.K. has a big stake in the pending outcome: London is the world’s leading derivatives center, with a 49 percent share of the market, more than double the share of the U.S., according to TheCityUK.
Osborne has also said he will challenge a proposed tax on financial transactions that’s being discussed in Brussels. The EU says the levy could raise as much as 35 billion euros a year.
As grateful as the City is for Osborne’s protection, the government’s swashbuckling legal tactics don’t always help the cause of the London finance industry, Boleat says.
“The British government is trying to be seen as tough with Europe,” he says. “It is not helpful to the general atmosphere if Britain is perceived to be rushing off to its lawyers all the time.”
While the City cherishes the freedoms to do business set out in a string of European treaties beginning in 1957, it’s chafing under rules emanating from Brussels. The bonus cap legislation, which Osborne tried and failed to kill, showed that power in Europe is shifting away from unelected bureaucrats and toward the parliament.
“It was dreadful negotiating tactics from the U.K.,” MEP Bowles says. “They thought they would get support from other member states on bonuses and the parliament would yield further down the track.”
As it turns out, banks in the City are finding ways around the rules. Barclays Plc, HSBC Holdings Plc and Lloyds Banking Group, among others, have announced plans to pay what they call allowances to staff, sidestepping the cap. In the case of HSBC, it will give 665 bankers a fixed-pay allowance that is neither salary nor bonus, CEO Stuart Gulliver said on a conference call with reporters in February.
“I think we had a compensation plan that shareholders liked,” Gulliver said. “Sadly, because of the EU directive, we’ve had to change.”
With populist and center-left parties looking strong in polling ahead of the May elections, the changing makeup of the European Parliament will probably work against the City, says Vicky Ford, a Conservative MEP who represents the East of England constituency.
Europe’s socialist parties are neck-and-neck with the center-right European People’s Party, according to the PollWatch 2014 website. The survey also projects strong showings for populist parties in Austria, Belgium, Italy, the Netherlands and Sweden that could form an alliance with Marine Le Pen’s National Front Party in France.
Ford predicts the new parliament will seek to reopen the debate on the financial transaction tax, or FTT. The European Commission, the EU’s executive body, has proposed charging a 0.1 percent tax on the sale of stocks and bonds and a 0.01 percent tax on derivatives trades.
After EU finance ministers rejected an EU-wide tax in 2012, 11 member states -- including Germany, France and Spain -- pushed ahead with plans to set up a common FTT.
Although the U.K. was not one of the 11, the common FTT could affect banks based in the City. The levy could apply, for example, to shares in a German company traded in London between two U.S. banks.
“This is not a Robin Hood tax,” Ford says. “This type of tax ends up hitting pensioners and savers.”
As vociferous as these arguments have become among politicians, the lips of City bankers are mostly sealed. Bank lobbyists do what they can to ward off, postpone or circumvent vexing red tape coming at them from Brussels.
At the same time, they’re urging the U.K. government not to abandon Europe and the rich market that lies across the English Channel. While the battles rage, few bankers dare to put their heads above the parapet.
Boleat puts the case mildly: “They’re all a bit reluctant to get into what is a political debate.”
With UKIP and euroskeptic Tories rallying for a Brexit and a potentially game-changing European election coming up, the silence of the banks may cost them.