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Podcast – Shaping Finance

William Wright: Capital Markets and Brexit – A think tank’s thoughts

Tous les 15 jours, Nicolas Mackel, CEO de Luxembourg for Finance, invite des leaders de haut niveau du secteur européen et mondial des services financiers à partager leur point de vue dans le podcast «Shaping Finance». Le 17e invité est William Wright, fondateur et managing director de New Financial.

Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.

Nicolas Mackel . – “Welcome to Shaping Finance, a podcast which offers a platform to high-level decision makers and shapers in international finance. My name is Nicolas Mackel. I’m the CEO of Luxembourg for Finance and the host of this podcast.

I am very pleased to welcome William Wright to our podcast. William is the Founder and Managing Director of New Financial, which is a think tank launched in 2014 that believes capital markets can and should be a force for economic and social good. New Financial also believes Europe needs bigger and better capital markets, and we will discuss this in detail with William. He has been covering the industry for more than 25 years. Prior to New Financial, William was a founding member of Financial News and acted as an editor for eight years. Before that, he worked in the internal consulting arm of a large UK bank. He is Oxford educated, also studied in London and at INSEAD in France. William is also a regular speaker and moderator at conferences, as well as a commentator on TV and radio news programs, including the Today program and BBC News. Well today, welcome to Shaping Finance, William.

William Wright. – Thank you, Nicolas.

You set up New Financial back in 2014 as a think tank making a case for capital markets. What exactly drove you to do so, and why do you think there is a need for a specialised research institution operating in this field?

“Nicolas, there were several factors on the pull side and also on the push side. If we start with the pull, as you say I’ve been a journalist, a financial journalist, for around 20 years. And over that time, I’ve become fascinated with the banking and finance industry, and come to understand that it plays a vital role in almost every aspect of our daily lives in every corner of the economy. But it’s a very complex industry. It’s become, over the past few decades, increasingly specialist. Some corners, perhaps, of the industry have become increasingly remote and detached from what you might call the real economy or the wider economy. And it’s a very poorly understood industry by both the wider public and by policymakers. Perhaps also it’s an industry where a lot of people working in it have lost sight of the underlying value or purpose of what they do and why.

And I had been trying to unpick in my own mind in the few years after the financial crisis, what had gone wrong with this industry? And what, if anything, the industry could do to help put the European economy, the global economy, back on the path to a recovery. I fundamentally believe, philosophically, that banking, finance, capital markets can and should be a force for economic and social good, and that they have a valuable role to play in fuelling a post-crisis recovery. And we wanted to work with the industry, with government, to help make a more positive, constructive, and where necessary constructively critical case for the value of what this industry does.

And then on the push side, and as I said, I’ve been a journalist for 20 years, I’ve always been drawn to the in-depth research-led, data-led projects that I worked on over that time. And increasingly the business model in journalism, particularly financial journalism, doesn’t allow for that anymore. It’s become too focused on volume and on traffic. And I saw that New Financial was an opportunity to get away from that model where we’re focusing on what happened this morning, what’s going to happen this afternoon, and work on bigger, longer-term projects that I hope can play a small part in helping this industry help the European economy and future.

And you were clearly ahead of your time, because about a year after you set up New Financial, the European Commission launched its Capital Markets Union project under the leadership of the then EU commissioner Lord Hill. So what is your view on this project and its progress or lack thereof so far?

“Oh, I’m incredibly grateful to Jean-Claude Junker for coming up with the Capital Markets Union slogan. When the commission first came out with that, it was literally a few months after I’d set up a new financial and –

You’re one of the few Brits, who is grateful to Junker for anything.

“Exactly. And the reason I’m particularly grateful in that respect is also, it’s the same as what I think has been the biggest impact of CMU. And that is that Capital Markets Union has put, or the Capital Markets Union initiative has put capital markets on the political agenda across Europe. It’s changed the nature, tone, direction of debate around banking, finance, and capital markets radically. It’s moved the Overton window, if you will, in terms of how this industry fits into the policy and political debate. Oh, one small example. A few years ago, the next CMU project that was put together by France, Germany and the Netherlands, calling for an acceleration of CMU in particular areas. It’s almost impossible to imagine that sort of discussion around the potential value and role that capital markets can play in supporting a recovery across Europe. It’s impossible to imagine that sort of discussion before the CMU initiative.

In terms of measuring its progress, I think the one thing that we do know is that probably the wrong way to measure its progress is the way in which many people have been measuring progress to date. And that is looking at it in terms of the number of regulations that have been passed or legislative changes that have been pushed through and agreed at an EU level. We think the way to measure progress is to look at outcomes. And if you’re going to look at outcomes, you have to accept that this is a multi-decade project. This is not something that was ever going to be completed in the first five-year term of the Junker commission. It’s not something that is going to be completed in the current term. It’s something that we should be focusing now on laying the foundations, the building blocks so that in 10, 20, 30 years, Europe has deeper, more efficient, more interconnected capital markets.

And we will certainly come to one of the factors that may or may not have given it a boost, but let’s stay a little bit with the capital markets. You have released last March, a report that is looking at some of the infrastructural problems in European capital markets. And you essentially suggest that capital market infrastructure in Europe is overly complex and constrained by national boundaries. What are some of the steps you would suggest taking to rectify this situation?

“Well if you think about what is the problem that Capital Markets Union is trying to solve, then market infrastructure, stock exchanges, clearing and settlement in Europe is almost the perfect example of how, despite progress towards a single market over the past 30 years, the EU is still very much a patchwork of national markets, national infrastructure constrained by national borders. In a very quick, comparative summary, if you look at the US market, the US equity market is twice as big, more than twice as big as in Europe. But it has two stock exchanges for listing, NASDAQ and the NYSE, 16 for trading, one CCP and one CSD for equities. And the genesis of this paper was what would the US equity market look like if every one of the 50 states in the US had its own stock exchange? And the answer is that it would look very much like the European market today.

Well we looked at 31 countries. And between those 31 countries in Europe, there are 22 exchange groups, 35 exchanges for listings, 41 exchanges for trading,18 CCPs and 22 CSDs. Now this complexity makes markets smaller, less efficient, less attractive to investors and issuers, particularly to investors from outside of any particular country for international capital. And we think it’s one of the main, one of the many reasons why European equity markets are half as big as in the US. Now there’s obviously a trade-off here. Every country can have its own infrastructure, can absolutely have its own infrastructure, but we have to accept, or countries have to accept, that if they choose to have their own infrastructure, that this does reduce the ability of equity markets to perform their basic purpose of helping companies raise money. And we broadly have sort of three recommendations.

The first is to continue the consolidation of exchange groups that we’ve seen over the past 20 years or so. Euronext now owns and operates seven stock exchanges in Europe and NASDAQ does too. Secondly, to push beyond that consolidation of exchange groups and focus more on consolidating, merging the underlying market. So that you have five, six, seven exchanges really operating one single market. And then thirdly, to go beyond that, to go a step further, so that ultimately perhaps in Europe, you would have three, four, five competing exchange groups across the whole of Europe. Much bigger groups operating multiple markets competing with each other.

I do understand, of course, the consolidation argument. But for instance, just to quote this example, we take great pride in Luxembourg at the independence of our stock exchange. And although it is small in relative terms, it plays quite an important role if you look at its position as a main listing venue globally for green bonds. It was and still is a leading renminbi denominated bond listing venue and so on. So sometimes small can be beautiful, as we say in Luxembourg. Anyway.

“Nicolas, I completely agree. What we’re proposing, our argument is not consolidation for the sake of consolidation. It’s consolidation where we think consolidation is necessary. And where an institution, such as an organisation, such as the stock exchange in Luxembourg, has a very clear focus and a clear competitive advantage that it makes sense to continue with that. The challenge, I think for many stock exchanges in Europe is that they don’t have that clear competitive advantage or that clear focus. They are merely another national version of a small exchange, and their competitive advantage is enclosed by their national borders. And those are, I think, are the exchanges that we really need to address.

Now switching to the contrary of consolidation, namely fragmentation, let’s get to Brexit. You have very recently published a new report on Brexit where you have made quite a splash by showing really the consequences for the city of London, in terms of relocation of financial institutions. And in particular also the assets that go with it. I would not now like to dwell on these relocations, but I would rather like to look at what the future holds. And I think in the report, you also ask the questions, where do we go from here? And to me, what I would be interested in is what is the impact of Brexit on the city of London overall? And where will be the UK’s selling proposition, its unique selling proposition? Which geographic markets will it serve in the future?

“That is literally the multi-trillion euro question. Isn’t it? I mean, like a lot of the debate on different aspects of Brexit, I think the impact, the outcome for the city will probably not be as bad as the most pessimistic forecast over the last few years from the Remain side of the debate. And we know that they definitely are not going to be as positive as some of the rosy forecasts from the Leave side. I mean, there’s no doubt that Brexit and the inevitable mechanical consequences of Brexit, the relocation of some activity from the UK to the EU, is a blow for the city. Our central thesis over the past five years has been something like 20–25% of the UK financial services activity in the UK is EU related. And roughly half of that, we think, is dependent on passports and the UK’s former membership of the single market.

So when you run those numbers through what you’re talking about is roughly 10, 12% of activity in the UK financial services industry is going to have to move. And that’s in line with the 10% or so of bank assets that we identified in our recent report as having been transferred. So it’s obviously a blow, but I don’t think it’s terminal. I think the real question in the future from Brexit and its impact on the city of London, is what is the role the city will be able to continue to play as a gateway to the European market for firms from the rest of the world. Traditionally over the last, certainly over the last 30 years, the city has benefited from the single market. It has become an ever more concentrated and bigger hub for access to the EU market.

And it’s unclear as yet how much of that role it will continue to be able to play. I think what we’re going to see, already beginning to see just in the first few months post Brexit, is the emergence of a key philosophical divide between the UK and the EU when it comes to banking and finance. And these comments are not in any way a criticism of either side. But what we’re seeing is the pitch from the EU is in my view, quite understandably, there are certain parts of the business that have to be conducted inside the EU because EU regulations, concerns around financial stability, require them to be conducted inside the EU. And then, on the other hand, you’ve got the UK pitch, which I think is going to be much more around, come and do business in the UK because you want to do business here not because you have to.

And I think this is going to be an interesting tension, competitive tension in the next few years. We’re not going to see any wholesale deregulation in UK banking and finance. Anybody who expects Singapore-on-Thames, whatever that was supposed to mean, is going to be very disappointed. But we are going to see changes at the margin. And I think the UK recognises that while the EU remains a very significant market on its doorstep. The inevitable consequence of Brexit, namely that we’re losing access in the UK to the EU market, it requires the UK to look further afield to try to develop closer, direct bilateral partnerships with other financial centres such as Switzerland we’ve already seen.

Perhaps Japan, maybe the US. And I think the UK’s selling proposition is going to be that it’s a highly developed international financial centre. It’s a significant free agent in some markets. It’s already a world leader in its own right, trading derivatives, foreign exchange, Fintech. And I think it’ll be looking to play a role in partnering with other developed markets in this space and perhaps helping or trying to shape global standards in those areas where the UK is already a significant world leader in these markets.

Well, we certainly wish them well. I still have difficulties understanding exactly what markets they would want to sell their products or services in. But I do understand that the best avenue for their future is to convince the world to, as you said, come and do business in London. If we look now to the flip side of Brexit, namely what it means for the European Union. Brexit, we have seen and you have reported this, has pushed financial institutions to relocate EU related activities to various different other EU financial centres. What trends have you seen emerge from these relocations? And will this lead to a weakening of the EU financial services landscape because of the fragmentation it creates? Or rather will it on the contrary contribute to its strengthening through the multi-polarisation it brings about?

“I think that multi-polarisation, or what you might call a polycentric model, is really the most striking aspect of the work that we’ve been doing on the reverse impact of Brexit, the impact of Brexit on EU financial centres. And one of the ways I think about it, Nicolas, is about 20 years ago I was a financial journalist based in Paris. And back then, pretty much every European and international investment bank and asset management firm had a local presence in Paris looking after French business and French clients. And what had happened over the next 15, 20 years was that everything that was not physically bolted to the floor in those offices, everything that could be moved back to London or relocated to London was because the single market allowed firms to concentrate their activities in one place. And it made economic sense for them to move as much activity as they possibly could back to London.

And what we’re seeing now is a sort of rewinding of the clock, rewinding the clock 20 years and redistributing a lot of that activity back across the EU. But what we’ve seen is there’s been no single winner, for once a better word, when it comes to financial centres in terms of these relocations. We’ve seen activity disperse according to sector specialisation. So for example, 60% of asset managers and more than two thirds of private equity firms and hedge funds that we identified as having moved something from the UK to the EU, have either moved it to Dublin or to Luxembourg. Frankfurt dominates relocations when comes to banks. And Amsterdam, building on centuries of tradition as a trading centre, dominates for relocations when it comes to trading exchanges and broking firms. The big exception is Paris. Paris doesn’t appear to have a clear sector specialisation.

And I think that Paris is going to evolve in the coming years as the closest thing in the EU to a mini version of the city of London, offering a global city, an international city, a deep pool of local talent and lots of different no clear sector specialisation, but lots of activity from different firms. And I think this could be a real positive for the EU. It injects, firstly, we’ve got an injection of activity, of experience, of skill into EU capital markets. It injects a little bit of urgency into Capital Markets Union. And I think it’s a positive development in the sense that if you had this activity dispersed across Europe and you had four or five financial centres competing with each other in every sector, it could perhaps be self-destructive. But if you’ve got the emergence of financial centres in Europe that are competing with each other on the basis of their sector specialisation, you’re likely to see faster growth in those sectors and more rapid development.

Very similar, if you think about the US market. Different financial centres on different sector specialisations. So New York for investment banking, Boston for asset management, Chicago for derivatives and so on. But I think it will need to be accompanied by a shift in thinking when it comes to supervision and regulation. And there may be some tension in the coming years in the EU between a one-size-fits-all centralised vision of supervision and regulation, and a slightly more dispersed model that enables and allows, encourages, fosters the sector specialisation to emerge in different financial centres.

Going together with convergence, obviously of not only regulation, but also supervision. Now if we take another step towards the future and look at what sustainable finance brings, we can I think, clearly see that the EU has become a leader and even a standard setter in sustainable finance. Will this be an opportunity for the EU financial services industry to gain back some of the global market share it has lost after the financial crisis of 2008, 2009? And will the EU and the UK take a cooperative approach on this going forward?

“You’re absolutely right. The EU is already a world leader in this area. It’s taken a giant leap towards on sustainable finance. And I suspect as with something like GDPR, that the sustainable finance taxonomy will effectively become a global standard. And we’ve already seen plenty of countries around the world signing up to and supporting that taxonomy. And I think in terms of the opportunity here for EU banking and finance, EU capital markets, I think it’s twofold. Firstly, ESG sustainability from my perspective, it’s a way for the industry to re-engage with citizens. I mentioned at the beginning of this discussion how this industry has become, in many respects, increasingly remote, detached from most of the population, most of the individuals that it serves. And the vast majority of capital that is put to work in the capital markets is generated by individuals. Individuals saving for their future retirement, or taking out insurance policies or investing directly in capital markets.

And the shift in ESG over the past 5–10 years, I think will accelerate this sort of process of engagement involvement. A sense of connection between individuals in Europe and the capital markets, which can only be a positive, I think for both sides. I think it’s going to be fascinating to see how international cooperation and competition evolve. We’ve recently had a new chairman of the Securities and Exchange Commission in the US, Gary Gensler. And he’s made ESG one of his top three priorities. But I suspect what we’re going to see coming out of the SEC and out of the US in the coming months is yes, a focus on ESG, but probably a different philosophical approach, a more market-led approach than maybe a sort of taxonomy-led approach.

And I think that’s probably philosophically closer to the UK’s approach. So I think the UK on the one hand will support and cooperate with the EU on sustainable finance, but on the other I think we’re going to see the emergence of some friendly and sometimes perhaps not so friendly competition between the UK and the EU. But to be crystal clear, the UK right now is a long way behind the EU in this field and has a lot of catching up to do.

Well let’s hope that they will speed up their process. And as we do also, obviously for the US, whatever process they will use. Because I think ultimately it’s in everybody’s interest that we speed up the uptake of sustainable finance and sustainable investment all over the world.

William, we are coming to the end of this podcast. And I would like to ask you one final question, which we tend to ask every time to our guests. And that is whether in your downtime, you have had the opportunity of reading a book that in particular you would like to recommend to our listeners?

“Well Nicolas, I have two very small boys and I run my own business. So for the last couple of years I haven’t had a huge amount of time to read. But I’ve resolved to change that this year, but I can give you lots of excellent tips on children’s books. And I resolved to change that at the beginning of this year –

I saw a tweet of yours on one of them. My wife is an author of children’s books, so I have some sort of interest in it. I have children who by now are adolescents, but they used to be small as well, including twin boys. So I feel with you.

“But the grownup book that I would recommend, it’s a book called the Moth and the Mountain. It’s pure escapism and adventurism, which I think is particularly useful while we’re all locked up with COVID. And it’s also beautifully written by a writer called Ed Caesar. It’s about a guy called Maurice Wilson in the 1930s in the UK. He didn’t know how to fly an aeroplane. He had no particular interest in mountaineering. But one day he woke up and he decided that he was going to fly from London to India, land his plane on the slopes of Mount Everest, and become the first person in the world to climb Mount Everest. And it’s an absolutely gripping story. I think we all know how it ends, but it’s a gripping story that I would strongly recommend.”

Very good. Very good. Well, I will definitely read it. Thank you very much, William, for sharing your insights with our audience. And thanks also to our listeners who have tuned in again to our podcast. In our next episode, I will be speaking to Lisette van Doorn, the CEO of the Urban Land Institute, Europe to discuss the real estate markets. And to stay up to date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website,