Gerry Grimstone Europe Still Needs the UK, British Banker Says

Gerry Grimstone, chairman of Standard Life, warns that financial institutions that leave London after Brexit may move to the United States instead of other European locations.
Gerry Grimstone told Handeslblatt that Photo: Jiri Rezac forHandelsblatt

Gerry Grimstone is at the heart of the financial sector. As chairman of Standard Life insurers and deputy chairman of Barclays bank, he was an outspoken critic of Brexit. He spoke to Handelsblatt about just where the British economy goes from here.

Handelsblatt: Mr Grimstone, Nissan has only 7,000 U.K. employees and got a sweetheart deal from the British government to compensate for possible negative Brexit-consequences. The financial sector employees more than two million people and didn’t get anything from the government. What went wrong?

Gerry Grimstone: The British government cannot give a sweetheart deal because in those negotiations there are two sides involved. London provides financial services for the whole of Europe.

Some people argue Prime Minister Theresa May is ignoring pleas from the City due to the financial crisis and the industry’s flawed reputation. Because of this she’s got more to gain in the public by supporting manufacturing.

It’s not that. We have a high level of engagement with the Treasury and the Brexit ministry.

And with Theresa May?

The Treasury has taken responsibility for being the government department that is the mouthpiece for financial services. And it's doing a good job at it.

The Treasury is doing such a good job that the financial sector is about to lose passporting rights since Theresa May made pretty clear she wants to give up the Single Market.

What she wants is control or our borders and not being subject to the European Court.

The financial sector came up with the privileged equivalence regime as a substitute for passporting. It’s based on the mutual recognition of financial rules and would give banks based in London access to the European Union. Why should the E.U. agree on that?

It’s a two-way request, you cannot look at it as a one-way request. The U.K. wants something from the E.U. But E.U. countries also want something from the U.K. German car manufacturers would like to sell cars in Britain. The U.K. does a lot in defense and security for Europe. I can imagine there are E.U. countries which would like to see this continue. That’s why it’s so hard to predict how the negotiations will pan out. The first six months might not be occupied with economic matters, there will be a lot of political positioning until we find out what the new configuration might look like but this is only going to be struck between Britain and the rest of the E.U.

Some experts argue Brexit will lead to a significant fragmentation of the financial markets and that could could cost E.U. customers up to €12 billion annually – is this a realistic guess from your point of view?

There will be an increase in costs. If you fragment capital, it will become less efficient. Just have a look down here: I can find you more German bankers here in the City than you can find in Frankfurt, I can find you more French bankers than you could find in Paris. And they are all within half a mile of here. It’s those economies of scale, that’s the ecosystem.

 

A lot of the business that will move away will realistically not go to Madrid or Frankfurt, it might move to New York.

 

Some people compare it to a Jenga-Tower which could fall apart when taking out one part due to Brexit.

Yes, and that’s why we have to explain carefully to politicians all over Europe what benefits come from the ecosystem – such as costs of capital and efficiency of serving customers. We’re competing against the United States. A lot of the business that will move away will realistically not go to Madrid or Frankfurt, it might move to New York. And Europe will be poorer as a result of that. Look at what is Donald Trump doing. His starting point is: Put America first.

What would be your advice to Europe in this case?

Europe should say: Europe comes first. And that would mean a Brexit-deal between the U.K. and the E.U. which does not destroy the ecosystem here in London or increase the cost of serving our clients.

You don't think there is a possibility to compensate the higher costs of fragmentation through savings in other parts of the business?

It’s hard to imagine. Certain aspects of financial services require the benefits of integration – and those areas are the wholesale market, clearing, management of money. A lot of sovereign wealth funds are here in London, a lot of capital is located here. When you asked why they are here, they will say it's because of talent.

Many of those talented people come from outside of the U.K. This could come to an end when U.K. starts to control its borders and it immigration.

Which is why setting immigration laws right is important.

Banks are trying to avoid high Brexit costs by exploring creative solutions with regulators on the Continent to make transition after Brexit easier. What’s your impression? Are regulators on the Continent open to this?

The dialogue up to now has been more with U.K. regulators and not overseas regulators. If you think of this as a military task, we will now increasingly take the second step and go with the arguments outside. And the third step will be the granularity of this and getting into details.

It seems as if the big banks have their Brexit contingency plan almost finalized but asset managers and smaller finance companies are not there yet.

Some things are a bit more complicated in insurance and asset management. It’s somewhat easier for the banks which already have a network of branches on the Continent. But there will also be an advantage for smaller companies: The government will be more responsive to the needs of small and medium enterprises  because this government draws its strength from many parts of the U.K. other than London. This government is far less of a metropolitan government than the last one. The voices of the SMEs will be very important.

At what stage are the Standard Life Brexit contingency plans?

I do not think anybody will go beyond the point of irreversibility and actually move things at an early stage. But they will go to the point to how to actually move things when you have to do it.

What does this mean for Standard Life?

We have a pretty clear view of what we need to do in certain scenarios to serve our German and Austrian customers. What we do not have a clear view yet as to which of the scenarios we will be playing.

How many scenarios are we talking about here?

Probably three: the best-case would mean pretty much how we operate will stay the same. The worst-case: no passporting at all and no equivalence. Or something in between. We already got past one scenario, the best case, being part of the single market. So one scenario is over.

You said in 2015 Brexit would be a disaster.

I was very much against leaving the Single Market. My position has always been that of a great supporter of the Single Market. The British public did not agree with that and we have to make the best out of that. From the benefit of the financial services there is nothing positive about Brexit. But disaster was probably too strong of a word.

How will London look like in five years or so as a financial center 

London constantly changes and adapts. And I would say it will be a bit smaller but still a big financial center.

 

 

Katharina Slodczyk is Handelsblatt's London correspondent. To contact the author: [email protected]