Hammond Puts Protecting City of London at Heart of Brexit Talks

(Bloomberg) -- U.K. Chancellor of the Exchequer Philip Hammond put protecting financial services at the heart of his plan for Brexit as he sought to shift the government’s focus away from controlling migration to safeguarding jobs.

Hammond, speaking in his delayed annual Mansion House speech on Tuesday, said breaking up financial services such as derivatives and lending after Britain leaves the European Union would result in higher costs for companies across the bloc. He also stressed the need to ensure companies can keep attracting global talent after Brexit.

“Fragmentation of financial services would result in poorer quality, higher-priced products for everyone concerned,” Hammond said. “Avoiding fragmentation of financial services is a huge prize for the economies of Europe, and I believe we can do it.”

Prime Minister Theresa May’s failure to gain the majority she sought in the June 8 election has forced the government to rethink its focus both on Brexit and austerity. The chancellor’s speech, with its emphasis on spurring growth and productivity, marks a shift away from May’s pre-election rhetoric, which touched little on the economy and instead focused on curbing migration.

"While we seek to manage migration, we do not seek to shut it down," Hammond said. "We must push for a new phase of globalization to ensure that it delivers clear benefits for ordinary working people in developed economies."

Political Football

By singling out financial services as a key driver of growth, Hammond put the City of London at the center of the Brexit talks, which kicked off in Brussels on Monday. The EU has proposed forcing the biggest foreign derivatives-clearing firms to set up shop in the bloc if they want to continue doing business there.

This so-called location requirement spurred warnings from the industry of skyrocketing costs and a loss of jobs in London. It has also helped to turn clearing into a political football.

Almost two thirds of EU capital markets activity is executed through the U.K., while banks based in Britain lent more than 1.1 trillion pounds ($1.4 trillion) to the rest of the EU in 2015.

Major banks in London have warned the loss of so-called passporting arrangements, which allow them to operate across the EU from any member state, will probably lead them to relocate jobs and activities in European cities such as Frankfurt, Paris and Dublin. However, the prospect of a softer Brexit deal could result in lenders staying put.

HSBC Holdings Plc’s investment bank chief Samir Assaf said last week a hard Brexit is now unlikely after the U.K. election, and that could mean more jobs staying in London after the bank said it could move about 1,000 roles to Paris. A softer deal would be “very good news for us because it will be less hassle and we would be able to do much more things from London,” he added.

While he maintained the Conservatives’ pre-election pledge to eliminate the budget deficit by 2025, Hammond acknowledged that voters had tired of budget cuts.

"Britain is weary after seven years of hard slog repairing the damage of the great recession, he said, adding that growth rather than higher taxes and borrowing is the only way to fund public services. “We must make anew the case for a market economy and for sound money. The case for growth."

To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net, Richard Partington in London at rpartington@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Andrew Atkinson, Fergal O'Brien