Why the City should create a single financial market with the Swiss
A tie-up between London and Zurich, two global financial centres, could pay huge dividends for both, says Matthew Lynn.
The UK will this week start taking advantage of its new freedom from regulation by Brussels to allow trading in Swiss shares in the City of London again. Buying and selling Swiss shares had been banned within the EU as part of a ridiculously high-handed attempt by the EU to impose its rules on the country (a foretaste, incidentally, of what the UK may face over the next few years).
It didn’t make a huge amount of difference, as it happens. If you wanted to buy shares in Nestlé and Roche – as you probably should, come to think of it, since they are great companies – it just meant you had to route the trade through a Swiss exchange rather than completing it in Paris or Frankfurt. As so often, the EU had overestimated the impact of bureaucratic pettiness and forgotten that a free market will usually find a way round any rules. Even so, it was a minor inconvenience, and one that hurt both European financial centres and the Swiss. Now that the UK is out, trading in those equities is going to be allowed in the City again. That should just be the start of a deeper relationship.
The beginning of a beautiful friendship
London and Zurich are two of the most significant finance centres in the world. According to the Global Financial Centres Index, London is the second largest globally and Zurich the tenth. Add in Edinburgh and Geneva in 13th and 14th place respectively and a real powerhouse emerges. Excluding tiny Luxembourg, mainly a tax base for shell companies, and the closest European competitor is Frankfurt at 16th place. Nowhere else in Europe comes close. A combination of history, law, and expertise has made both cities centres of excellence. Share trading should just be the start of a new relationship. Here’s how to cement it.
First, create a single financial market. The UK and Switzerland could create a market in financial products that covered both centres. If a bank, asset manager, insurer or adviser were operating in one they could automatically work in the other. Any product that could be sold in London could be sold in Zurich and Geneva, and vice versa. There would be automatic recognition of each other’s standards and trade barriers taken down.
Next, create a single regulator. The Bank of England and the Swiss National Bank are two of the oldest and most respected in the world. They could easily create a single financial regulator for both territories. Instead of applying for licences in both, a company would apply just once to a single body. It might quickly become the gold standard for finance around the world. Any fund or bank that had been approved by the London-Zurich regulator would find itself accepted anywhere (if not by a prickly EU). Even better, the two cities could create a single court system to settle disputes. There are few legal systems that are more trusted.
A new hub for financial innovation
Finally, the two cities could create new markets. The finance industry is witnessing an explosive growth in new technologies. The Swiss already have some of the most advanced law governing cryptocurrencies in the world. The UK is a global leader in fintech. As app-based payment and banking, artificial-intelligence-based insurance and robo-trading take a bigger share of the market, and disrupt traditional business models, new markets could be created to trade and regulate those assets. It would be the natural place for financial technology companies to list their shares. It would be a hub for venture-capital firms. And as the likes of Amazon and Facebook move deeper and deeper into the industry it would be a natural base for their expansion.
Those are just a few of the many possibilities. The EU would not like having a major financial centre on its doorstep that was completely outside its control. Tough. It’s a free market and you can’t complain when people compete with you. “Zurlon” could be the dominant player in the European time zone and the equal of both New York and Shanghai globally. Indeed, because it is not tied to a major power or a single economy, it could outstrip both.