A View from the Top: Daniel Hodson, chairman of The City for Britain and a director of Vote Leave

After the Brexit vote, rather than gloat, Hodson called a truce and set up the Forum to bring together practitioners of all views – not the easiest task, considering the bitter infighting

Click to follow
The Independent Online

What finer spot to unite the City’s warring factions over Brexit and plot EU deals than Mercers’ Hall at the heart of the Square Mile? St Thomas Becket was born here – his father was a mercer – and other old boys include some of Britain’s most famous buccaneers: William Caxton, who brought the printing press to the UK, Sir Thomas Gresham, who founded the Royal Exchange and Sir Richard “Dick” Whittington, four-times Lord Mayor of London and Master of the Mercers.

It was also at Mercers’ Hall – home to the wealthy Mercers’ Company of liverymen – that the first meetings of the Council of Trade, the Bank of England and the East India Company were held in the late 17th century, paving the way for the golden age of trading. 

Fast forward to today and it’s become the HQ of a newly launched City grouping, the Financial Services Negotiation Forum, created to bring together Leavers and Remainers and, more pertinently, to help set “red lines” for the Government to use in EU negotiations.

Unsurprisingly, the brain behind the forum is that of a mercer, Daniel Hodson, chairman of The City for Britain and a director of Vote Leave. The former chief executive of Liffe was one of a handful of City figures who dared speak up for Brexit, pitting themselves against the big US and overseas banks which lobbied so hard for the Remain campaign.

 

Rather than gloat over victory, Hodson called a truce and set up the forum to bring together practitioners of all views – not the easiest task, considering the bitter infighting. “One of the odd things I have discovered since the referendum was how much people were gagged, actually gagged, by their firms from speaking out, both before and after the vote. There are many people who still admit to me in private that they supported us but are still concerned about giving their view. It’s extraordinary.

“You can understand why the big US banks took such a strong line. But there were other important players, like the City Corporation, who foolishly in my view went strongly for Remain. I, along with others, tried to pull them back by their shirt tails as I didn’t think it was constitutionally appropriate, and also a tactical mistake, for them to take such a position.” 

Despite past bickering, the forum has attracted more than 250 members from all sides of the business and political spectrum – big hitters such as arch Remainer, the LibDem Baroness Sharon Bowles, to outer, Robert Hiscox, of the eponymous insurance company, are on the advisory council which is chaired by Anthony Belchambers.

All efforts are concentrated now on what Hodson calls the “best outcome” for the City, and the EU too. “We have to get the best outcome, whether that is us staying in the EU on some sort of fudge basis or walking away. It’s interesting that the Prime Minister has deliberately not abandoned ‘walking away’ so we have to be ready for that option.”

 

To help prepare the Government ahead of the crunch talks, the forum is providing independent, factual information on complex issues ranging from euro-clearing to market access and equivalence, probably the most crucial of the regulatory issues to be sorted. There’s a second approach – talking to other financial trade associations in the Commonwealth, the US and the EU’s 27 countries to see what they would want out of any deal.

“We are not in this business for our own egos. But we know there are a lot of gaps in the Government’s knowledge about financial services, particularly in relation to what can and should be done to improve the consequences of a walkaway situation. We want to help fill in those gaps.

“Our members are practitioners and British-orientated: they know what they want from any EU deal to do their businesses. We are not aiming at the big chiefs of large global firms – they are potentially conflicted, given their largely overseas shareholdings.”

Which is why the Forum has come up with “Batna” – the “best alternative to a negotiated agreement”. “And this can only be accurately done once the Batna for each side is fully understood,” says Hodson. “For example, what will we do if no agreement is reached? Our negotiating hand should also be strengthened by improving the Batna wherever possible.”

We meet in one of the beautiful wood-panelled rooms upstairs in the hall where past mercers look down from their grand portraits. Tea, in fine china cups, is brought by a splendidly dressed butler. Hodson is so calm and measured in his approach, the epitome of a City that plays by the rules and a million miles from the blood-curdling threats being heard daily from Brussels.

After Jean-Claude Juncker’s latest attack on the PM, isn’t he worried that the EU won’t play by the rules but try to grab every last City penny? For there is much to lose – the financial sector is the UK’s golden goose, accounting for a tenth of the economy, providing two million jobs and 10 per cent of our total EU exports – equivalent to about 5 per cent of what we sell to the whole world. More to the point, the UK sells £19bn more financial services to the EU than it buys. 

Yet Hodson is sanguine. “The City is too important to the rest of Europe, making availability of capital easy and cheap; it would take a generation or more to replicate what it does for European participants in any one place on the Continent. I don’t believe the EU will try to destroy the City; about 80 per cent of Europe’s capital markets are based here in London and this is where the liquidity is.

“We would argue – our Batna would argue – that the business has to stay in London or it will move to US. It can’t move to Europe even though that might be the objective of the negotiators. Financial markets are granular and organic. There will be some fragmentation to cities like Milan, Frankfurt and Paris but I don’t believe there will be a mass exodus. That’s not how markets work.”

What about the latest threat by Brussels to poach London’s £800bn-a-day euro-clearing business? Admittedly, the attempts have softened since they were first made, with the EU regulators now proposing shared regulation, rather than a land grab to relocate the EU parts of euro-clearing. Hodson is adamant this would prove a huge mistake by the EU, and could well backfire against them: “This is potentially self-defeating. Our report into euro-clearing shows graphically what a big mistake they could be making, not least in actually increasing systemic risk, totally contrary to their stated aims.”

Indeed, Hodson believes that moving the business away from London could have serious systemic risks for the EU countries, risks they would not necessarily want to accept. “If they were to attempt to disaggregate the euro-clearing business of the London Clearing House, only 20 to 25 per cent of LCH’s total volume would be at risk.

“But two things would then happen – you could have a Brit-euros market, rather like the euro-dollar market being created. More immediately, more practically, to the extent that clearing didn’t move to the US but to the Continent, then the EU 27 clearing houses would need more capital and so would the clearing members. They would need more because the amount of margin they would have to put up for their trades would increase, since they would be losing the immense benefits of cross margining that LCH provides.”

And that, he adds, would further strain continental capital requirements, leading to an unattractive risk transfer to the continent: “Probably people there, and particularly in Germany, would rather see London go up in smoke than Frankfurt go up in smoke in any future systemic meltdown.” 

As a futures man, Hodson’s preferred option is that economics will trump politics, and hopes the EU will come to recognise the City as a pan-European asset and accept equivalence. “On the first day of Brexit we will be ‘practically equivalent’ anyway but it may take a large multibillion-euro cheque for the EU 27 to endorse that politically. That’s why it suits them to establish the divorce settlement now. But we must prepare for a walkaway which could be very positive and would certainly not be as bad as some portray.”

Comments