Brexit, Voice and Loyalty: The City

and the Limits of Financial Power

Scott James (King’s College London)

Lucia Quaglia (University of Bologna)
The puzzle
• Brexit poses a fundamental challenge to the City of London’s
economic model

7% of UK GDP
12% of PAYE income tax and NI
15% of onshore corporation tax
Pays £60bn in tax a year
UK net exports of FS = $71bn
Employs 2.2 million people

(House of Lords 2016)

The puzzle
• City official bodies lobbied for a soft Brexit to retain
passporting rights
• May Government continues to pursue a hard Brexit

Q. How can we explain the City’s apparent failure to

influence the UK’s Brexit policy?
The Cameron Years
• Early effort to restore relations with Brussels and not exploit
Eurozone crisis
• Osborne’s ‘remorseless logic’ speech (e.g. supports Banking
Union)

EU defence of Eurozone interests

Post-crisis EU legislation (AIFMD,
bonus caps, short selling)
ECB policy on euro-denominated
clearing
Financial Transactions Tax
The Cameron Years

UK defence of City interests

• Attempt to use EU treaty reform to secure de facto opt-out
from future FS legislation
• Attempt to rally support of other non-Eurozone states to
defend SEM against Eurozone caucusing
• Strategy backfired (Dec 2011) revealing singularity of UK
position (Thompson 2017a, 2017b)
• Referendum (2013 Bloomberg speech) an attempt to revive
opt-out strategy and re-embed EU membership
• Strategy backfired as immigration, not City interests, became
defining issue (Goodwin et al 2016)
?
Existing theories – not helpful
Varieties of (Financial) Capitalism (Zysman 1983, Hall
and Soskice 1996, Howarth and Quaglia 2016):
• UK will seek to defend a key economic sector

Theories of business power (Lindblom 1977, Moran

1991, Culpepper 2013, Bell and Hindmoor 2016):
• City wields significant power and influence within
government
Refining theories of business power
• Structural power = governments dependent on investment
decisions to sustain growth and fund public services (power of
‘exit’)
• Instrumental power = mobilisation of financial and human
resources for lobbying and policy engagement (power of ‘voice’)

• A false dichotomy (Culpepper and Reinke 2014): threat to exit

has to be asserted strategically through instrumental action; a
firm’s bargaining strength is related to its structural position
• Firms can manipulate SP by reshaping availability of exit options
(‘structuring power’) (Farrell and Newman 2015)
• Three mediating factors between SP and IP:

1. Political statecraft
• Pursuit of electoral winning strategies determines how elected officials
interpret and construct BP
• BP can vary suddenly in response to electoral developments and voter
concerns

2. Institutional structures
• State capacity and bureaucratic interests structure government-business
interaction
• e.g. informal ‘quiet politics’ v’s formal political arenas

3. Business organisation
• Capacity for collective action determined by alignment of economic incentives,
producing shared policy preferences
• Regulation produces winners and losers amongst business
Brexit and the
power of the City

Pre-referendum
• Produced ‘hard facts and figures’ detailing economic importance of
City to UK economy, benefits of EU membership, and economic costs
of Brexit

Post-referendum
• Signalling credible threats to exit, e.g. JP Morgan will ‘quit’ UK (Jamie
Dimon); banks ‘quivering over the relocate button’ (Anthony Browne)
• Structuring power = contingency plans to relocate staff to EU27
(Paris, Frankfurt, Dublin, Amsterdam)
May’s party conference speech (Oct 2016):

‘There was an absolute stunned reaction which left

us all for the next twenty-four hours in a complete
funk, because it was clear that No.10 didn't
understand what the impact of that announcement
was.’ (Interview, UK bank)
City gears up…

• EFSCAC established under Baroness Vadera to

coordinate response and examine all EU regulation
• City envoy, Jeremy Browne, 6-month tour of EU
capitals and lobbying embassies/MEPs
• European Banking Policy Network est by BBA
May’s Lancaster House speech (Jan 2017):

‘They are deaf by choice…They did not know when

they made those initial choices at the Party
Conference. But they went ahead anyway, which was
gross negligence on their part. But once they were
told they carried on anyway.’ (Interview, UK bank)
City rolls over…

• City drops demand for full passporting rights

• Calls for ‘bespoke agreement’ based on mutual
market access and mutual recognition
• Focused on quantifying economic costs of a ‘cliff
edge’ no deal and reliance on third country
equivalence rules
• Drafting Financial Services Chapter of a UK-EU FTA

Why has the City’s influence been so limited?

1. Political statecraft
• Post-referendum vacuum filled by unofficial Brexit
Cabinet and ‘All Souls Group’ (Redwood, Paterson,
Baker, Jenkin)
• Hard Brexit position reflected:

1. Short-term demands of party management

(Eurosceptic backbenchers)
2. Long-term goal of building post-Brexit electoral
winning strategy (capture UKIP voters)
May v1

• City’s reputation diminished by ‘special pleading’ during

the financial crisis
• Industry ‘screams’ about Brexit viewed as
‘scaremongering’
• Hammond privately appealed to City as counter-
productive

‘We took the lesson that we needed to observe a degree of

restraint and comparative silence…There was a massive
toning down from the industry post-referendum. It wasn't
that our messages were no longer true, it was simply that
we saw only downside risk in communicating them
publicly.’ (Interview, US bank)
May v2

June 2017 General Election:

• Toning down of Brexit rhetoric, acceptance of

status quo transition, and formalised business
consultation
• But demands of party management more acute and
increased risk of no deal
• No movement on post-Brexit deal, which is ‘locked
in’ by Lancaster House speech
City influence subordinated to political statecraft:

‘There’s a disconnect between technocratic

arguments and the political arguments. We can have
all the support that we want for some kind of
pragmatic solution from the Bank of England and the
Treasury. But no one’s willing to say anything or
speak to European counterparts until such time as
they have political cover to do so.’ (Interview, UK
bank)
2. Institutional structures
• Relations based on institutionalised City-Bank-
Treasury ‘nexus’ (Moran 1991, Baker 1999)
• But Whitehall reform has challenged channels of
access:

DExEU and DIT subverts traditional mechanisms for

coordinating EU policy through CO, FCO and HMT
No.10 closed down access for business; DExEU a
‘black hole’ and ‘impenetrable’; critical voices
deliberately ‘frozen out’
‘What really gets you a good hearing is if you come in
and say that you see opportunities around Brexit and
come up with solutions to any problems.’ (Interview,
trade association)

• HMT ‘completely downgraded’, sparking turf war

with DExEU over responsibility for post-Brexit
financial services
• BoE relations strained as UK cannot be a ‘rule taker’
and views Brexit as opportunity to goldplate
regulation/strengthen supervision
City’s response:

Abandons soft Brexit:

• ‘HSBC were pushing [the EEA] as an option. But I think it was quashed
by the Bank of England who were adamant that a financial services
sector of this size could not realistically operate on that model.’

Disengagement:
• ‘Ultimately the PM was the one calling the shots with her little cabal
in No.10. We didn't see any point as a bank in asking for a meeting
with the Chancellor, let alone with anyone in No.10.’

Government capture?
• ‘We have to challenge ourselves about whether we are just being
captured by the UK government. How the government shuts FS out if
it’s not saying things that it wants to hear is a big risk. Over time the
FS sector has ended up singing to the same tune as the government.’
3. Business organisation
• Variegated impact of Brexit on sub-sectors/firm
business models generates collective action
problems

Referendum campaign:
• UK banks forced to go ‘silent’ due to electoral rules
to avoid alienating customers and ‘hedge bets’
• But US banks very vocal and made campaign
donations to official Remain campaign
Post-referendum:

• Divergence over strategy has posed a ‘massive

challenge’
• Groups competing to play a lead role:

‘What you saw was a slightly unseemly scramble in the

form of EFSCAC. Which was partly a vehicle for self-
promotion, partly a sense of desperation. It was badly
executed, not representative, and not very influential.’
(Interview, UK bank)

• US banks resisted efforts to centralise lobbying and

small firms felt marginalised = EFSCAC downgraded
Preference divergence:

1. US/EU banks (passporting) v’s UK banks (UK as rule-maker)

‘As a wholesale bank, we would rather give up the influence

over rules being made, and have access to the single market
than not…Now the Bank of England, and banks that have just
a domestic footprint, they don’t want to be rule takers and
they’re not really very fussed about the single market. So the
trade-offs are different.’ (Interview, US bank)
2. Banks (soft Brexit) v’s non-banks (‘pockets of Euroscepticism’)

• Many investment/hedge funds contributed to Leave campaign,

fund pro-Brexit FSNF, and view Brexit as opportunity to roll
back regulation (‘one third of City’)

‘As an industry, we haven’t said this is a disaster for us because

there are ways in which our industry can, on a very technical
level, overcome obstacles without access to the single market…
We have a different set of priorities [from the banks] and they
are not quite as polarised.’ (Interview, trade association)
Conclusion:
‘Politics trumps economics…’

What Brexit tells us:

1. BP is strategically (re)constructed to justify policy

decisions (Jabko 2006)
2. State’s capacity to resist BP, in face of ‘exit’ and ‘voice’, is
significant
3. Political interests take precedence over economic ones
4. Provides unique test case of the contingency of BP over
time
…but for how long?

May v1: hard Brexit shaped by political statecraft

May v2: hard Brexit ‘locked in’ by June GE

• Impact of economic downturn could harden, not soften, Brexit

• No prospect of parliamentary arithmetic changing for
foreseeable future
• Public opinion has not shifted fundamentally
• New PM would face same structural constraints