What Would Brexit Mean for the City of London?

Hi, Dominic.

Dominic Johnson: Hello.

Wall: So I thought today we can talk about Brexit.

Johnson: Well, what else is there to talk about?

Wall:  Indeed, there has been a lot of press coverage on what it would mean for the economy, but of course, one of the great assets of the U.K. is London and the Financial District. How would Brexit affect the city?

Johnson: Well, look, I think you got to look at sort of short, medium and long term ramifications of anything as serious as this. In the short-term, there will be turmoil. There is no question that Brexit plus one, everyone is going to wake up saying “What the hell do we do now?” Decisions will be delayed, no one will know about trade agreements let alone what will happen with short-term contracts and just you know, do you move office, or take on a new hire. So I think short-term very problematic.

Medium-term more complex, because I think even if we vote to stay in the European Union, you still have an echo of these huge decisions, and you saw that in Canada with the French-Canadian Provinces trying to pull out. It actually destroyed Montreal for about 20 years. And you are sort of seeing in Scotland as well. Even a year later, people are still thinking about the referendum in Scotland; Will happen again? Was the margin large enough? et cetera.

So short-term; turmoil, medium-term; echoes and ramifications, either way actually, but long-term; who knows? The big issue fund managers or financial services companies is that we were heavily regulated by the European Union not in a particularly appropriate way. So everything they do, tries to make the big bigger and probably reduces ultimate performance, whereas the U.K. sort of Anglo-Saxon modelists have a more diverse, sort of more grassroots economy.

So long-term who knows whether the city will be better off. We'll certainly be regulated, I think, more appropriately, but in the short-term, you definitely have turmoil and then medium-term complexities while you reached maybe the promised land, depending on which side you're on.

Wall: So is it then just a case of paperwork? Because the overwhelming feeling from the City has been for us to stay in. Certainly, I have had fund managers in this room saying, regardless of what I think for personal reasons, the best thing for my fund would be for us to stay in. Is it simply a case that they don’t want to do the paperwork or is there reason to suggest that actually we are best governed from the EU?

Johnson: I don’t think we are best governed from the EU in terms of financial services regulation. I think the FCA is probably the most sophisticated and appropriate regulatory body in the world for financial services. That’s not to say we are not better off in the EU.

The big issue from my point of view as a fund manager is I always thought that EU was an open market for financial services, and it isn't, which is incredible. You have to register in each country if you want to sell your goods and services, not like in the U.S. or Australia or anywhere else where you have a sort of federal complex.

And that’s a big problem. So it is very expensive to access the European Union. So many of our fund managers in London don’t bother because they just can't which is extraordinary, say, what you get is a peculiar situation where the European system is regulating companies that aren't actually doing any business in Europe per se if you exclude the U.K.

And the reason why that’s a problem is because London is not just U.K. equities being managed here, for example, I mean this is an incredibly vibrant hub of human capital from all over the world. So we are an emerging markets firm, for example, and we are based in London, which in itself quite extraordinary, but very commonplace in that sense.

So the big argument is about what Europe can do to make itself more attractive as a free market. So we would probably as a community say that we are better off having a free and open European market than coming out. But the great question you have to ask yourself is, is that possible and when is that likely to actually take place, because at the moment it's just not there.

Wall:  And of course, there are a lot of concerns about staying in, as you say, about certain products, for example, there were rumours that investment trusts would suddenly become illegal because of their fund structure, because of the things that are going on the EU. On the flipside of that, there is regulation in the U.K. that applies only to the U.K. such as RDR, we were trailblazing in that, and now France and other European countries are following.

So how do you get that balance right between the stuff that's right for the U.K. and only for the U.K. and indeed, stuff that's not right for the U.K. and saying actually, no, thanks, we don’t need that?

Johnson: Well, this is a great question. Theoretically, good regulation should be right for everyone, and one of the big issues, I think, that my industry has faced is that there are cultural differences between the regulators in the U.K. and in Europe. I think in Europe the concept of investing is seen in not such a positive way as we see it, in a way capitalism is viewed slightly differently. Their structure is much more revolving around very large banks as intermediaries; whereas in the U.K. you have financial services companies and so on, and it is much more competitive and there are far more boutiques.

So the approach that the Europeans take, I think, has frustrated many firms based in London. But as I said, I'm not negative and I'm not a campaigner actually one way or the other. I take quite a balanced view. What I ideally want to see is a true European free market for financial services because that would be damn good for Europe.

And the one way we are going to survive, is A, having a huge pool of good human capital running these sorts of businesses; and B, by having proper capital investment structures that can drive growth. So, if anything, the Brexit debate regardless of the outcome will, hopefully, drive better reforms in financial services in Europe and that’s what we would push for whatever happens.

Wall: Dominic, thank you very much.

Johnson: Great.

Wall: This is Emma Wall for Morningstar. Thank you for watching.