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CITYPERC Policy Report 2017/MAY

A SINGAPORE ON THE THAMES?

POST-BREXIT DEREGULATION IN THE UK

City Political Economy Research Centre City, University of London

[email protected] @cityperc

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— CITYPERC POLICY REPORT 2017/MAY —

A SINGAPORE ON THE THAMES?POST-BREXIT DEREGULATION IN THE UK

CITYPERC

12 May 2017


Contents

1 Executive Summary 3

2 Introduction 5ANASTASIA NESVETAILOVACity, University of London

3 Politics and the Fragile Alliance of the Brexit Vote 9RONEN PALANCity, University of London

4 Financial Regulatory Arbitrage after Brexit: How Feasible? 14STEFANO PAGLIARICity, University of London

5 The Failure of Financial Market Integration in the EU and theLooming Dominance of Wall Street 19

JOHN GRAHLUniversity of Middlesex

6 How Might the UK be Turned into a Tax Haven? 22RICHARD MURPHYCity, University of London

7 Brexit as a Catalyst for Reinventing the Eurodollar Markets 26IZABELLA KAMINSKAFinancial Times

8 Singapore-on-the-Thames: Slogan or Strategy? 28JOHN CHRISTENSENTax Justice Network

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Executive Summary

• The so-called ‘Singapore on theThames’ scenarios for post-BrexitUK tend to envisage a country thathas abandoned the red tape of EUregulations, likely adopted a unilat-eral free trade approach and intro-duced a low taxation regime for thecorporate sector.

• Technically, it is possible to makeBritain into a low corporate tax ju-risdiction. However, while the abo-lition of corporation tax would cre-ate an entirely tax-free environmentfor foreign shareholders in UK com-panies, this measure would end upincreasing taxes on UK privatelyowned businesses. In the financialsector post-Brexit, the deregulatedfintech industry is likely to evolvealong the historical path of the un-regulated Eurodollar markets, cre-ating additional risks for financialstability, transparency and the rep-utation of the UK.

• In reality, two sets of political-economic factors will influencethe UK’s economic strategy post-Brexit: domestic alliances and theinternational policy context.

– Domestically, the populist al-liance that brought aboutBrexit is likely to be short-lived. Hyper-liberals, the mi-nority element in this alliance,are unlikely to hold the bal-ance of power in the UK. Thismakes the prospects for theunregulated, low corporate taxor the tax haven model, slim.

– Internationally, both thepolitical-economic contextof global tax governance, aswell as individual interests ofmajor global players (the US,the EU and China), make the‘Singapore on the Thames’scenario an unlikely outcomefor the UK. First, Brexitwill unfold in the context ofthe emergent global profitssplit approach which aimsto align taxing with genuineeconomic substance. Thiswill inevitably undermine theviability of a tax haven-baseddevelopment strategy.

• In the financial sector, the failureof the European Capital MarketUnion project will expose Europe,including the UK, to greater depen-

3


dence on the US and dollar fund-ing. London may capitalise on anew, if limited, role: that of fa-cilitating transactions between theincreasingly dominant US financialsystem and EU companies seekingaccess to US markets. However, thecapacity of the UK to embark ona deregulatory race to the bottomis likely to be constrained by ex-traterritorial application of regula-tory rules of other major jurisdic-tions, including the US.

• The introduction of selected el-ements of the Singaporean eco-nomic model will generate tangiblemacroeconomic, political and mar-ket risks; a choice that would ag-gravate, rather than resolve, thesocio-economic problems that in-formed much of the Brexit vote. Afull re-orientation of a post-BrexitUK along the lines of the Singa-porean economic model is thereforeunlikely to come to fuition, becauseit would require a comprehensiveoverhaul of the existing political-economic structures in the UK to-wards a new system of public own-ership of assets and a high state in-terventionism.

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Introduction

ANASTASIA NESVETAILOVACity, University of London

“We would have the freedom to set thecompetitive tax rates and embrace thepolicies that would attract the world’sbest companies and biggest investors toBritain. And – if we were excluded fromaccessing the Single Market – we wouldbe free to change the basis of Britain’seconomic model”, so declared TheresaMay in her Lancaster House Speech on17 January 2017.1 Days later, Chancel-lor Phillip Hammond explained that incase Britain gets a bad deal from theEU, “we could be forced to change oureconomic model, and we will have tochange our model to regain competitive-ness […] We will change our model andwe will come back, and we will be com-petitively engaged.”2 While it is easyto dismiss such proclamations as acts ofpolitical posturing in the face of tough

1http://www.telegraph.co.uk/news/2017/01/17/theresa-mays-brexit-speech-full/

2https://www.theguardian.com/politics/2017/jan/15/philip-hammond-suggests-uk-outside-single-market-could-become-tax-haven

Brexit negotiations ahead, the businesscommunity seems very keen to stress theneed to find a new anchor for the UKeconomy post-Brexit. According to apoll conducted by PwC on the eve of theEU referendum, four-fifths of UK chiefexecutives were concerned about “over-regulation.” The Institute of Directorssaid 60% of its members want Britain toreduce the volume of “unnecessary redtape.”3

Such arguments are typically based onthree interrelated assumptions.

1. The regulatory regime associatedwith Brussels and the European socialmodel of capitalism have been a con-straint on UK businesses. According toOpen Europe,4 outside the EU it wouldbe “politically feasible” for the UK tosave £12.8bn a year, through deregu-lating areas such as employment rights,health and safety, climate change and fi-nancial services.”5 Brexit opens up theopportunity to remove or ease the regu-lations imposed by the EU, thus makingthe UK business environment more ap-

3https://www.ft.com/content/6e9f3e5e-12c9-11e6-839f-2922947098f0

4A think tank associated with Eurosceptics.5https://www.ft.com/content/

6e9f3e5e-12c9-11e6-839f-2922947098f0

5

http://www.telegraph.co.uk/news/2017/01/17/theresa-mays-brexit-speech-full/



https://www.theguardian.com/politics/2017/jan/15/philip-hammond-suggests-uk-outside-single-market-could-become-tax-haven




https://www.ft.com/content/6e9f3e5e-12c9-11e6-839f-2922947098f0





INTRODUCTION A NESVETAILOVA

pealing to global capital and more sup-portive of its domestic companies.

2. In the financial financial servicessector specifically, the post-2008 finan-cial regulations imposed by the EUare stifling innovation, productivity andgrowth. Brexit offers an opportunity tore-cast the place of the City of Londonas an agile, low-regulation hub for globalcapital that would be as competitive asother low-regulation niches such as HongKong and Singapore. Post-Brexit UKcould even become a “serious competi-tor” to Switzerland as a “low-tax busi-ness location” in Europe.6

3. As a concrete example of a new modelof economic integration for the UK, itis the Singapore model of a dynamicand open economy - defined by unilat-eral free trade approach and a low taxregime – that is being cited most often.A donor to the Leave.eu campaign andUK fund manager Peter Hargreaves ar-gued that Singapore presents the bestbusiness model for the newly ‘indepen-dent UK.”7 Susan Schwab, a former chieftrade official President Bush Jr, sug-gested that the UK could become the“Singapore of the West”, because post-Brexit it was in a “unique position tocreate a whole new template for freetrade agreements.”8

6https://www.ft.com/content/2354d3c0-0d8a-11e7-b030-768954394623

7http://www.telegraph.co.uk/news/2017/01/25/post-brexit-britain-could-singapore-effective-model-twenty-first/

8http://www.theaustralian.com.au/news/world/the-times/after-brexit-

This report exposes all three sets of as-sumptions as (1) mistaken and (2) inap-plicable to the case of the UK. There aretwo major reasons for this.

First, at the level of the global politi-cal economy, Brexit transforms the UKfrom being a rule-giver to being a rule-taker. This transformation imposes itsown set of risks and constraints. Re-gardless of the specifics of the final dealwith the EU (if any), the UK will haveto abide by most global standards andrules governing major continental mar-kets of North America, the EU andAsia, including China. Any pursuit of aderegulatory niche strategy will be im-perilled by the political preferences ofthese major global players. And whilein the financial sector specifically, do-mestic political and international insti-tutional constraints may in fact appearless effective (see the pieces by Pagliariand Grahl ), UK’s capacity to pursue astrategy of competitive deregulation islikely to be constrained by other juris-dictions – primarily the US – “by moreextraterritorial application of their ownregulatory rules” (Pagliari).

Second, perhaps the biggest illusionabout a ‘Singapore on the Thames’ vi-sion for post-Brexit UK is Singapore it-self. The political economy of Singaporeis based on principles that are vastly dif-ferent to those of the UK. Singapore isa founding member of ASEAN and hasbeen an avid promoter of regional eco-

britain-could-be-the-new-singapore-says-trade-veteran/news-story/f9104ed9af8aa1f8b5aaf8a90bfb8a7f

6

https://www.ft.com/content/2354d3c0-0d8a-11e7-b030-768954394623

https://www.ft.com/content/2354d3c0-0d8a-11e7-b030-768954394623

http://www.telegraph.co.uk/news/2017/01/25/post-brexit-britain-could-singapore-effective-model-twenty-first/




http://www.theaustralian.com.au/news/world/the-times/after-brexit-britain-could-be-the-new-singapore-says-trade-veteran/news-story/f9104ed9af8aa1f8b5aaf8a90bfb8a7f


























nomic integration in Asia. Singaporeis a uniquely open economy: up to athird of its workforce at present consistsof migrant workers; Singapore’s liber-alised financial centre, while among thetop five in the world, caters primarilyto the regional economy of Asia. Mostcrucially perhaps, the underlying assetstructure of Singapore is unique: upto 90% of housing stock is government-owned and rents are strictly controlledby the state.

In fact, “far from being a poster-child forfree-market globalisation the Singaporestate is unapologetically intervention-ist […]The founding articles of the Peo-ples Action Party were cribbed from theBritish Labour Party, and the legacy ofthat post-war social democratic momentremains foundational to the success oftwenty-first century Singapore.”9

As Scott Antony explains further in theNew Statesman, for the ‘Singapore onthe Thames’ scenario to become a suc-cess, the British state “would not onlyhave to reappraise its attitude to tech-nocratic governance in the civil service,revolutionise its housing policies and in-tervene in industrial development, and itwould have to develop a completely newtype of immigration policy.”10

It is possible that individual elementsof this change – such as immigration orhousing policies - may well feature in

9http://www.newstatesman.com/politics/staggers/2017/02/heres-what-it-would-really-mean-if-britain-was-singapore

10ibid.

post-Brexit policy rhetoric, yet it is hardto imagine that a comprehensive over-haul of the UK’s political economy maybe achieved in the short and mediumterm. Not least because it will requirea fundamental change in the structureof the UK’s capital assets and most cru-cially, land ownership.11

In other words, the idea of replicatingor even adapting the Singapore modelin today’s UK – with a population of 65million, an economy dominated by theservice sector and marked by low labourproductivity,12 and a financial centretuned to cater to the global system bybeing, until now, an EU-protected ‘in-shore offshore’ hub for global capital –is, quite simply, a non-starter.

In this report, we focus on the political,economic, fiscal and financial aspects ofthe UK economic system and the dilem-mas of economic integration facing thecountry. We explain why a Singapore onthe Thames model for post-Brexit UK– although technically, a possibility - isnot plausible. The report is organised asfollows.

Ronen Palan examines the fragile al-liance of the Brexit vote and argues thatthe political will necessary to pursue alow-taxation deregulatory niche strategyin post-Brexit UK is unlikely to materi-alise. Stefano Pagliari examines the pol-icy constraints on post-Brexit arbitrage

11Ryan-Collins, J, et al 2017, Rethinking theEconomics of Land and Housing, London: ZedBooks.

12https://www.ft.com/article-UK-labour-productivity-martin-wolf

7

http://www.newstatesman.com/politics/staggers/2017/02/heres-what-it-would-really-mean-if-britain-was-singapore






in the financial sector, and finds thatit is the national interests of the majorglobal players – mainly the US, the EUand China- that will facilitate the ex-traterritorial application of national reg-ulations and thus prevent the UK frombecoming a deregulated haven. JohnGrahl brings the European dimension tothis analysis, pointing at the prospect ofover-dependence on the US and dollarfunding following the failure of the EUcapital market integration project.

Two case studies follow, showing thatthe technical implementation of a lowtaxation or low regulation post-Brexitstrategy, while possible, will imposevery high risks on domestic companiesand public services by way of additionaltax (Murphy) and may generate ad-ditional risks and costs in the finan-cial sector by enabling further growthof grey and illicit financial innova-tions, such as initial token offerings(ITOs) currently spreading in the fin-tech industry (Kiminska). John Chris-tensen concludes our report arguingthat the rhetoric of Singapore-on-the-Thames does not appear to match upto the reality of the likely post-Brexitfinancial services market.

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Politics and the Fragile Alliance of the Brexit Vote

RONEN PALANCity, University of London

The idea of a ‘Singapore on the Thames’is not a well-thought out set of pol-icy ideas for post-Brexit Britain. It isnot based on anything resembling a se-rious analysis of the causes (and pit-falls) of the relative success of Singa-pore of Hong Kong and/or whether thecity-state model applicable in any wayto a middle size economic power with a60+ million population. Rather, ‘Sin-gapore on the Thames’ is a politicalproject and an ideological roadmap forpost-Brexit Britain driven by certaingroups of vested interests that had mostprobably been supporting a Brexit fora long time, or at the very least sincethe signing of the Maastricht treaty.This essay centres on the politics of thisproject.

Strictly speaking, the tax haven strat-egy can work only for very small juris-dictions. Tax havens aim to garner in-come through extremely high volume ofactivity licensed at low costs or taxed atvery low levels. But as there are manytax havens in the world, competition be-

tween them is fierce. Financial assetsregistered at the Cayman Island amountfor about 400 times its GDP. The off-shore financial centre generates certainincome indirectly, but even such incomeis not enough to maintain the govern-ment of a nation of 55,000. Despite be-ing the fifth largest financial centre inthe world, The Cayman Island’s govern-ment is practically insolvent.1 Althoughthe UK does have tax haven–like dimen-sions (which I discuss below), a fully-fledged tax haven strategy is not a viablepolicy.

The idea of a Singapore on the Thamesrefers, most probably, to a return to theheady days of the late 1950s, wherebythrough the establishment of the Euro-markets, the City of London had be-come in effect an offshore financial cen-tre, subject to minimal levels of reg-ulation. The idea may also refer tolow or very low corporate taxation, per-haps even the abolishment of corporatetax altogether (See Murphy’s contribu-tion to this report). But what are theprospects for such policies to succeed?Not much. I believe Singapore on the

1https://www.theguardian.com/world/2009/sep/01/cayman-islands-tax-haven-bankrupt

9

https://www.theguardian.com/world/2009/sep/01/cayman-islands-tax-haven-bankrupt




FRAGILE ALLIANCE R PALAN

Thames is more of a fantasy then a likelyreality.

The Brexit campaign was successfulin bringing together a tentative al-liance of two disparate set of politi-cal projects and ideological positionsunited against the so-called ‘metropoli-tan elites.’ One group in this al-liance, undoubtedly a minority of voters,consists of hyper-liberals: pro-businessand anti-regulation, including corpo-rate taxation (which is viewed by manyeconomists, incorrectly in my view, as aform of regulation and a stealth tax onconsumers). This group considers thehost of new post-2007 financial regula-tions introduced by the EU and the USAas unnecessary and market-distorting.They view the EU as too intervention-ist, anti-business and anti-City. Theother group, the majority of Brexit vot-ers, appear to have taken a diametri-cally opposing view. These voters areconcerned with ‘globalisation’, associ-ated with intensified immigration, ris-ing inequalities, unrestricted power of fi-nance, and so on. The alliance of thesetwo groups is now called ‘populism’: itbacked Trump and other populist forcesin the world.

The two groups share little in commonexcept for their dislike of the ‘establish-ment’ or the metropolitan elites, whichthey associate, in the UK, with West-minster and pro-EU forces. In the USthe ‘establishment’ is associated withthe UN, the transatlantic trade and in-vestment partnership, and the powerof Wall Street. But the establishment

was never defined very well. I willtry and do so now. Contrary to com-mon assumptions about unfettered ne-oliberalism, around the turn of the cen-tury a new established position evolvedunder the Clinton administration andsupported by the G7 groups of na-tions. This view can be described as ‘re-sponsible globalisation’. The G7 meet-ing in Lyon, France, on June 27–29,1996 established certain principles of re-sponsible globalisation. The G7 taskedthe OECD with dealing, among otherthings, with problems of fiscal leakages.The OECD published in 1998 a reporttitled ‘Harmful Tax Competition: AnEmerging Global Issue.’ The report an-ticipated many of the issues that haveled to the rise of populism. It arguedthat globalisation must be legitimised,and for that to happen, its benefits mustbe distributed more evenly around theglobe. Harmful tax competition perpe-trated by tax havens was singled out asundermining the legitimacy of globali-sation. Since then, and in particular,following the financial crisis of 2007-8,there had been a concerted campaignled by the US, the EU and the OECDagainst tax abuse.

This background information is relevantfor two reasons. First, the tentativepopulist alliance at the heart of theBrexit vote appears singularly tentativein the UK. Such alliances do not appearto be built on solid foundations, and arelikely to be pulled in conflicting direc-tions. But some of these alliances havemanaged to survive in the past decadeor so in countries like Italy under Berlus-

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coni, Israel under Netanyahu, Turkeyunder Erdogan or even Russia underPutin. Such alliances appear to surviveover time under three conditions:

1. A charismatic leader

2. who controls the media

3. and who plays up a heightenedsense of insecurity or threat of war.

The conditions do not seem salient inthe case of the UK. It is debatable, tobegin with, whether Britain possesses acharismatic leader. Boris Johnson wassupposed to be the one, but he failedmiserably at the first hurdle. TheresaMay does not appear as a likely charis-matic leader, although perceptions maychange. The media in the UK is still rel-atively independent and decentralised –although the attempt by Rupert Mur-doch to gain control over Sky may bea significant move in the direction (andthe attacks against the BBC for its ‘anti-Brexit’ bias). Indeed, in the US Trumpis trying to wrest control of the mediaby discrediting serious media outlets as‘fake news.’ Netanyahu is engaged invigorous attempt to gain control overpublic and private media outlets in Is-rael. A heightened sense of insecurityis currently part of the favoured tacticsof the current President of the UnitedStates, who, within the first 100 daysof taking office, has managed to bombYemen and Syria and is now threaten-ing North Korea as well. There is nosign that UK public is interested in warand violence right now.

My analysis suggests, therefore, that thepopulist alliance that gave us Brexitis unlikely to survive for long in theUK. Without those three conditions, theminority in this alliance – the hyper-liberals such as Fox or Johnson – are un-likely, in my view, to hold the balance ofpower in the UK. Hence, the prospectsfor the unregulated, low corporate tax(which, as Richard Murphy shows in thisreport, will lead to higher taxation andlower services to the rest of population),or the tax haven model, are slim. Thedomestic political context does not seemfor the time being to favour the hyper-liberal developmental model.

Second, the international environmentmay not allow Britain to adopt the Sin-gaporean model either. My point goesto the very heart of the argument aboutthe so-called sovereignty gain achievedby Britain following Brexit. In the1990s, globalisation was assumed to sig-nal the decline of the state. But the 21stcentury has witnessed the rise of verylarge political entities as the controllingelements of globalisation, or as I callthem, the rule-givers. The rule-giversconsist of the largest political organi-sations, including the US (representingNAFTA), the EU, China and – we cananticipate – India joining this exclusivegroup within a decade or so. (Rus-sia is making plans for joining as wellthrough the formation of Eurasia; theprospects for Brazil leading a similar al-liance in Latin America are currentlyslim). These rule-giving political enti-ties are setting the rules of globalisa-tion: trade and investment rules, fiscal

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and accounting rules and so on. Theselarge political entities do not need tocompete with each other in order to at-tract foreign investment or adopt pro-business policies: no large firm can af-ford to withdraw from any of these largemarkets.

With Brexit, Britain is joining the rankof the rule-takers, and that means thatits ability to pursue independent setof policies, particularly during a periodthat it enters trade negotiations with thekey rule-givers from a point of weak-ness, is highly circumscribed. To putit bluntly, Britain could develop the so-called Singaporean model, provided therule-givers will allow it to do so. The EUhas made it very clear that it will pre-vent the UK from pursuing this path.The EU could, and probably would,introduce various policies that preventfirms or financial institutions that mayconsider locating in the UK for tax andregulatory purposes from accessing theEU market. If this will be the case, thenthe UK will be far less attractive to firmsand financial institutions because theywill be barred from the second largestmarket in the world.

The UK, therefore, relies ever more onthe consent of US for doing so. It wasclear that under the Obama adminis-tration, or had Hilary Clinton won, theUS would not have permitted the UKto pursue a hyper-liberal set of policiesthat could harm in any way the US’ fis-cal state or banking and financial regula-tions. Both the EU and Obama/Clintonshared the ‘responsible globalisation’ vi-

sion of the world. As the US FATCAtemplate shows, if the UK ever devel-oped into a tax haven, UK based or evenUK linked firms or financial institutionscould be barred from participating inthe US economy. Without access to theEU and the US markets, UK would notbe an attractive place.

The election of Donald Trump changesthings quite drastically, but for the timebeing, entirely unpredictably. Trump ispro-Brexit, but how and why he is go-ing to support post-Brexit Britain is notmade very clear. Whereas Trump andhis associates, as businessmen, may liketo see the UK developing into a large taxhaven for their own private businesses, itis difficult to see how to US would gainfrom Britain pursuing the Singaporeanmodel. Trump’s ‘America first’ is pred-icated on the assumption that businessshould return to the US, not move totake advantage of tax or regulatory laxenvironments offered by other states, in-cluding the UK. The Trump adminis-tration is about to embark on low taxpolicy in the US, combined with mas-sive infrastructural expansion. It is dif-ficult to see why the US would supportfiscal leakages perpetrated through theUK.

It is still the case that in the generalconfusion that surrounds Brexit, and ina period of high misrepresentations anda climate of distrust of ‘experts’, anddue to threat of relocation, the financialcentre of London will be able to securelow regulation, perhaps even low taxa-tion, to counteract the move of many

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of its institutions the continent or Wallstreet.

The UK holds on to domicile rules thatfavour the very rich born outside theUK. The UK also developed facilitiessuch as the agency company, which isa tax structure using a UK company asan agent for an offshore company. In2011, the UK removed taxation on theflourishing wealth management industry(tax on the corporate entities, not theindividuals, serving perhaps as the tem-plate for the removal of corporate taxalto her), but it is difficult to see how theUK will be able to develop such policiesmore widely and fully over a long periodof time in the current domestic and in-ternational political climate.

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Financial Regulatory Arbitrage after Brexit: HowFeasible?

STEFANO PAGLIARICity, University of London

One of the benefits to come from Brexitaccording to different policymakers andfinancial industry representatives, isthat Britain can ‘take back control’ overthe way its financial services are beingregulated. The process of deepening in-tegration of European financial servicessince the 1990s has led a greater shareof UK financial regulatory policies to beset in Brussels. While Britain has of-ten been regarded as highly successfulin shaping the design of the emergingEuropean financial regulatory architec-ture, Brexit has been heralded as an op-portunity to lower the regulatory bur-den imposed by EU financial rules overthe attractiveness of the City of Lon-don. Leaving considerations of whetherthis strategy would be desirable aside,an important question is to what extentis financial regulatory arbitrage a fea-sible strategy for the UK after Brexit.In other words, what are the constraintsupon the capacity of UK authorities torekindle the competitiveness of the City

of London by chart an independent fi-nancial regulatory path?

A first set of potential constraints onthe capacity of UK authorities to pursuea strategy of regulatory arbitrage couldcome from the domestic context. Thedesire of policymakers to scale back es-tablished policies often runs into the op-position of those groups are the mainbeneficiaries of those policies. For in-stance, the literature on the resilience ofthe welfare state suggests that attemptsto turn the British economy into a lowtax jurisdictions are likely to be opposedby the numerous groups that would findthemselves on the losing end from thereduction in spending required by thestrategy.

In the case of financial regulatory poli-cies, however, the domestic oppositionto a relaxation of financial rules is un-likely to be as strong given the differ-ent distribution of winners and losersthat are arise from the two policies. At-tempts to relax financial regulatory re-quirements are likely to be supported bywide segments of the financial industrythat are the beneficiaries of this strat-egy. On the contrary, the fact that

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REGULATORY ARBITRAGE S PAGLIARI

the costs generated by this strategy interms of higher financial vulnerabilityare likely to be widespread means thatthe financial industry will face only lim-ited mobilisation from stakeholders op-posing this strategy. Moreover, as thememories of the financial crisis fade,elected officials have little gain from op-posing a relaxation of financial rulesgiven the limited public salience of fi-nancial regulatory policies.1

A second set of constraints comes fromthe international institutional and legalframework within which British authori-ties will find themselves operating. Overthe recent years international financialregulatory institutions, such as the Fi-nancial Stability Board, InternationalOrganisation of Securities Commissions,and Basel Committee have not only in-creased their standard-setting activities,but also increased their monitoring ofthe extent to which national authoritiescomply with these international stan-dards. As a member of these bodies,the UK will continue to have its financialregulatory policies scrutinised through avariety of thematic and country-basedpeer reviews from the FSB, regulatormonitoring exercises conducted by the

1The opposition to regulatory arbitrage isparticularly likely to be low in the case ofthose regulatory policies where British authori-ties have found themselves trying to scale backthe scope of more stringent rules supported byFrance and Germany. On the contrary, poli-cymakers are less likely to support a relaxationof regulatory policies where they have investedsignificant capital during the crisis (e.g. higherbanking capital requirements or structural re-forms in the banking industry).

Basel Committee, IOSCO, and FSBon the implementation of key interna-tional standards, as well as its finan-cial regulatory system subject to thescrutiny by the IMF through its regu-lar Article IV consultations, the Finan-cial Sector Assessment Program (FSAP)and the Reports on the Observance ofStandards and Codes (ROSC). However,the constraints posed by these monitor-ing mechanisms upon the UK financialregulatory policies should not be over-stated. Unlike the multilateral trad-ing regime where deviations from WTOcommitments could result in costly le-gal disputes and retaliatory measuresby other countries, the sanctions as-sociated with deviation from interna-tional financial standards remain mostlya form of ‘naming and shaming’. Thereputational costs associated with be-ing red-flagged by an international reg-ulatory body as partially non-compliantwith existing standards have so far re-mained negligible. In sum, similarly tothe domestic context, also internationalinstitutions and set of international eco-nomic rules are unlikely to place signif-icant constrains on the capacity of UKauthorities to engage in regulatory arbi-trage.

There is however a third domain whereUK authorities are likely to face greaterpush-backs if they were to opt for astrategy of regulatory arbitrage: theinter-state context. The internationalnature of most financial activities meansthat the decision of a country to re-lax domestic regulatory policies in or-der to increase the competitiveness of

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its financial industry is likely to gen-erate a response from other countries.In particular, it is possible to identifytwo competing types of responses. First,other countries may respond to the at-tempt of British authorities to relax reg-ulatory rules by responding in a sim-ilar way. This type of “competitivederegulation” has been a key driver ofmany of the regulatory changes in thedecade before the global financial crisisof 2008, where the battle between Lon-don and New York for primacy in in-ternational financial markets providedthe justification for many deregulatorypolicies introduced in the US over the1990s, as well as for the promotion of‘soft touch’ regulation in the UK. Whilethe financial crisis has brought this dy-namic to a halt and most jurisdictionshave engaged into international coopera-tive attempts at reregulating their finan-cial sectors, recent developments suggestthat competitive deregulation may be onthe rise again. For instance, not long af-ter being elected, US President Trumphas signed an executive order calling forsteps to “enable American companies tobe competitive with foreign firms in do-mestic & foreign markets”. This posi-tion was echoed by US regulatory au-thorities. The new chief regulator forUS derivatives markets Chris Giancarlohas commented “Championing Ameri-can markets means no longer asking U.S.market participants to go it alone andtake it on the chin in implementationof global regulatory reform”. Even be-fore this, different jurisdictions in EastAsia have engaged in different degrees of

‘cherry-picking’ and delays in implemen-tation of elements of the G20 agendain East Asia that can be explained inpart by the attempt to attract finan-cial activities and bolster the competi-tive position of their financial centres.The extent to which other major com-petitors abandon some of the post-crisisregulatory commitments in order to en-hance the competitiveness of their re-spective financial industries will influ-ence the likelihood that the UK will en-gage in a similar strategy.

At the same time, other countries mayalso respond to a strategy of competitivederegulation by adopting defensive mea-sures to limit the impact of this strategyover their own markets. As the formerhead of the CFTC Gary Gensler wrotein 2012 commenting on the case of the“London Whale” (losses undertaken byJP Morgan from its London subsidiary),“trades overseas can quickly reverberatewith losses coming back into the US.”The possibility that US derivative deal-ers may escape the regulatory require-ments imposed by Dodd-Frank by re-routing their derivatives trades throughoverseas affiliates based in London andother jurisdictions has led US authori-ties increasingly expand the territorialscope of US rules to incorporate also ac-tivities conducted by firms that were op-erating outside of the US jurisdiction.For instance, the CFTC has expandedthe scope of the new derivatives rulesto cover all transactions ”arranged, ne-gotiated or executed” by U.S. agents,even if conducted through a foreign af-filiate or on behalf of an overseas client.

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Along the same lines, the new US rulesgoverning trading platforms on whichstandardised OTC derivatives are beingtraded (SEF) includes a provision re-quiring all overseas trading platform onwhich US persons trade to comply withUS rules. Along the same lines, alsothe regulation introduced in the Euro-pean Union to govern derivatives mar-kets (EMIR) has been criticised for itsextraterritorial scope. From this per-spective, the capacity of the UK toincrease the competitiveness of its fi-nancial industry by lowering regulatorystandards could be constrained by moreextraterritorial application of their ownregulatory rules undertaken by other ju-risdictions. Both the EU and the USregulatory frameworks introduced afterthe crisis have included mutual recog-nition tools (called ‘substituted compli-ance’ in the US and ‘equivalence andrecognition’ in the EU) to allow for-eign actors to comply only with foreignrules if those rules were found to be sub-stantially similar in delivering the out-comes that regulators seek. However,in practice the application of these mu-tual recognition tools has been limitedand both the EU and US have used thethreat of denying this mutual recogni-tion in order to demand changes in theregulatory policies of a third country.For instance, during the implementationof European derivatives rules, the Euro-pean Commission has for a long periodwithheld the recognition of US rules forclearinghouses as equivalent to the Eu-ropean ones, on the ground that theirmargin requirements for cleared swaps

did not meet the same level of stringencyas the EU rules. The protracted transat-lantic dispute that emerged was resolvedonly when in 2016 US authorities agreedtheir clearinghouses should make tar-geted amendments to their margin rulesto bring them into alignment with theEMIR rules, as a condition of equiva-lence and EU market access.

The importance of maintaining access tothe EU market for the City of Londongives the EU significant levers to preventa regulatory race to the bottom by UKauthorities by the threat of withholdingthe recognition of UK rules as equivalentto those of the EU.2

Overall, while the domestic context andinternational legal environment are un-likely to exercise significant constraintsover the capacity of the UK to engagein regulatory arbitrage, a more signifi-

2This threat is particularly crucial in thecase of the clearing of Euro-denominatedderivatives. The fact that the large majority ofEZ-denominated derivatives are cleared in Lon-don has been regarded by the ECB as a threatto its mandate of ensuring financial stability inthe Eurozone. As the former governor of theBank of France Christian Noyer stated in 2016,“with the UK outside the EU, maintaining thehyper-concentration of EU financial activity inLondon would be a permanent threat to our fi-nancial stability. No other major sovereign ormonetary zone would allow itself to rely as pre-dominantly on an offshore centre”. While in thepast the UK has been able to challenge the im-position of location requirements by the ECBin front of the European Court of Justice, af-ter Brexit the UK will remain more vulnerableto the threat of the equivalence of its regula-tory framework being denied by the EuropeanCommission in the case this deviated from EUrules.

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cant constraint is posed by the reactionof the EU and the US, and the extentto which these jurisdictions will eithertake measures to counter attempts atregulatory arbitrage or rather try to en-gage in a process of competitive deregu-lation.

18


The Failure of Financial Market Integration in theEU and the Looming Dominance of Wall Street

JOHN GRAHLUniversity of Middlesex

The EU’s approach to capital market in-tegration falls into four phases – eachending in failure. To begin with theproblem was hardly seen. In most EUmember states finance was dominatedby bank credit which was allocated ona relational basis. Integration seemedto be essentially a matter of banking di-rectives, although these did not lead tomuch in the way of cross-border finan-cial activity. Different financial mod-els had developed in different countries.In Germany, for instance, cross-holdingsof equity supported industrial relation-ships; state-controlled finance was im-portant in France; there were regionalfinancial systems in parts of Italy whichproved effective in development. How-ever, it was just this diversity and theclose adaptation to national or regionalcircumstances which turned out to be anobstacle – EU finance could not easilygrow and expand beyond its home ter-ritories. The more anonymous, “arms-length”, financial connections of US se-

curity markets, could though, be ex-tended universally on the basis that“anyone can play” (obviously, providedthey had dollars).

By the turn of the century the stag-nation of EU output and productivity,relative to those in the US, had led toa virtual moral panic among Europeanleaders. America’s economic dynamism– in any case greatly exaggerated – wasattributed to the scale and fluidity ofits markets, especially its capital mar-kets, ignoring the important role of sup-portive macroeconomic policies in theUS. The imitation of US financial prac-tices became a central theme in the Lis-bon agenda, the EU’s programme for thefirst decade of the new century – aimed,in the words of the Commission, at mak-ing the EU “the easiest and cheapestplace to do business in the world.” It waslearned subsequently, and hardly for thefirst time, that cheap and easy businessis not always good business. The capitalmarket programmes associated with theLisbon agenda were entrusted to D.-G.Internal Market which, under the force-ful leadership first of Frits Bolkesteinthen of Charlie McCreevy, adopted aradically deregulatory approach. Two

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key Bolkestein initiatives – a completeliberalisation of mergers and takeoversand a service sector directive whichwould have put the regulatory regimes ofall member states into competition witheach other – ran into intense politicalresistance and were in the end adoptedonly in diluted form. Another scheme– to deregulate EU mortgage marketsand stimulate the provision of sub-primemortgages – was aborted after the sub-prime crash in the US.

However, in a deregulatory climate, andenthused by the euphoric response of UScapital markets to the monetary easingknown as the “Greenspan put”, Euro-pean banks built up massive exposuresto the US economy. Contrary to Com-mission claims these banks had neitherwell diversified assets nor adequate cap-ital buffers – in fact they were evenmore leveraged than their US counter-parts and held even greater amounts ofdubious or “toxic” assets. There fol-lowed acute banking crises across theEU, leading to immense bailouts at theexpense of the taxpayer before triggeringthe latent crisis of the eurozone, whichhad itself been disguised only by spec-ulative capital flows into unbalancedeconomies.

The deregulatory approach to financialintegration then gave way to intense ef-forts to compensate for the absence ofthe horse by attaching multiple boltsand padlocks to the stable door. Fi-nancial integration now meant the re-inforcement of EU-wide regulatory bod-ies for banks, security markets and fund

managers, the introduction of a macro-prudential board to be located at theECB and no less than forty pieces of leg-islation to check the adventures of banksand other financial businesses which hadin fact lost much of their erstwhile ap-petite for risk.

The phase of rapid, and in some casesdysfunctional, re-regulation was eventu-ally followed to a renewed effort to buildintegrated EU security markets. TheCommission feels its legitimacy weaken-ing because of very high levels of unem-ployment, especially among the young,and low economic growth. Financial fac-tors are not, in reality, the main cause ofthe malaise; austerity drives across theEU and the uncorrected malfunctionsof the monetary union are more impor-tant factors. However, unable to ad-dress these central problems, the Com-mission eagerly set about tackling a sec-ondary one with the project of a cap-ital markets union. Renewed enthu-siasm for security markets reflects im-patience with the cautious, defensive,post-crash stance of the banking sec-tors which still dominate financial sys-tems in most member states. It seemsprobable, also, that the capital marketsproject represents a certain shift of em-phasis away from the eurozone towardsthe single market as a potential sourceof economic dynamism. The promotionof capital markets was clearly seen asenhancing the role of the City of Lon-don, site of the largest and most liquidmarkets in the EU. The appointmentof British Commissioner Jonathan Hillto lead the integration drive symbolised

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this new centrality of the City within EUpolicy.

It seems unlikely that the capital mar-kets project would have got very fareven without Brexit. There is a chroniclack of marketable securities, especiallylow-risk ones, within the EU. Stag-nation holds the private sector backfrom seeking funds while the attemptto reduce public debt through the Ger-man Schuldenbremse and similar poli-cies elsewhere has led to a severe short-age of safe, government-issued, financialassets. This shortage provoked an as-tonishing disruption of EU debt mar-kets in December 2016, with banks andwealth-holders prepared to accept inter-est rates of minus 6% in order to gethold of good quality securities. The eu-rozone’s problems became an opportu-nity for US finance as any agent ableto advance dollars could swap them intoeuros on extremely favourable terms. Itseems likely that eurozone finance willbecome increasingly dependent on thedollar-based system to provide the liq-uidity which it is unable to supply on anautonomous basis. Integration will con-tinue, but in an indirect, subordinatedform, with links between EU agents me-diated through US ones.

The future of the City of London nowtherefore depends on how successfullyit can intermediate US-eurozone rela-tions. It remains an irony that, just asEU leaders were preparing an enhancedrole for the British financial sector, anelectoral coup-de-tête moved London outof the EU. Hill’s resignation immedi-

ately thereafter could signal the death ofthe project with which he was charged.Post-Brexit, the City of London can nolonger hope to become the Europeanequivalent of Wall Street – centre ofa massive financial system. However,it may still prosper in a more limitedrole – facilitating links and transactionsbetween the increasingly dominant USfinancial system and EU corporationsseeking access to US markets.

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How Might the UK be Turned into a Tax Haven?

RICHARD MURPHYCity, University of London

The press has been much taken with theidea that the UK might be turned intoa tax haven in the case of a hard Brexit.Philip Hammond has hinted at the pos-sibility.1 The rhetoric of the govern-ment has been to suggest that the UKwill continue to be ‘open for business’; aphrase first created by George Osbornein 2010 when launching his own corpo-ration tax reforms.2 These reduced thelarge company corporation tax rate from28% to 20%, with it forecast to fall to17%. With the concurrent changes inthe laws on the tax base that meant thatterritorial taxation is now a de facto re-ality in the UK the question has to beasked as to what more the UK can do onthis issue, especially when noting thatSingapore has a 15% territorially basedcorporation tax system?

1See https://www.theguardian.com/politics/2017/jan/15/philip-hammond-suggests-uk-outside-single-market-could-become-tax-haven accessed 21-4-17

2See https://www.gov.uk/government/publications/the-corporation-tax-road-map accessed 21-4-2017

The broad answer would appear to be‘not a lot’ unless the government is will-ing to be especially bold in its attemptto create an even more relaxed tax en-vironment for some businesses than theUK already provides. And I stress, onlyboldness would work because so longas the UK has a corporation tax thenits room for manoeuvre is constrainedeither by OECD rules and double taxagreements, to which the UK is commit-ted, or by existing facts such as the al-ready low tax rates, generous tax baseand de facto weak regulation of com-panies that mean that the UK is thecentre of tax abuse to which the gov-ernment turns a deliberate blind eye.There is then not much more the gov-ernment can apparently deliver in thisarea unless, I suggest, it decides to dothe one thing that no one expects, andthat would be to abolish corporation taxaltogether.

Abolishing corporation tax has, ofcourse, long been a favourite ideaamongst right wing think tanks thereisn’t a Treasury minister who cannotbe aware of that.3 The appeal to

3See for example https://iea.org.uk/publications/why-corporation-tax-should-be-scrapped/ accessed 21-4-2017

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UK TAX HAVEN R MURPHY

them is obvious: an apparent lifting ofthe ‘burden’ on business would happenovernight. The UK would signal in theclearest possible way that it was ‘openfor business’, even if of the tax haven va-riety, and the right wing would get whatthey want because such a move would letthe UK claim it had the friendliest cor-poration tax regime of any major statein the world.

Appearances can, however, be decep-tive. Corporation tax is expected toraise £52 billion in revenue this taxyear.4 That may be just 7.5% of totaltax revenues,5 but when the governmentstill wishes to pursue balanced budgetsthat means that there have to either besubstantial tax cuts as a result of thisabolition or, like so many tax changes inrecent years, the abolition would have tobe more like a sleight of hand. The latteris more likely: cuts are already provingto be hard to find and politically diffi-cult to deliver.

This sleight of hand is possible. Theabolition of corporation tax would notcreate a tax-free panacea in the UK.What it would instead create is an en-tirely tax-free environment for foreignshareholders in UK companies, which isthe tax haven bit of the idea. I however,also strongly suspect that abolishingcorporation tax would actually increasetaxes on UK privately owned businesses.This would be because the obvious move

4https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597467/spring_budget_2017_web.pdf page 4 accessed 21-4-17

5ibid.

for the UK government to make whenabolishing corporation tax would be todeem that the UK based owners of UKbased companies are the actual literalowners of the profits that those compa-nies in which they have shareholdingsmake, and then require that those UKbased shareholders be charged to incometax at their highest marginal rate on thisincome, maybe whether they have actu-ally received that income, or not.

The argument for imposing this chargeon UK resident taxpayers would bethreefold. First, it would be said thatthis stops tax avoidance. There is somelogic to this. The currently attractivearbitrage of shifting income into com-panies to avoid income tax might end.Second, it would be argued that the self-employed do not pay enough tax now (aline that is already rolling out, maybein anticipation of this move) and thatthis move just levels the playing field.Third, it would be argued that this isa tax simplification, which it will bein the same sense that this governmentsays that submitting six tax returns ayear in the future is a tax simplifica-tion compared to submitting one as atpresent.6

A rhetoric to support a change thatdoes, therefore, make the UK a taxhaven for foreign investors who wouldsuffer no tax charge at all on the profitsthat they earn in this country whilst in-creasing the tax charge ion UK resident

6http://www.taxresearch.org.uk/Blog/2017/04/06/the-uks-tax-simplification-now-means-submitting-six-tax-returns-a-year-not-one/ accessed 21-4-17

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shareholders to make good the revenuelost as a result could be created.

I also stress that technically the schemeis possible. It is based on what werecalled close company tax laws that werecommonly used until the mid-1980s.7The Crown Dependencies all tried suchschemes a decade ago before discover-ing they were not legal in EU law ifthey only applied to resident people (asI am sure any UK scheme would do).8This obstacle may, of course, now fallaway.

In addition, the books may still bal-ance despite this change. With the newtax charge on UK resident individualsthat I note and with a basic rate, non-refundable, tax charge being requiredof UK charities and pension funds whomight otherwise do rather well out ofthis, it is not impossible that the schemecould be revenue neutral with a 17% cor-poration tax rate.

So why might a UK government betempted to do this? There are at leastsix reasons. First it would signal achange not possible in the EU. WhenBrexit will actually produce so little ob-vious change in the UK the governmentmight be desperate for such a measure.

7For discussion of what a close com-pany is see https://uk.practicallaw.thomsonreuters.com/4-107-5926?__lrTS=20170421083449092&transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 accessed 21-4-17

8http://www.taxresearch.org.uk/Documents/JerseyEUCodeReport15-6-05.pdf accessed 21-4-17

Second, such a move might show aggres-sion towards Europe, and maybe the UScome to that, when both might threatenour own tax base. Third, it will beclaimed that this will draw inward in-vestment into the UK without breach-ing competition rules (although I doubtit will achieve that investment goal inpractice).

Fourth, this will appease the Tory rightwho are going to be mightily upset byany Brexit deal, including no deal atall.

Fifth, such a move will neuter a taxfavoured by all other political parties ofall other persuasions who will then haveproblems reintroducing it creating clearpolitical difference.

And last, but by no means least, thiswalks right round the OECD rules andconstraints in double tax agreements bysimply letting the UK claim there is nocorporation tax left for them to referto.

The question to then be asked is howthis might impact quoted companies?My suggestion is straightforward and isthat I do not think it would: I suspectthey would be exempted in full fromthe corporation tax charge and from therules deeming their shareholders to havereceived an income they might not reallyenjoy, further biasing the tax system tobig business.

So, who would the winners be? Thoseoutside the UK. They could trade in thiscountry tax free. They would pay no UKsource tax on profits earned here despite

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enjoying the benefit of all the facilitieswe provide. This would be a direct sub-sidy from the UK to those not residenthere, in classic tax haven style.

And the financial services sector –bankers, lawyers and accountants –would win, of course.

The cost would be to British businessand its owners, as well as to the oppor-tunities foregone because British compa-nies would lose their competitive advan-tage and they still employ most peoplein the UK. How likely is this? That’s foran election to decide.

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Brexit as a Catalyst for Reinventing the Eurodol-lar Markets

IZABELLA KAMINSKAFinancial Times

In spring 2017, London has topped thelist of fintech capitals of the world. 1 Inthe space of JUST a few years, the finan-cial technology sector has grown from afew start-ups challenging established fi-nancial institutions to an industry in itsown right, having generated £6.6 billionin revenues and having attracted around£524 million in investment.2 Fintechcompanies employ about 61,000 people— about 5% of the total financial ser-vices workforce - making the UK largerthan rival techhubs in New York, andSingapore, Hong Kong and Australiacombined. 3

But with competition from other citiesgetting more intense, many seem to be-

1http://www.cityam.com/262644/london-keeps-hold-global-fintech-lead-but-these-global

2https://www.gov.uk/government/publications/uk-fintech-on-the-cutting-edge

3https://www.ft.com/content/08c52e4a-3c6d-11e6-9f2c-36b487ebd80a

lieve that it is the withdrawal from theEU that will help London sustain itsleadership in this area of financial ac-tivities. Although experts warn that abonfire of regulations is unlikely to bene-fit fintech,4Brexit does allow London be-come as a de facto base for risk in thegrey markets. In fintech, these opportu-nities exist outside of conventional reg-ulated finance.

A case example is the rise of the ITO”Initial Token Offering” market. ITOis the digital equivalent of the InitialPublic Offering. Using blockchain tech-nology, instead of buying shares, in-vestors use cryptocurrencies such as Bit-coin or Ether to buy digital tokens with-out paying the high commissions asso-ciated with equity investing.5 Via theITO, capital locked in the cryptocur-rency world finds a way to funding le-gitimate business. ITOs therefore, per-

4http://www.cityam.com/261244/why-red-tape-bonfire-wont-help-fintech-fcas-christopher

5https://medium.com/@tokenfunder_53555/the-tokenfunder-project-initial-token-offerings-as-a-revolutionary-equity-crowdfunding-platform-on-205b3337f957

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https://www.gov.uk/government/publications/uk-fintech-on-the-cutting-edge



https://www.ft.com/content/08c52e4a-3c6d-11e6-9f2c-36b487ebd80a

https://www.ft.com/content/08c52e4a-3c6d-11e6-9f2c-36b487ebd80a

http://www.cityam.com/261244/why-red-tape-bonfire-wont-help-fintech-fcas-christopher



https://medium.com/@tokenfunder_53555/the-tokenfunder-project-initial-token-offerings-as-a-revolutionary-equity-crowdfunding-platform-on-205b3337f957






EURODOLLAR MARKETS I KAMINSKA

forms a maturity transformation func-tion for capital which would otherwisedecay much more quickly.

The phenomenon closely resembles therise of the Eurobond markets in thelate 1960s. The Eurodollar marketstemmed out of the Suez Canal crisis of1956 and the imposition of restrictionson the use of sterling in trade creditswith non-residents. At the time, manyCity banks, who saw their core businessof international lending disappear, re-sponded to the new rules by using USdollars in their international operations,and explained to a receptive Bank ofEngland that such transactions have nobearing on UK balance of payment is-sues.6 The Bank classified certain typesof financial transactions undertaken be-tween non-resident parties and in for-eign currencies as non-UK transactions.Yet as these transactions were takingplace in London, and since they couldnot be regulated by any other regula-tory authority, they effectively ended upin a regulatory black hole. This blackhole, soon to be joined by others andto become known as the offshore finan-cial markets or Euromarkets, was themost important enabling factor behindthe rise of London as a global financialcentre in the 20th century.7

6Burn, G., 2005, The State, City and theEuromarkets, Basingstoke: Palgrave.

7Ibid.; Lysandrou, P., A. Nesvetailova, R.Palan, 2017, “The City of London: Economiesof Scale and Discriminatory Policies behind theGlobal Financial Centre”, Economy and Soci-ety, forthcoming.

In essence, the ITO process representsan asset swap which exchanges cryp-tocurrency funds for assets entitlingholders to legitimate fiat income stream.The ingenuity of the swap relates tothe fact that it allows legitimate compa-nies to formally liquidise cryptocurrencystock, and illegitimate companies to re-main off-shore beneficiaries of legitimaterevenue streams.

Like the Eurodollar market, the fintechsector is predicated on ignoring exist-ing regulations and moving in-betweenthe crevices of existing regulatory struc-tures. While Brexit withdraws a lotof funding from start-up fintech firms,at the same time it also allows themto explore entirely new avenues in thegrey area. Interestingly, while most fin-techs were originally very worried aboutBrexit, now collectively they see it as anopportunity. ITO markets do not needpassports and thus are posed to expand,at least in the short term, despite Brexituncertainty and risks.

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Singapore-on-the-Thames: Slogan or Strategy?

JOHN CHRISTENSENTax Justice Network

Brexit was largely sold to the Britishpublic under the slogan of “takingback control”. In reality withdrawalfrom the European Union will removeBritain’s ability to block EU attemptsat strengthening financial market reg-ulation, leaving the City of London’slight-touch regulation and offshore se-crecy vulnerable to international reformpressures. The UK remains trapped bythe Finance Curse, which limits its post-Brexit development options.

For decades successive British govern-ments have placed ‘light-touch’ regula-tion and corporate tax cuts at the coreof their economic development strate-gies. So-called ‘competitiveness’ is seenas key to attracting mobile foreign di-rect investment to Britain, with partic-ular focus on securing London’s statusas the globally pre-eminent offshore fi-nancial centre. The assumptions behindPrime Minister May’s proposed post-Brexit strategy of enlarging London’stax haven role offshore the EuropeanUnion is that further cuts to the CIT

rate, and more tax reliefs alongside evengreater regulatory and compliance lax-ity, will be sufficient to match Singa-pore’s success as the fastest growing off-shore finance centre in Far East Asia.1The key question here is whether sucha strategy is viable, especially within afast evolving international ecosystem ofrules and regulations that previously al-lowed Britain’s offshore secrecy jurisdic-tions to flourish.

Since the 1980s government and op-position parties have taken it as self-evident that expanding London’s off-shore financial centre would benefit therest of the UK economy. Former Lon-don Mayor Boris Johnson said in 2012that “a pound spent in Croydon is offar more value to the country than apound spent in Strathclyde. You willgenerate jobs and growth in Strathclydefar more effectively if you invest inHackney or Croydon or other part ofLondon.” This London-centric develop-ment strategy was reinforced by govern-ment responses to the 2008 great finan-cial crisis, which largely focussed on re-

1http://www.economist.com/news/leaders/21714986-government-promises-truly-global-britain-after-brexit-plausible-theresa-may-opt

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SLOGAN OR STRATEGY J CHRISTENSEN

Chart 1: Corporate tax rates, inwardFDI flows, and corporate tax yields

(2006-2014)

Red line: corporate tax receipts as apercentage of GDP – left axis

Purple line: Net FDI flows into the UK (£billion) – right axis

Sources: Tax Justice Network; UK Office for NationalStatistics

building the balance sheets of the largerbanks while massively reducing fund-ing to public services and infrastructureinvestment in most regions apart fromsouth-east England.

Despite accumulating evidence that be-yond a certain size financial sectorgrowth does not deliver benefits to thehost country and renders it vulnerablethe Finance Curse,2 and despite over-whelming evidence that cutting CITrates (see chart 1) and deregulating fi-nancial services is counter-productive,the current British government threat-ens to go further and faster if it is unableto secure favourable post-Brexit tradingterms with the EU.

2See Shaxson, N. and Christensen, J. (2013)The Finance Curse: How Oversized FinanceSectors Attack Democracy and Corrupt Eco-nomics, Commonwealth Publishing, London

Chart 1 tells an important story aboutthe effectiveness of using corporate taxcuts as a means of attracting inward FDIflows. The UK CIT rate was cut from30% to 21% between 2006 and 2014 (andhas since been cut further to 17 per-cent), but inward FDI flows fell signif-icantly and have largely involved invest-ment in real estate and mergers and ac-quisitions. Furthermore, and contraryto Laffer Curve theory, corporate taxyields have continued their long-termsecular decline, notwithstanding the factthat private sector companies have ex-panded their role in the overall economyand returns to capital have increased aswage rates have remained largely static.The evidence suggests that cutting CITrates does not achieve the claimed ben-efits and, worse, trying to compete withother corporate tax haven economies likeIreland, Luxembourg and the Nether-lands, will merely lead to even lower taxyields with no measurable gain (as thePatent Box fiasco demonstrated3). Fur-thermore, the long term internationaltrend away from the OECD’s past re-liance on the arm’s length method to de-termine corporate profits allocation be-tween different jurisdictions is steadilygiving way to a profits split approachwhich more clearly aligns taxing rightswith genuine economic substance. Thiswill inevitably reduce the potential forprofits shifting to tax havens, undermin-ing the viability of a tax haven-based de-velopment strategy.

3 See Picciotto, S. (2014) herehttp://www.taxjustice.net/2014/11/17/patent-boxes-progress-racing-bottom/

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http://www.taxjustice.net/2014/11/17/patent-boxes-progress-racing-bottom/

http://www.taxjustice.net/2014/11/17/patent-boxes-progress-racing-bottom/



Looking to the medium and longer termthe Singapore-on-the-Thames develop-ment strategy is likely to face stronghead winds from a combination of heavycompetition – not least from Singaporeitself, which has geographic advantagein the fast growing south east Asianfinancial markets – and from interna-tional efforts to resist tax haven activ-ity. Brexit confronts the City of Londonand its offshore satellites in the BritishOverseas Territories (BOTs) with thepolitical challenge of trying to resist EUpressures for improved cooperation andenhanced transparency while no longerbeing able to act as a blocker at theEuropean Commission. For the BOTs,which have acted for decades as the se-cretive conduits of dirty money flows into London, the UK’s withdrawal fromthe negotiating table in Brussels threat-ens major disruption. We can reason-ably anticipate that major concessions,for example on transparency of trustsand public disclosure of company own-ership information, will be a bargainingchip in return for financial passportingrights for banks and law firms seeking tosell cross-border services into the SingleMarket.

The City of London faces an additionalpolitical hurdle arising from widespreadperceptions around the world that thecontagious effects of light-touch regula-tion have spawned a culture of finan-cial rent-seeking combined with money-laundering on an industrial scale. Forprudential reasons EU27 politicians andnegotiators are likely to require thata considerable range of services cur-

rently provided on a cross-border ba-sis out of London will need to relocateto commercial establishments operatingwithin the Single Market. Needless tosay, commercial establishments locatedin Amsterdam, Frankfurt, Luxembourgor Paris will come under the regula-tory regimes of the respective host coun-tries.

Most City banks and law firms are cur-rently evaluating which of their servicescan remain in London (under so-calledMode 1 arrangements, that largely re-late to some types of insurance services,a limited range of deposit-taking andloan activities, and some fund manage-ment activities), and which services willrequire commercial establishment in a fi-nancial centre within the Single Marketunder Mode 3 arrangements. Given thelevel of uncertainty surrounding the na-ture of the trading arrangements thatwill eventually emerge from forthcom-ing negotiations between Britain and theUK, many City businesses are likely todefault to the less risky option of relocat-ing key operations to commercial estab-lishments with the Single Market.

In conclusion, the rhetoric of Singapore-on-the-Thames does not appear tomatch up to the reality of the likely post-Brexit financial services market. Britainwill no longer have a role as a rule-makerin Brussels, but London-based banksand law firms wanting to sell servicesinto the Single Market will need eitherto relocate some (maybe all) activitiesto commercial establishments operatingwithin the Single Market, or will need

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to secure passporting rights that com-ply with regulations set by EU27 mem-ber states, who are likely to take strongpositions on exercising their rights toprudentialism. BOTs like the ChannelIslands will no longer be protected byBritain’s presence in Brussels and maywell face existential threats to the off-shore secrecy that underpins their roleas offshore financial centres adjacent toEurope. To further complicate mat-ters for the UK government, having suc-cumbed to the Finance Curse, the UKeconomy is trapped by a legacy of un-derinvestment in research, infrastruc-ture, training and industrial diversifi-cation. Overcoming the Finance Cursewill require a sustained effort to reduceBritain’s dependence on an over-sized fi-nancial sector in order to create oppor-tunities for development of other sec-tors.

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