Anthony Hilton: Blunt Rolet sets out his Brexit survival plan

Rory Lindsay

24 October 2017

Perhaps he was de-mob happy having decided to announce the end his time as chief executive of the London Stock Exchange Group but Xavier Rolet did not mince his words last week as he spelt out what needs to be done to avoid Brexit turning into a disaster for the UK economy.

At an event organised by New City Agenda in one of the committee rooms of Parliament and before an audience with a particularly high proportion of MPs, Rolet focused on two things.

First, Government had only two months to get its act together on Brexit, before it turned into a slow-motion train crash.

Second, the UK had a desperate need to retool its capital system by developing and implementing a coherent plan for its capital markets.

The Brexit issue was quite clear.

Almost every City institution has a board meeting in December, where the Number One item is how they should position themselves for a UK outside the European Union.

Business has been waiting to see what will replace the present arrangements but it cannot afford to wait much longer, given the way the clock is running down towards departure.

City firms need the Government to tell them what the new world is going to look like.

Failing that, the Government has to deliver a transition deal which has credibility and genuinely delivers significantly more time for adjustment.

Soothing words will not be enough.

Credibility means this outline needs to be more substance than spin.

It is important that both sides, the British and the EU, say the same thing so those listening know what certainty looks like.

If a credible outline plan and timetable for transition is not forthcoming in the six to eight weeks before their board meetings, firms will feel they have no choice but to assume the worst and push the button to leave.

Remember few of these are British-owned and their foreign parents don’t feel any need to indulge the inadequacies and vanities of the British Governments’ negotiators.

Unlike Government these boards have their plans in place, so the decision is simply to activate them.

The exodus will then begin in earnest next spring, and once started will be difficult, if not impossible, to reverse. These things acquire a momentum of their own.

Interestingly, according to Rolet, the London Stock Exchange is itself among those which might have to move some of its operations, particularly the sophisticated clearing of interest-rate swaps and other derivatives.

At present these operate under a joint US/UK regulatory framework which in effect allows the Stock Exchange to operate under a US regulatory licence, something not copied anywhere else in the EU.

If these clearing operations have to move, it would be to New York, not anywhere on the Continent.

More generally, Rolet said that if the City’s expertise becomes fragmented it will move to Asia, especially China.

This does not spell the end of the City but you have to be a peculiar kind of masochist to believe as some do that it will make it stronger.

Rolet’s second point was that, in or out, the UK’s future depends in large part on having a thriving small and medium-sized enterprise sector which has access to the capital it needs for growth.

To have any chance of achieving this the country needs a long-term capital plan which plays to the strengths of all the different forms of finance, so these can be mobilised to support businesses.

Partly this is about organisation as well as money — it means proper well-resourced aid for exporters and requires much better partnerships between universities and business.

But crucially it really means Government has to support long-term patient capital and make business less dependent on debt.

The system needs to be changed so that the small business no longer feels that the best way to grow is by selling out.

The alternative has to be that it can raise capital directly from investors, because only equity looks to the upside — only equity allows businesses to think and plan for the long-term.

There is, he said, a £7 billion subsidy for debt across Europe whereas equity is taxed four times in its life cycle, so the tax system has to change.

At the very least it should no longer be possible to set interest payments off against tax, so the system is no longer so biased in favour of debt.

If the Government gets behind the capital markets in the right way then business can be transformed in the way the United States was transformed in the Nineties, he says.

Citing that precedent, Rolet reminded his audience that Japan appeared to be all-powerful in the Eighties and was grabbing an ever-increasing share of the markets where the US had dominated.

But the US response was to change fundamentally how capital was deployed with the arrival of high-yield bonds and other capital market instruments.

This resulted in more sophisticated capital allocation so that companies had to innovate and invest or be taken over and broken up.

Thus US business was transformed with the mass transfer of resources to technology and the rapid decline of traditional businesses where it could no longer compete.

Today there are four times as many SMEs in the US as there are in the EU.

The UK needs a nationwide programme to create more innovative SMEs.

It should be the national priority.

But it is a sign of the bizarre world of politics that such an agenda is heard more often in the Labour side of the political divide than from a Conservative party which can think of nothing but Europe.

Anthony Hilton: Blunt Rolet sets out his Brexit survival plan

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