How Can the City of London Survive Brexit?

LONDON — Coming out of Brexit this year, Britain’s government needed a new blueprint for the future of the nation’s financial services as cities like Amsterdam and Paris vied to become Europe’s next capital of investment and banking.

For some, the answer was Deliveroo, a London-based food delivery company with 100,000 riders on motor scooters and bicycles. Although it lost more than 226 million pounds (nearly $310 million) last year, Deliveroo offered the raw promise of many fast-growing tech start-ups — and it became a symbol of Britain’s new ambitions by deciding to go public and list its shares not in New York but on the London Stock Exchange.

Deliveroo is a “true British tech success story,” Rishi Sunak, Britain’s top finance official, said last month.

It was a false start. Deliveroo has since been called “the worst I.P.O. in London’s history.” On the first day of trading, March 31, the shares dropped 26 percent below the initial public offering price. (It has gotten worse.)

impacts from Brexit were immediate: On the first working day of 2021, trading in European shares shifted from venues in London to major cities in the bloc. Then London’s share of euro-denominated derivatives trading dropped sharply. There’s anxiety over what could go next.

Financial services are a vital component of Britain’s economy, making up 7 percent of gross domestic product — £132 billion in 2019, or some $170 billion. Exporting financial and other professional services is something Britain excels at. Membership in the European Union allowed London to serve as a financial base for the rest of the continent, and the City’s business ballooned. Four-tenths of financial services exports go to the European Union.

The government has begun hunting for ideas to bolster London’s reputation as a global finance center, in a series of reviews and consultations on a variety of issues, including I.P.O.s and trading regulations.

For many, the changes can’t come soon enough.

“The United Kingdom is not going to sit still and watch its financial services move across” to other European cities, said Alasdair Haynes, the founder of Aquis, a trading venue and stock exchange for equities in London. This will make the next three or four years exciting, he said.

But this optimism isn’t universal. The prospects of a warm and close relationship between Britain and the European Union have considerably dimmed. The two sides recently finished negotiations on a memorandum of understanding to establish a forum to discuss financial regulation, but the forum is voluntary, and the document has yet to be signed.

Duff & Phelps found that fewer see London as the world’s leading financial center but that it topped the leader board for regulatory environment.

Here are some of the plans.

Mr. Sunak told Parliament on March 3, the same day a review commissioned by the government recommended changes designed to encourage tech companies to go public in London. It proposed ideas, common in New York, that would let founders keep more control of their company after they began selling shares.

For example: allowing companies with two classes of shares and different voting rights (like Facebook) to list in the “premium” section of the London Stock Exchange, which could pave the way for them to be included in benchmark indexes. Or: allowing a company to go public while selling a smaller proportion of its shares than the current rules require.

The timing of Deliveroo’s I.P.O. wasn’t a coincidence. It listed with dual-class shares that give its co-founder William Shu more than half of the voting rights for three years — a structure set to “closely align” with the review’s recommendations, the company said.

But the idea may be a nonstarter among some of London’s institutional investors. Deliveroo flopped partly because they balked at the offer of shares with minimal voting rights.

The City’s future

London’s finance industry isn’t in danger of imminent collapse, but because of Brexit a cornerstone of the British economy isn’t looking as formidable as it once did. And as London tries to keep up with New York, it is looking over its shoulders at the financial technology coming out of Asia.