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A recent report from the Z/Yen Group confirmed that London retained its position as the top global financial centre1. Suffice to say London’s competitive strengths are still formidable: access to international financial markets and clients, availability of skilled personnel, a strong business infrastructure and a strategic positioning in a central time zone. The City, quite simply, has a terrific “reputation”. 
 
But London’s lead is being nibbled away. New York, in second place, has almost caught up whilst the dynamic centres of the Far East, Hong Kong, Singapore and Shanghai, are gaining ground quickly. Perhaps this is not so surprising given the dramatic growth in the Chinese economy, in 2010 it was over seven times the size it was in 1990. But it reminds us that we cannot afford to be complacent about London’s supremacy. London cannot rest on its laurels. The Z/Yen study, along with research from the City of London Corporation, identifies some very specific threats to London’s position. The top two concerns are, unsurprisingly, over-regulation and taxation.
 
When discussing regulations it is wise to tread carefully. In the wake of financial debacle of 2007-08, it was clear that the regulatory authorities, not just here but elsewhere, had comprehensively failed to ensure a stable financial sector. This, allied with poor governance, unleashed a disaster. “Bank bashing” has, of course, since become a national sport and the “bankers” have become the fall-guys for a multitude of economic woes which were not their fault. (The equally culpable, if not more culpable, behaviour of certain politicians springs to mind.) But whatever the rights and wrongs, tighter regulation has been widely accepted as necessary and inevitable.
 


Much of the extra regulations in the pipeline has been agreed at a global level and, provided there is a reasonably level playing field in implementation, should not affect London’s relative competitiveness. The Basel 3 Accord, agreed by the Basel Committee on Banking Supervision in 2010, is one example and includes very significant changes to the capital, liquidity and leverage rules for banks. The promotion of Recovery and Resolution Plans (RRPs or “living wills”) for systemically important financial institutions, agreed by G20, is another.
 
A second layer of regulation derives from the EU. It should however be noted that some of the EU’s initiatives relate to the implementation of globally agreed financial regulations. But other initiatives most emphatically do not. The monumentally unpopular Alternative Investment Fund Managers Directive (AIFMD) is one such EU initiative. A report prepared for the FSA concluded “the AIFMD will have significant impacts in terms of reduced investor choice and substantial compliance costs for the AIF industry, which will be passed on to investors, ultimately resulting in lower returns”. Such conclusions are unambiguous. The AIFMD undermines London as the location of choice for the Hedge Funds (for example) vis-à-vis non-EU locations such as Zurich and Geneva. Perhaps some people do not care whether these businesses stay or go but, given their ability to generate tax revenue, if for no other reason, they indubitably contribute to the economy.
 
Domestically-sourced regulation is a third layer which, insofar as costs outweigh benefits, can undermine London vis-à-vis all other centres. There is not the space to consider the recent, highly political, Vickers report on banking here. But suffice to say it will impose extra costs, and is arguably surplus to requirements, when the banks are already experiencing a regulatory revolution.
 
Turning to taxation, London is gaining an unenviable reputation for being a high tax centre by international standards. This applies to both corporate and income taxes. The 50p income tax rate, reputedly a poor revenue earner, is especially singled out as a deterrent to globally mobile talent working and investing in London, who quite bluntly do not have work and invest here. There is also the Bank Levy, which has already been amended three times since it was first announced in June 2010. High taxes and a frequently changing tax system risk Britain’s reputation for a stable, competitive and predictable tax regime in which businesses can plan and thrive.
 
And then there is the EU-wide Financial Transactions Tax (FTT), promoted by France and Germany, supported by the Commission and which would disproportionately damage London. Non-EU financial centres have no intention of following suit and London would inevitably lose business. The British government must veto this tax.
 
These cumulative threats, extra regulations and high taxes, have major potential downsides. As I have already said, we cannot afford to be complacent about London’s supremacy. Perhaps, again, some people do not care whether we have a thriving City or not. But in spite of all the financial turmoil of the last three years the City and financial services, more generally, still make a very major contribution to the economy.
 
According to the City of London Corporation, the City generated nearly 3% of GDP in 2010. The net overseas earnings of the financial services and insurance industries together were £35bn (about 2½% of GDP) in 2010. And the financial services sector as a whole made a total tax contribution of £53.4bn in FY2009, over 11% of total government tax receipts.

There is some discussion about a “desirable” switch from financial services to manufacturing industry in order to “rebalance the economy”. There is, in itself, nothing wrong with this objective, though manufacturing will struggle given DECC’s ruinous energy policies. But if it comes about by default because neglect of the City’s competitiveness results in the City’s decline, this would be a disastrous policy error – little short of criminal. Be careful what you wish for. 
 
Reference (1) Z/Yen Group, Global Financial Centres Index 10, September 2011, Long Finance’s “Financial Centre Futures” programme.

10 comments for: Ruth Lea: The City is a great asset – but under threat

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