Is London losing its lustre?

A perennial favourite among global investors, London has been shaken lately by major banks considering a move out of the UK, amid rising regulation and tougher taxes. Is the UK capital's investment appeal waning?

London has always hovered around the top spot in the annual Global Financial Centres Index (GFCI). If the City has not been crowned number one, it has traditionally been a safe bet that it will come in just shy. The March 2015 index saw the UK capital pipped to the post by New York – the second time in two years – but it confidently jostled its way into a respectable second place. 

And that’s just one index. Many financial commentators still laud London as the most desirable place to do business, with a diverse and skilled workforce, Europe’s largest stock exchange, the world’s biggest bullion market and roots in trade that date back to the Middle Ages. 

Alderman Alan Yarrow, Chartered FCSI(Hon), The Lord Mayor and CISI Chairman, says: “Everybody wants to emulate the City of London. They think it’s wonderful. The rule of law, the language, the renewable government, the education and availability of bright graduates... It’s a phenomenal offering.”

No room for complacencyRecently though, the City of London has had a wake-up call, as other cities, especially Asian capitals, close in on this financial stalwart. What’s more, a recent study by The Banker found that none of the top five global banks are British. Yes, the Western hubs of New York and London came in at number one and two in the GCFI, but they were the only western cities to feature in the top five. Hong Kong, Singapore and Tokyo nabbed the respective remaining spots. 

And this was back in March. Since then, HSBC has said it is considering a return to its native Hong Kong, and, while there is some doubt as to whether the territory's financial infrastructure would manage to accommodate the banking giant, Hong Kong said it would welcome back its prodigal son with open arms. Standard Chartered announced in April that it too was considering a move away from the UK. The bank cited the bank levy as a primary trigger, following the Chancellor of the Exchequer George Osborne’s bank levy increase from 0.156% to 0.21%. Standard Chartered estimated that in line with the rise, it would be required to pay $170m more than last year, despite having relatively little business on British shores. 

Dr David Lutton, Director of Competitiveness and Financial Services Policy at London First, which aims to make London the best place in the world to do business, suggests it is more about whether the cost of doing business is proportionate to the gains of operating in London: “The disadvantage of the increased bank levy has reached the point where it outweighs the benefits for Standard Chartered. But there are banks paying the levy that still think the benefits of operating in London significantly outweigh the disadvantages.” 

Bank levy bluesNonetheless, industry voices have called for a rethink of the levy – most recently, the British Bankers’ Association, which just days before the Chancellor’s emergency Summer Budget wrote to George Osborne to urge him to cap the levy. Such calls reflect the opinion that the rises in the levy seen so far – nine since it was introduced to deter banks from risky borrowing in 2011 – may put banks off operating in the UK. 

surcharge on bank profits to be introduced by the Chancellor from 1 January, 2016 
Those calls appear to have been answered, with the Chancellor announcing in his Summer Budget that he will gradually reduce the bank levy rate over the next six years, and after that make sure it no longer applies to worldwide balance sheets. The announcement perhaps underlines the Lord Mayor’s assertion that “George Osborne has very clearly indicated that he wants the UK to be the headquarters for big banks”.

Whether the Chancellor’s pledge to reduce the bank levy rate persuades Standard Chartered to stay in the UK remains to be seen. Six years is a long time in banking and other factors might still prompt it and other banks to move abroad.

While softening his stance on the levy, the Chancellor also announced that he would introduce a new 8% surcharge on bank profits from 1 January next year. And then there’s the regulation debate.

Balanced, proportionate and right?The complex regulatory labyrinth, woven ever tighter following the implementation of Basel III and MiFID II, is bound to have some effect on the allure of doing business in London. That said, the same regulation in Europe and the strict Dodd-Frank legislation in the US mean that many financial hubs are experiencing similar regulatory consequences. 

Jim Pettigrew, Chairman of Clydesdale Bank, recently told the CISI: “Let’s make sure we have regulation that is balanced, proportionate and right.” The Lord Mayor takes a similar view. “The most important thing is to make sure that regulation is very aware of the fact that we are in a globally competitive world. It’s no good having regulation specifically in the UK if it’s not endorsed and enforced globally,” he says. 

There is clearly no quenching the regulation debate, but Dr Lutton thinks that the sector needs simply to accept that regulatory scrutiny has intensified and move on. “I think the regulation ship has sailed. We live in a different regulatory environment now,” he says.

Brexit concernsDr Lutton believes we should instead be focusing on the UK’s potential split with the European Union, now that a referendum has been slated for 2017. “Thirty to forty percent of London’s trade is with Europe,” he declares. “I’m not saying that trade will dry up if we leave. Of course we will still do trade with European countries, but there’s no way of telling what trade tariffs might arise if we do leave. And you’ve got to remember that smaller businesses often have parent companies and supply chains that depend on trade with Europe.” 

6.3-9.5% of GDP
The income loss Britain could incur if it leaves the EU, according to the
Centre for Economic Performance
While Eurosceptics have lauded Britain’s exit – or ‘Brexit’ – as a way to save the taxpayer billions and rid the UK of economic shackles, it’s hard to deny that it would throw a blanket of economic uncertainty over the City. And people are less inclined to invest in uncertainty.

A report by analysts at the London School of Economics’ Centre for Economic Performance estimates that, assuming that the UK maintains a free trade agreement with the EU, the UK could suffer a loss of income of 2.2% of GDP following a Brexit. Under worst-case assumptions, the analysts calculated an income loss of between 6.3% and 9.5% of GDP – about the same as the loss incurred during the 2008–2009 global financial crisis. 

As is the case with hypothetical situations, though, there is a less gloomy possibility that investors may be keen to capitalise on the freedom that could result from no longer being tied to Brussels. 

Prioritising infrastructureMayor of London Boris Johnson recently said that as long as the City keeps investing in infrastructure, there is little to fear from a Brexit. Is that a fair statement? “I think that’s more of a soundbite than a policy statement, as a way to shine a light on an issue,” says Dr Lutton. “But I agree with the Mayor that continued investment in infrastructure will be hugely important to the attractiveness of the City.”

“The current population is 8.6 million and that’s set to grow to 10 million by 2036, so investment in infrastructure isn’t a one-off event, it has to be a process. When we’ve completed Crossrail 1, we need to be on to Crossrail 2,” he adds.

Asked whether the City is investing enough in infrastructure, the Lord Mayor is vehement: “£115bn has been invested in property in London in the past five years. That’s a phenomenal amount. And that’s by people who see the UK as an international safe haven for investment,” he says. 

The City is clearly still able to attract huge investment, at the very least, in property. Nevertheless, the resultant high housing costs threaten to reduce London’s competitiveness as a business centre. And that, many argue, is due to unoccupied property. The Lord Mayor explains: “People should be asking: ‘Is that property available for rent?’ If you look up at tower blocks and all the lights are off, that doesn’t look great.”

The pull of fintechAnother area that will be key to the City’s investment appeal will be how it harnesses its thriving financial technology – ‘fintech’ – sector. Global investment in fintech start-ups trebled in one year to $2.97bn, and while the US can safely boast that it started the revolution, the UK and Ireland are now the biggest fintech sectors in the world. Yet, with smaller London companies being swiftly snapped up by larger American tech companies like Google, there’s a risk of UK talent migrating from Silicon Roundabout to Silicon Valley.

Dr Lutton isn’t concerned, however, and thinks that London’s fintech offering serves only to boost the City’s investment appeal. “I think the fact that Santander has just opened up a $100m fintech innovation fund in London speaks for itself. We’re in an excellent position. We have the talent in London and the institutions that will benefit from it.”

The Lord Mayor agrees with this sentiment. “If you are going to be the largest financial centre in the world, you have got to be able to offer a number of things. One of those is a research and development centre – a hub. You have to be able to deliver the sharp end of technological development to remain attractive.”

London's still got itThe City’s lustre is protected for now, it seems. But what if HSBC, Standard Chartered and Deutsche Bank do move away? “The former two have historic roots in Asia, so I don’t think it would be an [indictment] on the City if they moved,” says Lutton. “And Deutsche Bank is a huge European bank, so it makes sense for them to be planning ahead and looking at how a Brexit would affect their European relationships,” he adds. 

But it’s not just about regulation and taxation, emphasises Lutton: “We also have a vibrant liberal culture that makes people want to live and work here.”

“It would be a loss to the City but we would recover,” says the Lord Mayor of these banks’ potential moves away. “I don’t think it would be terminal by any means.” 

He shares a recent memory: “I was speaking with someone about an hour ago, who said they are moving more business into London. I asked why and they said because the tax rate where they’re coming from is 45% and the tax rate here is 22%.”

“You’ve got to be realistic,” he says. “You hear about the big stories and no one can predict the outcome. But the reality is, we’re still an extremely attractive place for people to invest in.”
Published: 09 Jul 2015
  • Wealth Management
  • Compliance, Regulation & Risk
  • The Review
  • Features
  • reputation
  • Regulation
  • Lord Mayor
  • London
  • investors
  • investment
  • Finance
  • economy
  • Alan Yarrow

No Comments

Sign in to leave a comment

Leave a comment

Further Information