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City Culture

June 7, 2007

City Culture

Last Bank Holiday weekend brought to my attention two distinct snapshots emphasizing the diversity, openness and health of the City of London’s financial services industry.
On the Friday night I had dinner with an old university friend who had just returned from a decade in Hong Kong.  Now a senior…

City Culture

Last Bank Holiday weekend brought to my attention two distinct snapshots emphasizing the diversity, openness and health of the City of London’s financial services industry.

On the Friday night I had dinner with an old university friend who had just returned from a decade in Hong Kong.  Now a senior Managing Director with a leading international investment bank, he marvelled at the energy and excitement of London’s financial district, incomparably outpacing its European rivals and giving both New York and Tokyo a run for their money.  The following afternoon, standing at the top of Primrose Hill with its panoramic views across the City of London, I saw countless cranes stretching out into the horizon.  Confidence in Britain’s financial services flourishes like never before.

Over the past twenty years or so the City of London has enjoyed a golden age of growth and prosperity.  The international pre-eminence of the City is, of course, nothing new.  Indeed, the explosion within the outstanding international reputation of the City is a throwback to the period between the mid-eighteenth century and 1914 when London’s global supremacy in the financial and commercial field was unsurpassed.

For sure, the City of London does have a lingering reputation as an ‘Old Boys Club’. But this now outdated perception only came to the fore relatively recently.  After the massive external jolt to the international financial system during and in the aftermath of the First World War, the City of London became far more inward-looking than had previously been the case.  Whilst the pace of internationalisation has been most evident since the Big Bang in 1986 of deregulation, the seeds of London’s recovery as a pre-eminent global financial capital pre-dated that important event.  The migration of the international capital markets from London to New York after 1914 began to be reversed during the Kennedy Presidency of the early 1960s.  It was at this point that Wall Street instituted Regulation S which was designed to allow public companies to sell shares to non-US citizens.  While the US regulators wished to assure home investors had adequate access to information about public companies, non-US citizens could not be afforded the same protection.  The unintended consequence of this regulation was to open up the Euro bond and Euro dollar markets, initially out of Switzerland and subsequently in London.  As a result the City of London re-established its critical mass as an international financial centre which it has retained by maintaining a relatively light and proportionate regulatory regime.  Crucially the City was assisted by the failure of either Paris or Frankfurt to emerge as a key European time-zone rival.

The influx of global business has brought with it the best possible antidote to a cosy "Old Boys Club" ? large numbers of well-paid, highly qualified professionals from across the globe locating themselves in London.  The emergence of India & China as great economic – and in time financial services – superpowers in the decades ahead will surely contribute further to London’s role as a cauldron of global talent of the highest order.  So what then are the threats the City as a financial centre?

Complacency and over-confidence leading to diminishing levels of service are surely the most obvious. I must confess that I do not detect any particular problem in this regard yet, but inevitably a longstanding pre-eminence in any walk of commercial life opens up opportunities for innovation from elsewhere. Whilst London’s light regulatory touch keeps the risk of excessive bureaucracy at bay, it also brings with it the potential for the opposite problem ? a risk of cultivating a reputation for lower ethical standards.  It should come as no surprise that, in the aftermath of Sarbanes-Oxley reforms in Wall Street, leading financial regulators in New York have been casting a critical eye over the supposedly low standards of entry to the AIM market especially from companies and operations in Eastern Europe listing in London.

On the issue of infrastructure, again there are two distinct stories to tell.  Most businesses in London’s financial world regard an inadequate public transport system as the biggest barrier to future growth – there is a virtually universal clamour from the City for the building of Crossrail as well as substantial improvements in the already over-burdened tube network.  Nevertheless the emergence of Canary Wharf as an eastern outpost of London’s financial district has transformed the prospects of London as a financial centre.  The continued development in the Isle of Dogs is a reassuring sign of future potential growth capacity that London’s financial district enjoys.  Inevitably, much of this growth will take place outside the traditional Square Mile, raising important issues about the co-ordination of leadership in London’s financial services.  The Bank of England’s regulatory powers were proscribed in 1997 as part of the deal that saw the Bank enjoying interest-rate setting powers. Similarly the City of London Corporation which has raised its profile significantly over recent years technically lacks any jurisdiction in Canary Wharf ? nevertheless efforts continue to be made in co-ordinating the promotional activities of Financial London under a single umbrella.

There is of course another perennial cloud on the horizon.  The continued ? and increasing ? disparity in remuneration between those working in financial services and the economy as a whole.  This is no longer an isolated party political concern. The high cost of living no longer applies to exclusive districts in central London alone. Virtually all suburbs in the capital, not to mention the vast number of towns in the Home Counties, now boast average house prices outside the reach of virtually any first-time buyer who is not employed in financial services or related industries.

Paradoxically this may prove one of the biggest threats to the continued growth and changing culture of the City of London.

Mark Field, June 2007