Will London survive as the world’s financial capital?
July 1, 2012
Mark spoke as part of a panel with historian Niall Ferguson, banker Jeremy Quin and financial journalist, James Ashton, last week at the Corinthia Hotel at an event sponsored by global law firm, Latham & Watkins. This sets out an expanded version of the views he expressed.
As the world’s most powerful leaders gathered in Mexico last month for the latest G20 ‘last chance saloon’, each turned to their domestic media to declare that ‘something must be done’ to stem the descent of the global economy into chaos. Surely no one disagreed. But what and by whom?
When politicians concur only on the gravity of a situation, the seemingly endless rounds of summitry achieve precisely the opposite to their goal – the unnerving impression of impotence. Precious wonder that investors now seek security. With the Eurozone’s problems deepening, many find it in London.
Some now describe the capital’s real estate as being akin to gold – a secure store of wealth as western economies wobble. In spite of the state of the UK’s public finances, the government continues to borrow at rock bottom rates. Our continental competitors are currently too busy stabilising ailing banks and sovereigns to launch power grabs at our capital’s expense. Panic that investors and entrepreneurs will flee new regulation and taxes, leading to the inexorable decline of the City, seems not to be shared by those with money to spend. Surely this all adds up to a vote of confidence in the continuing status of the City of London as the world’s financial capital?
Perhaps. After all, London’s apparent resilience is not a consequence of global volatility alone. One cannot discount how well our capital has been served by its international reputation as a bastion of commercial certainty and reliability. It has promoted financial innovation, provided an international market to global merchants and in commercial affairs has rightly been seen as a watchword for justice, neutrality and fairness. London also has a number of innate advantages, including a time zone that lies between those of North America and Asia – making the City an excellent base for international company headquarters – and the lifestyle assets of culture, an excellent educational offering and a population so diverse that all can feel at home. We also have the inestimable benefit of the rule of law, a crucial ingredient for investors from all corners of the globe keen to undertake international transactions.
The government has committed itself to key infrastructure projects aimed at boosting London’s ability to compete globally. I have already visited Crossrail’s headquarters and seen the gargantuan concrete box that will eventually become the new Canary Wharf station. After years of wrangling, it is encouraging to see this crucial transport link finally take shape and provide jobs and training in the meantime. The picture on HS2 and aviation is more mixed. I am not yet convinced the government has properly made the case for a new high speed rail line and HS2 should also not be seen as compensation in the absence of a serious aviation policy. Until the government has a clear strategy in this regard, the inadequate capacity and service at Heathrow will continue to blight London’s ability to compete as a truly modern, global city.
But there is no room for complacency. The threats to London’s competitiveness, many of which I have long warned about, have not yet gone away. As a place to do business, London is promoted best by a competitive, certain tax system. The government has already done some good work on corporation tax and entrepreneur’s relief. I have long said that the same must also apply to our income tax rates and am glad that the government has recognised that the 50% tax rate was sending the wrong message about what Britain and London stand for internationally.
But the recent furore over tax avoidance is not what international investors expect from the Britain. If investors sense that UK policy over tax and regulation is becoming ever more arbitrary – and governed by sentiment and the news cycle as much as strict rules enforced by the courts – we shall all be the losers.
The targeting of Stephen Hester and Fred Goodwin at the beginning of the year also flies in the face of the key coalition message that the “UK is open for business”. The government needs to nip this dangerous misconception in the bud. Meanwhile the Treasury is committed within a year to introducing general (tax) anti-avoidance provisions, whilst too often coalition Ministers seem to conflate the concepts of “avoidance” and “evasion” in debating taxation policy. It is clear that any such general power of anti-avoidance will result in retrospective taxation; this is wrong in a free society and will further risk damaging our nation’s reputation as a free, open, transparent place to set-up, develop and run a business.
Arguably the biggest threat to the competitiveness of London is the gloomy picture of the wider British economy. The capital is the engine for economic growth in the UK and the revenues it generates are redistributed across the nation. While this makes it all the more important to nurture London’s competitive advantages, it also leaves open the temptation to milk the cash cow.
The government should also be mindful of the impact on London’s image of its occasionally dismissive attitude to financial services. That industry has provided this country with an enormous competitive advantage in exploiting developing markets, not least as the increased wealth and propensity to save from people in these new markets will ensure that this sector will continue to grow rapidly in the decades ahead. Whatever the current distaste for the banking fraternity, it is firmly in the national interest that the City of London and the UK maintain its global pre-eminence in this highly mobile sector.
By contrast many of the sector’s leading players are now spending huge sums trying to second-guess what regulations might be coming over the horizon in this environment of damaging uncertainty. When such doubt encourages the holding rather than lending of capital, regulation becomes a problem not just for the banks but for the wider economy, as businesses seek to borrow and grow.
It has always been my concern that unilateral British action on bank regulation risks diminishing the competitiveness of domestic financial services. Historically the City of London has benefited from arbitrage with Wall Street from withholding tax under President Kennedy (which precipitated the creation of the Eurodollar and Eurobond markets) to Big Bang in the mid-1980s and the effects of Sarbanes-Oxley (2002) in the aftermath of the Enron and Worldcom scandals. If we are to prevent our competitors benefiting from unilateral action in the UK, we must continue to press for international agreement on the future landscape of the financial services world. Instead the Chancellor has accepted in full the recommendations on banking reform put forward by the Vickers Commission.
It remains crucial that we keep an eagle eye on developments across the Channel. I suspect new French President, Francois Hollande, will struggle to overturn the broad thrust of the Eurozone’s austerity programme. To detract from his inability to make progress, he may well be drawn to totemic diversions such as a financial transactions tax or a land grab by the Paris-based European Securities and Markets Authority, which may start sabre-rattling when it comes to the question of which financial entities and products pose systemic risk. The Treasury must be on its guard as a constrained President searches desperately for external enemies. As ever, the City of London’s pre-eminence as the only global financial centre in the European timezone could be under envious threat from across the Channel.
Finally, many City figures with whom I am in regular contact feel passionately that the coalition’s approach to human capital is a threat to London’s competitiveness. Sustained growth in this difficult era will only be promoted by private sector commerce and global businesses based here will want to recruit the most talented people. This should be encouraged, not restricted, if the UK is to be truly open for business. The Prime Minister has acknowledged some of the concerns over his government’s immigration policy by providing assurances that, for instance, those with the skills we require – scientists, entrepreneurs, people with specialist knowledge – will be welcomed with open arms via changes to qualifying criteria. Yet the cap on numbers remains firmly in place and, indeed, stands to be lowered.
To know London’s history is to understand that our great city has suffered innumerable breakdowns and revivals. There are many reasons to believe that the capital will once again thrust forward and reinvent itself in an ever more competitive global economy. But we cannot take anything for granted. If London is to maintain its reputation as a premier world city long into the twenty-first century, it must also maintain the characteristic diversity and openness that have been crucial to its former glory. In this regard, tax, regulation (both home grown and European) and the quality of London’s human capital loom as clouds on the horizon. The government would be wise to address these quickly. If one thing is for sure, if this ever resourceful city stalls, so too will Britain.