London is the world’s major financial centre and this is a business in which the UK clearly excels. There is now a real risk of forgetting some important facts of life as politicians and the popular press conspire in the continued demonisation of finance. There are also some voices in the EU that project serious antagonism towards the City and what they believe it represents. At the same time, there are those in the City and wider UK who forget the important boost to the City that full membership of the EU has bestowed and vice versa
The City is a world leader in several key financial markets and its contribution to the UK economy is impressive. Overall, the export surplus (foreign earnings) from the City and related services (like legal and accountancy) comprise over 3 per cent of GDP. No other country can match this. The City is one of the UK’s major export earners and by several measures one of its most successful industries.
But London’s global position is currently being tested severely on many fronts. Some of these threats are global phenomena and common to many of its competitors across the word – they include the post-crash decline in many important areas of financial services and the implementation of tougher banking and financial services regulation.
Some of the threats to London, though, are more UK and EU-specific. They include the UK’s domestic policies on tax (like the 50 per cent tax brought in by the previous Labour Government) and tougher blanket immigration rules (making it ever more difficult for talented individuals to come into the UK and the City). Both of these measures may constrain an industry that is an important ‘knowledge economy’ sector and driver, because they impact on the high quality staff talent pool that is an important part of what the City is all about and one of its less publicised USPs. Specific EU threats include the much vaunted financial transactions tax.
Overlaying these two groups of threats are others that are not so tangible, but which could also have severe and unforeseen longer-term consequences. They include the current political ‘angst’ in the UK against banks and bankers. This angst is typified and fuelled via stimuli like the recurring questions about an alleged lack of professional ethics in some areas of banking (vide the recent spate of mis-selling and PPI scandals), banks apparent reluctance to lend and, of course, bankers pay.
These issues are also fuel for the wider movement that now attacks bankers and the financial industry at every opportunity. Increasingly, British politicians are being incentivised from many different quarters to demonise ‘all things finance’. A bandwagon seems to be gathering pace. Serious politicians know that there is a real threat here of generating excessive and punitive measures in regulating and commenting on financial services, but many continue to respond to the signals of what they perceive to be popular public opinion.
Across the channel, there are many who are also critical at best and downright hostile at worst about the City. In some EU circles, the City is positively hated. It is accused (amongst other things) of being a strong driver (with US banking) of the 2007/09 ‘credit crunch’, causing the eurozone crisis and poaching business and talented staff from other European financial centres.
Against this background, it is easy to forget that the City is still the UK’s most successful industry in terms of being a major taxpayer, most successful exporter, attractor of impressive intellectual talent, proven innovation capabilities and an unprecedented ability to respond to global competition. In this context, it is also one of the most impressive and sustained economic success stories in the EU. This should be good news, surely ?
This is not the first time that the City has been under siege. But the continuing eurozone crisis, the global downturn in many key financial markets that are important to the City, apparently hostile political attitudes, and ever more regulations and the continued threat of further punitive moves conspire to produce a challenging and unusually negative scenario. Already there is a grumbling amongst some major City banks about the burgeoning ‘costs’ of staying in the City.
This is not the kind of environment that is conducive for facilitating and harnessing the City’s traditional innovation expertise, together with its tried and tested capacity to exploit global change and challenges. We are presently living through a time of unusually severe and complex economic threats and opportunities. The UK and the rest of the world need the City’s proven ability to turn threats into opportunities, and in so doing make an important contribution to economic recovery . The world is changing and new major forces are developing in global finance with, for example, the BRIC countries starting to assume an increasing global role and influence.
There are now effectively two global economic blocs in the world – the West (which is still struggling to restore and sustain economic recovery) and the East (which continues to grow and which will increasingly position itself as a key driver of the world’s financial services industry). These are not disparate economic blocs – they are part of the wider global economy and linked to each other in many ways. Nevertheless, the rise of the East heralds a new dawn for global finance and great opportunities for those that are ready and able to avail of them.
At the same time, it is worth remembering that the City’s global dominance in finance has been fuelled in part by UK membership of the EU. The ability to move staff and transact business anywhere within the EU under the Single Market system has certainly added to the City’s global appeal as a base to locate and do business. UK membership of the EU has up to now been very good for the City. It would take a major ‘sea change’ to reverse the economic logic of that position. EU politicians also have to appreciate the economic and political attractions of housing within it the world’s major banking and financial centre.
There are many realities that the City has to accept in common with other jurisdictions across the globe. A sluggish economic recovery in the West, the continuing eurozone problems, muted bank lending, weakened fee prospects, a poor outlook globally for trading, and tighter banking and other important kinds of financial services regulation. There are now 7 per cent less employees working in the UK financial industry compared with just a year ago – a sobering statistic. A carping popular press, apparent weakening political support and more punitive regulatory and structural regulations (imminent and threatened) are also part of this post-crisis scenario.
There comes a point when all of this can lead to a kind of ‘feeding frenzy’ that carries with it actions that could elicit negative and probably unintended longer-term consequences for all. It is time to remind ourselves that an efficient and well-run financial services industry is both necessary and good for the wider economy. We must learn from past mistakes, since nothing is perfect and most important things can invariably be improved.
But the world will move on and there will be a Western longer-term economic recovery (already the signs are looking more positive as 2012 unfolds). The City must be a key part of this recovery. In this context, for example, it should be facilitated if not exhorted (certainly not constrained) to respond to the emergence of the new BRIC superpowers (especially China, India and Brazil) as massive opportunities for the foreseeable future.
In this respect we have seen historically what London can do – one need only recall that it was the drive and expertise of London that made it a global centre for dollar trading. Why shouldn’t this capacity for innovation and proven track record be exploited in the same way as China, India and Brazil emerge as major global players in finance ? Other key area that the city might continue to exploit include the new global industry of international asset management as countries across the world re-organise their pension arrangements to cope with an aging population and the inevitable decline of old style pensions. Mutual funds, retail and private banking are other areas where the City’s expertise may be developed in comparatively new directions.
It is important that politicians in the UK do not succumb to a sustained and intensifying demonization of the financial industry. To be sure, reform is needed, badly needed, in many important areas of finance. For example, many of the bad management attitudes and practices appear still to be evident in some banking sectors – these include the dominant ‘selling culture’, various mis-selling scandals and, of course, big bonuses on top of handsome salaries. Banking governance remains a major post-crisis issue. A more transparent and accountable financial services industry are top priorities and should not be ‘shelved’ or their need downgraded in any way within the slowly developing economic recovery.
In accepting all of this, we should also be reminded that a sound, well -functioning financial services industry remains a crucial driver of real economic development and progress. We need only recall what happens when the banking and financial industry ‘falls over’ to appreciate the undoubted economic importance of banking and financial services.
We need also to recognise that financial services and the City operate and compete in a global market. Excessively punitive measures that constrain London and the UK financial services industry from being competitive are ultimately self-defeating. The UK should be leading the chase for global-based reforms that help produce a safer and fairer system and, at the same time, a more level playing field for competition. Globalisation requires that in a truly global industry like finance, the major reforms needed post-crash must be internationally agreed and implemented. In this context, the Basel rules on international bank capital adequacy and liquidity are a good example of what is needed in developing rules that are agreed for all.
The UK is a world leader in the key industry of financial services and the City is the tangible statement of that key success factor. Protecting and nurturing the City, and recognising what it can do for the UK and global economy are logical economic responses in today’s seriously challenging economic marketplace. ‘Killing the goose that lays the golden egg ’ is not a sensible option. History will not forgive the politicians who continue with a demonization of finance in concert with a strident and sensation-seeking popular press that may ultimately weaken the global position of the CIty.
At the same time, the City and the global finance industry have to accept the harsh and sometimes damning lessons of the last crisis. Having learned from them, we need to move on. There has to be a renewed optimism in the City and in what it can do for the economy in the challenging times ahead. In so doing, the UK financial services industry needs to be able to turn some of the many threats it faces within the new global ‘knowledge economy’ into opportunities and this task is very much a ‘City thing’.
Professor Ted Gardener