My speech to the Merrill Lynch Real Estate Conference, 28th March 2007
- It is a pleasure to be here today – I would like to begin by thanking you for inviting me to speak about the case for the City of London in the global economy at the beginning of your two-day conference.
- London is one of the most vibrant and dynamic cities in the world – and vitally important to the UK economy. In 2005 the capital delivered £180bn of economic activity, productivity is a quarter higher than the rest of the UK, and nearly a quarter of the workforce is educated to degree level.
- London is also the world’s leading international financial centre supporting an industry that generates around 6.8 per cent of the UK economy and one million jobs. And as a result it stands in a strong position to benefit from the opportunities presented by continuing global economic growth and integration. The City is today the natural location for 70% of the global secondary bond market, over 40% of the derivatives market, over 30% of world foreign exchange business, over 40% of cross-border equities trading and 20% of cross-border bank lending.
- And after an unprecedented period of economic growth and stability, I am pleased to say that the property industry in Britain is also rising to the challenge and attracting some of the biggest companies and investors to our capital. The demand for prime London office space is a very good barometer of its strength. The latest surveys of companies’ property needs are all extremely positive, with a quarter of firms aiming to increase their property use in the next six months alone, and over £10bn of prime London space being bought in the last year – up 20% on sales in 2005.
- As Minister for the UK financial sector over the past year, I have seen and discussed what makes the UK a global leader in financial services: our shared commitment to openness; the great pool of talent gathered from across the world working in the City; and our proportionate and risk-based regulatory approach.
- Indeed, as the recent City of London Z/Yen report demonstrated, alongside skills, the UK’s unified and statutory regulator the Financial Services Authority, is regularly cited as one of our chief attractions – a huge competitive advantage. However, at the same time, we are not immune to the challenges faced – on both sides of the Atlantic – to ensure that our system of regulation remains responsive and proportionate in today’s fast-moving global economy.
- And this morning I want to set out the steps that we are taking to ensure that we strengthen our competitive advantage and further entrench our success.
Building on our success
- Supporting and promoting London, and the UK, as a centre for financial and business services is a priority for the Government. That is why the Chancellor set up the High Level Group on City Competitiveness in 2006, bringing together senior representatives from across the financial services sector, to develop a strategy to enhance the UK and the City of London’s international competitiveness. The High Level Group, chaired by the Chancellor of the Exchequer, had its inaugural meeting in October and will next meet in full session in May.
- Following the first meeting of the High Level Group, the Government agreed to take forward proposals to: maintain cutting edge, principle-based regulation; modernise the wholesale insurance market; boost professional financial skills and promote, in a co-ordinated strategy led by UK Trade and Investment, the UK-based financial sector in high growth overseas markets. The Government will report back on progress at the next meeting of the High Level Group, together with the Secretary of State for Scotland leading a discussion on the contribution of the Scottish Financial Services Sector.
- In addition to this, work continues on a number of broader issues affecting the financial and business services sector, including tax, migration and infrastructure. In response to London’s success, I am aware that there are major efforts underway to improve New York’s competitiveness, with the publication of three recent reports – the report commissioned by Mayor Bloomberg and Senator Schumer, the report earlier this month by the US Chamber of Commerce and the Committee on Capital Markets Report in November last year.
- In addition, although the three reports are aimed at making the US regulatory framework for its capital markets more internationally competitive, they have different areas of focus. Their unifying theme is the need to reform the way in which Section 404 of Sarbanes Oxley is implemented, and the linked issue of the high cost of excessive litigation within the US system. In a speech last November, US Treasury Secretary Hank Paulson noted that US tort costs had now reached a record quarter-trillion US dollars, which is over 2 per cent of US GDP, three times the level in the UK.
- Both the Bloomberg/Schumer and the Chamber of Commerce reports also focus on the importance of international cooperation, including recognition and adoption of international standards such as the International Accounting Standards and Basel II, in promoting international competitiveness. We have worked hard in Europe to agree a sensible roadmap towards ensuring continued acceptance of US accounting standards subject to an acceptable level of convergence with international standards by the end of next year. It’s now up to the standard setters and regulators to deliver that roadmap and the necessary convergence.
- These reports discuss important issues for London’s competitiveness, and we will be looking in detail at the points raised. Today, I would like to focus on three of the most important subjects covered.
- Firstly, talent and skills. The recent Global Financial Centres Index Report by Z/Yen for the City of London Corporation highlighted, the availability of good personnel as one of the key indicators of competitiveness – and they placed London in pole position. We recognise the importance of having access to a motivated and skilled labour force, as I have mentioned it is one of the key areas of work for the High Level Group.
- The report commissioned by Mayor Bloomberg and Senator Schumer also rightly suggests that while New York currently has a significant share of the global talent pool, it indicates that this is under threat from restrictive immigration policies which are shutting out talent whereas London benefits from the EU’s free movement of people.
- In London we are working closely with the City to ensure that we preserve our tradition of openness not just to foreign ownership but also to foreign participation, enabling UK-based companies to employ the brightest and best from all over the world. This is reflected in the diverse workforce we have in the city today – some firms tell me that their staff speak up to 60 different languages.
- Second – regulation. The UK’s principles and risk-based regulation is key to London’s success and has proved to be highly effective, while being flexible and adapting to change. We are determined to keep it that way.
- Interestingly, the Bloomberg/Schumer report states that America’s entrepreneurial culture is at risk from its culture of litigation, and suggests that London is closing the gap with New York on innovation, with 12 of the top 50 hedge funds located in London last year, up from just three in 2002, while New York’s share of the top 50 was down from 28 to 18 over the same period.
- I am aware that the SEC is already working to lighten the burden of Section 404, particularly on smaller and foreign companies. And the increasingly integrated way in which global financial markets operate means we all stand to benefit from this – it is not a zero sum game.
- We welcome the unanimous decision of the SEC last week to ease its deregistration rules. This decision is a significant success for the EU US Financial Markets Regulatory Dialogue – it is good for European companies as well as for US capital markets. Commissioner McCreevy welcomed the rule change by commenting ‘the solution of the deregistration issue is a milestone of the Financial Markets Regulatory Dialogue between the EU and US. This is very good news for our companies and economy. The general criteria to exit US markets envisaged in the final rule are sensible, workable and practicable.’
- Given the success of the UK’s risk-based approach it’s disappointing and surprising that the London Stock Exchange’s Alternative Investment Market has been the subject of some recent unwarranted and inaccurate criticism. I am pleased to say that there are many who do understand the importance of proportionate, risk-based regulation including US Treasury Secretary Hank Paulson and SEC Chairman Chris Cox. And recently in the Financial Times, the Chief Executive of the American Stock Exchange, Neal Wolkoff, hailed AIM’s success. He made one very important point – that an exchange’s role is not to eliminate risk, nor to guarantee the success of a company. An exchange exists to provide transparency and liquidity to investors and enable companies with promising business plans to raise needed capital.
- I could not agree more. And to echo the comments made by Clara Furse, to come to terms with the success of AIM, people need to accept that modern, dynamic economies depends on entrepreneurial risk. AIM exists to fill a niche of the market – typically it provides capital for small, growing companies that have outgrown the venture capital stage – and it has been extremely successful in doing so. The failure rate for its companies differs little from the main London market. According to Thomson Financial, the AIM market as a whole raised $3.4bn in initial public offerings in the first three months of this year, more than the $3.1bn raised on the whole of the NYSE. In total, the LSE – including AIM – raised $11.2bn in IPOs in the year so far, outstripping the combined NYSE and NASDAQ total of $8.3bn. Its investors understand what the risks are. So does the FSA, and its regulatory regime reflects the fact that from time to time there will be individual participants in all markets whose behaviour is not perfect, but the overall approach needs be to proportionate and risk-based.
- However, we cannot relax and are determined to maintain the UK’s regulatory system to ensure that it is competitive. That is why the FSA will be hosting a conference on more principles-based regulation on 23 April. This theme will also be discussed at an informal meeting of the High Level Group that I will chair on 30 April.
- And as part of the work of the High Level Group, Lord Currie is leading a working group to develop a proposal for an international centre for financial regulation. In our changing global economy it is important to understand and explore the contribution efficient systems of financial regulation make to global growth. As financial markets integrate further there is a move towards greater regulatory co-operation and mutual recognition. The Centre will be aimed at stimulating debate on these types of issues, analysing trends and generating potential solutions. The Budget announced that the Government has committed to making a contribution to the start up costs for the Centre – underlining our commitment to promoting world-class skills, education and regulation in the UK and in London.
- Third, ensuring that the tax system continues to support business competitiveness is vital to the further development of an innovative and fast moving financial sector. We made a number of announcements in the Budget last week in this area.
- Following detailed consultation with the asset management industry, prompted by the establishment of the High Level Group, the Finance Bill 2007 will include legislation to remove a restriction in the Offshore Funds Tax Regime on the structure of multi-tiered funds, and will continue to consult with industry on a wider reform to address other tax barriers currently impacting on the development of offshore funds.
- We have also announced an extension of the scope of the Investment Manager Exemption – the IME – which will now include certain instruments related to carbon trading. HMRC has also recently been consulting with industry on proposed changes to modernise the Statement of Practice underpinning the IME. We will be reporting shortly on the responses to that consultation and, beyond this, will continue to engage with the industry and its representatives to ensure that the IME continues to attract investment management business to London.
- The Budget also outlined a package of measures to improve the tax rules on insurance to help business operate in a flexible and modern environment, and to reduce compliance burdens as far as possible. The measures on Lloyd’s modernisation, life insurance and insurance premium tax are aimed at modernising the tax rules to reduce complexity and where the level and quality of engagement has been excellent.
- And London’s pre-eminence as a leading financial centre will be further strengthened by the major package of reforms to business tax announced in the Budget last week, including a reduction in the main rate of corporation tax from 30 per cent to 28 per cent in 2008-9 – a rate that compares favourably internationally, and particularly with other G7 countries. All of these measures will help to sustain the UK, and London in particular, as the most competitive place in the world to do business.
- Finally, let me turn to property – the theme of this Conference. This year saw the launch – after some years of detailed and constructive consultation and engagement with the industry – of an important new tax regime for property investment in the UK: UK Real Estate Investment Trusts – UK-REITs.
- By allowing indirect investment in property to enjoy the same tax treatment as direct investment, our objectives in introducing UK-REITs are to improve the quality and quantity of finance for investment in property; to promote a wider range of savings products for individual investors; and to support structural change in property markets to reduce costs and improve professionalism in property management. And by doing so in a revenue neutral fashion that also allowed for ISA investors to hold UK-REITs shares – our aim has been to move the property investment industry into everyone’s reach with no cost to the taxpayer.
- I am delighted that since the launch of UK-REITs on 1 January, there have been ten converters to the regime – demonstrating that industry has confidence in the model. And I too am confident that we shall see more conversions in the coming months, hopefully also from the residential property sector.
- As we announced in the PBR last December, we will be making some minor changes to the regime in the forthcoming Finance Bill to make it easier for new companies to enter. The modesty of the changes we are making is, I think, testament to the detail and thoroughness of the work done already by the industry in partnership with us in the design of the regime.
- It’s now for the industry to take the opportunities that UK-REITs provide. There is space for innovation in the regime, and I look forward to seeing how the industry responds to that over the coming months and years. We in the Treasury will be watching the development of UK-REITs closely.
- We also announced in the Budget that are now taking the same principles that shape UK-REITs and building tax equivalence for Property Authorised Investment Funds – allowing open-ended investment in property to enjoy the same tax treatment as that for UK-REITs. And the UK is also leading the world in innovation in property derivatives – a market in which I know our hosts have a significant role and will be discussed in detail later on in the conference.
- In addition to this, the reforms announced at Budget to empty property relief, the introduction of 100 per cent capital allowances for renovating business premises in Assisted Areas, and the consultations on land remediation relief and the tax treatment of penalty payments by business tenants, will boost the supply of land and flexibility of property use. We have also accepted Michael Lyons’ recommendations that the RPI cap on business rates be retained, which I know has been widely welcomed, and will examine the case for local supplements only with the closest attention to ensuring that business has a strong and clear means of holding authorities to account – including through a vote. And reforms to be outlined in the Planning White Paper – due this spring – will help to provide an environment for the development of the quantity and quality of property that UK business – and homeowners – demand.
- A mature and deep property investment market is good for investment and investors, and good for the future attractiveness of the UK as a place for business – and we are determined to do what is necessary to make this happen.
- So let me end where I started: by stressing that we can continue to deliver stability and economic growth. We want to extend the City’s global reach even further and bring more investment into London and the UK. And my view is that our commitment to stability, our flexible and open business environment and our determination to engage effectively with our international partners, will help us maintain our position as one of the world’s two truly global financial centres.
- Thank you.