The City as the global finance centre: risks & opportunities – My speech at Bloomberg, 14th June 2006
Let me start by saying what a great honour it is to be appointed as Britain’s 26th Economic Secretary to the Treasury, with responsibility for the City and financial services.
It is an exciting and a daunting time to be the UK City minister. These are days of unparalleled change and huge opportunity for our financial services across this country, in Edinburgh, in Leeds and of course, here in London.
And I have absolutely no hesitation when I say to you that London is – now, today – the world’s greatest global financial centre.
While New York and Tokyo rely for business on their large domestic economies, London is by its nature global, 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.
It is fitting that I am delivering my first ministerial speech in the City here at Bloomberg.
As a global firm, locating a major portion of your business here in London and with Lex Fenwick a British CEO, you are innovative, at the cutting edge – using new technology, attracting world-wide talent. You symbolise the strengths upon which the City is built.
I know you are here because it makes good business sense. We cannot take London’s status for granted.
My job is to ensure that companies like yours have a natural home here in Britain, not just this year, but for the decade and beyond.
Global economic opportunity
The global economy is going through a period of radical transformation, as new communication technologies and falling transport costs break down geographical barriers to trade and economic integration.
It is only a short time ago that many commentators and practitioners feared that these globalising forces – not to mention regulatory challenges – might well threaten the City’s economic strength. That was certainly a common concern during my first time at the Treasury as the Chancellor’s Economic Adviser and then Chief Economic Adviser.
So today I want to highlight why – in my view – London has confounded the pessimists, indeed surpassed all expectations in rising to the global challenge.
But I am not complacent – so I will end with my view of the risks that we must face down in the months and years ahead if London is to remain the global financial centre.
Government & the City: pre-1997
London’s standing as a global centre for trade and finance is nothing new – it even predates the existence of my 25 illustrious Economic Secretary predecessors.
London’s history as a trading and financial centre over the last three centuries and our long-standing traditions of openness, internationalism and of flexibility explain why modern Britain is responding to the challenge of globalisation without the kinds of protectionist and nationalist reactions that hold back many of our trading partners.
It is this commitment to openness and internationalism – and the great pool of talent gathered from across the planet – that underpins London’s success as a modern international financial centre.
Countless men and women working hard across the City must take the credit for this.
Yet Government can make a contribution, for good or ill. Let me give you two critical decisions one passive, one active which previous governments took over the last 40 years which have shaped London’s success.
The first was the decision not to copy the adverse regulation and tax policies which severely hampered parts of the American financial markets and drove Eurobond business from New York to London in the early 1970’s.
These regulations helped to push dollar deposits into Europe and increase the costs of doing business in the US, and I see a major lesson in that. Decisions not to act can be just as significant as decisions to act.
The second was the liberalisation of the City of London and the opening up of our markets in the mid-1980’s.
This Big Bang – and the raft of consolidations, takeovers and influx of foreign institutions and talent it involved, was decisive.
It confirmed that at least in financial services we would choose global integration and openness over protectionism and national ownership; competition and market discipline over discrimination and cartels.
I give full credit to those who made that happen.
Government & the City: Post-1997
In 1997, though, there were three critical areas of unfinished business, which we were right to concentrate on.
First, this country’s macroeconomic framework was flawed and it was politicised. Hence the right action was to grant operational independence to a reformed and a modernised Bank of England.
Second, our competition laws and institutions were badly in need of reform – and we were right to give the goal of competition primary importance and take ministers out of case-by-case competition decisions.
But the third – and from the City’s point of view the most critical weakness– was the fragmented, overlapping, burdensome, self-regulatory system by which the financial sector was governed.
Much of our work in the Treasury during those early years meant legislating for – and bedding down – a new independent and unified regulator, the Financial Services Authority, as well as new institutional arrangements for financial stability.
And I want to be crystal clear on this. Sir Howard Davies did a brilliant job – alongside his counter part at the Bank of England Sir Eddie George and Sir David Clementi – for this was no easy period. Not only did we enact the Financial Services and Markets Bill. But our new regulatory regime also had to deal with a series of events, some unforeseen – from the Asian crisis, the LTCM scare, and the advent of the Euro, through to the collapse of Equitable Life.
But many commentators and practitioners feared for the health of the City.
Fear number one, was of an FSA that might become inflexible and over-burdensome – a heavy-handed regulator oblivious of or uncaring about London’s wholesale markets.
Fear number two, was that by not joining the first wave of monetary union, Britain would exclude itself from Euro-based financial markets. In effect the City would shrink as Frankfurt or Paris grew in stature.
Fear three, was of the Single Market failing to materialise as promised – with directives or regulations or withholding taxes imposing new burdens on the City, and by doing so, moving London and European financial services away from that fundamental open, liberal instinct championed by the UK.
Lastly, fear number four – that new emerging financial centres alongside new technologies, and the switch from physical to virtual trading platforms, would undermine the City’s place in the world. In effect, slowly dissolving London as a geographical financial services cluster.
Return to Treasury
Yet the City has not stumbled, but prospered. Today, no other financial centre matches the global scale, scope and internationalism of London’s financial markets.
And our system of regulation is regularly cited, alongside the City’s internationalism and the skills of those who work here, as one of our chief attractions – a huge competitive advantage.
According to the City of London Corporation our regulatory system is ranked as the best in the world, ahead of both New York and Frankfurt.
We have a single unified regulator. And it is clearly independent of day-to-day political control – as are the competition authorities who scrutinise it. It is important that the FSA continues to deliver a light-touch and risk-based regulatory approach
I hope too the City has taken comfort from the way in which we have responded to new risks and to events.
Four years ago – almost to the day – the WorldCom accounting scandal broke in the US – just a few days before the annual Mansion House dinner.
I remember well the internal discussions at the Treasury – and the external pressure in Parliament and among commentators to respond with a regulatory crackdown.
We decided that in the face of pressure and criticism, the best action was to pursue a measured, proportionate response, and we were initially criticised in some quarters.
Of course, it would have been so much easier not to have done so – we could have sought easy headlines and used an aggressive and heavy-handed populist response.
But at what cost? That approach, as the Americans have found with Sarbanes-Oxley, would have been wrong for Britain.
I believe we are right to avoid prescriptive, heavy-handed regulation in Britain. Indeed, I believe that while it is Bank of England independence that is regularly cited as the Government’s most significant financial reform, the establishment of the FSA has been as important for Britain.
But there is no room for complacency, the wisdom of that approach can be measured in the number of international companies choosing to do business in London and to list on our markets – not because we are a soft touch, but because our system is fair, proportionate and predictable.
Euro & London
What of the second fear – the impact of the Euro on London – an issue we judged sufficiently important to be one of the five economic tests of British membership?
With those five tests first conducted in 1997, then again in 2003 we twice concluded that the City of London would prosper whether or not sterling joined the Euro.
Three years on, that assessment is sound. As expected, monetary union has driven growth in and the integration of Euro-denominated financial markets.
But far from weakening London’s role, the establishment of the Euro has seen London increase its lead over Frankfurt, Paris and other markets. London now accounts for over two-thirds of the global market in international bonds. It is by far the largest global market for foreign exchange trading, with about one-third of all transactions.
Again, there is no room for complacency if we are to maintain this environment. That is why, for example, we worked hard to secure the Committee of European Banking Supervisors in London.
But far from business shifting to the continent, London has proven that the scale, scope, efficiency and innovation of our markets means that it is the world’s best location from which to trade Euro-based securities.
The third fear – closely linked – was that Europe would be a deadweight on the City and on the UK.
There have undoubtedly been tough times, hard fights. But, through active and informed engagement, we have show we can win debates and change attitudes in Brussels and across member states.
Take the Savings Directive – where Britain won the argument for a global solution, based on exchange of information – rather than through an outdated model for tackling tax avoidance which simply wouldn’t have worked.
Or the Lamfalussy arrangements and MiFID – with its greater appreciation of mutual recognition and home state regulation, which has reduced the number of regulators dealing with investment banks.
The Commission’s new White Paper on financial services, with its commitments to better regulation and global competition, demonstrates that opinions in Europe can be changed for the better through thoughtful debate and engagement by the City and by Government.
Since the Prospectus Directive came into force last July, London looks to have increased its debt listings by around 100% – a sign that business is moving to London as a gateway to the rest of the single market.
But this has, at times, required the Government to stand up and fight the UK’s corner when, as with the withholding tax, we were isolated for a long period. And on this – as on the original proposal for a Prospectus directive – the decision to say “no” and force a fundamental rethink has been pivotal in securing the right kind of reform.
And what of the fourth fear – that global integration would undermine our historic position with London as a world financial centre? Well, the facts speak for themselves.
The growth in London’s markets has been phenomenal over the last ten years. In cross-border banking, the UK has 20% of the global market, up in value by over 160%.
With foreign company share trading, where the UK accounts for over 40% of the market – growth of over 250%.
And with directly traded derivatives, where the UK again accounts for over 40% of global trades – and where growth has been a staggering 770%.
Today London has more foreign banks than in any other financial centre.
We are the location for six of the world’s ten largest law firms. And for 200 foreign law firms who recognise the importance of English law for global trade.
And we have won notable recent success with foreign listings not only from China, Russia and the former Soviet Republics but also in the growing interest from the United States – with twice as much foreign equity traded in London as in New York, and AIM, the world’s leading market for smaller quoted companies.
The UK has clearly benefited from our existing comparative advantage in international financial services. But I believe these advantages have grown more important not less.
Even with modern communications technology, London’s long accumulation of expertise, its specialist suppliers and a skilled labour force and the benefits of physical co-location of businesses make it very difficult for any other centre to replicate the efficiency of doing business in London.
Today our location provides a bridge between the time-zones of Asia and America – an increasingly important quality in a world where a single business or supply-chain needs to operate across continents with ease, and where financial markets adapt to price sensitive information twenty-four hours a day.
And while English is the unquestioned global business language, clarity and certainty of English law has heralded a leading position too for much international commerce.
Far from weakening London’s standing, global financial integration and the emergence of new economic powers and regional financial centres have all strengthened the importance of London’s attraction.
Challenges to come
There is an important lesson here for other sectors of our economy. Embracing change, being innovative and open to new ideas, encouraging ownership and talents from around the world, investing in skills and new technologies – these are the keys to success in the modern economy.
But I stress – the speed and the scope of change in the global economy means that we can never be complacent about our past successes, nor blindly assume they will continue.
My job as City Minister is to stand up for London and financial services around our country, in Whitehall, in Brussels, across the world.
But my job is also to keep a close eye out for any developments which could undermine your competitive position. So let me highlight three areas where we must proceed with care.
First, we must build on London’s characteristic strengths of openness and internationalism and recognise the forces that determine business location decisions.
This means continuing to improve the UK as a location for business compared to competitor countries, investing in infrastructure and skills, but also supporting what makes London a creative, dynamic and great place to live.
In the Budget, the Chancellor spelled out our ambition for London’s financial centre to become even more successful, and the steps this Government will take with the industry to realise this objective.
He has established a new high level advisory group, with which some of you are involved, to bring together key participants in London’s financial markets and public authorities.
Through this group’s pioneering work we will together draw up a single strategy for maintaining and promoting London’s competitiveness as an international financial centre.
Because the lesson of the past is that even a successful economic cluster can erode over time if economic policy does not recognise and adapt to the needs of the businesses within it. To build upon the success of our financial sector we must listen to concerns of the industry and work closely with you to address them – in areas from infrastructure and planning, to skills, immigration and tax.
As with regulation, the way the tax system is administered is clearly also an important factor for the competitiveness of the financial sector. I am struck already in the first weeks of my time as Economics secretary that financial firms in areas such as asset management desire where possible further improvements in the existing engagements and consultation from HMRC as they have seen relations with the FSA improve. While recognising the tax system is different from regulation, we will put in place arrangements to make even more responsive this dialogue on tax matters involving the Treasury and HMRC.
I believe if we get this right we can do even better in the future. Already the UK is the home of 26% of all European headquarters for companies from North America and Asia-Pacific – and the numbers of companies choosing the UK is increasing.
So I want us to go even further and make the UK and the City the place of choice for new listings and European headquarters.
Secondly, we must keep the UK’s regulatory system at the cutting edge – the best in the world.
Demands for higher standards of probity – and for greater protection for investors – never cease, and we will judge these demands on their merits. But at all times we will apply a principled system of risk-based regulation, without unnecessary administrative burdens.
I have spoken to Sir Callum – and I know he is committed to this goal. It is important that the FSA delivers.
Increasing competition from other international financial centres means London’s future success cannot be taken for granted. And we are aware of the competitive challenges facing London as a world centre for insurance and reinsurance, including from Bermuda.
Let me say, Sir Callum was right to raise the potential longer term implications of any change of ownership at the LSE in his statement this week. I too would expect that the exchange’s stakeholders will want to satisfy themselves that any owners’ plans and any implications for the way the exchange is regulated, meet the test of being what is best for the City as a global financial centre in the long term and that nothing should be done to put at risk a light-touch, risk-based regulatory regime.
Alongside an effective regulatory regime we must also remain vigilant to the risks to stability of the financial system. That means not only ensuring the financial system is robust and can cope with unexpected events and market volatility – it means remaining alive to the potential of new and emerging risks too. For example, understanding the benefits and potential risks of new, innovative and complex financial instruments, or the growing significance of the hedge fund industry.
Third, while we will continue to keep the UK decision on the euro under review on the basis of an assessment of the five economic tests, we will also continue to work with our European partners to complete the single market.
That means engaging closely to influence the arguments where Britain and the City’s interests are at stake – yet standing firm where UK interests would be damaged.
So in the financial services arena we will continue to resist proposals that are unnecessary or would be positively damaging. For example we are pressing to exclude mortgages from the Consumer Credit Directive. And as we consider proposal from the Commission to liberalise clearing and settlement in Europe, we will once more make the case for a light-touch, risk-based approach.
Next weekend, the Transatlantic Business Forum will be discussing how we can breakdown the regulatory barriers in financial services between the USA and Europe. This is an important opportunity for Europe, working with business, to reduce barriers and strengthen international trade.
But I am also clear that it is in the best interest of the City that we stay fully engaged.
You have told me that you want Britain to reject ideological approaches to Europe – in favour of a pragmatic approach that reflects the reality of London as a global financial centre. A London strengthened as part of a European single market for financial services.
But we will not stand up for City interests by leaving the table or withdrawing to the extremes and anti-European fringes of the big European debates.
That is no way to stand up for the City or for Britain and – under this government at least – that will not be our approach.
To withdraw from the mainstream of Europe and diminish our influence would be bad for Britain, bad for London and bad for the City.
So I look forward over the coming weeks and months to work with you all so that your record of success is developed and advanced. Your success, built up through your efforts in the City of London.
I promise you this – I will make it my task to ensure you have the right kind of government on your side as you work to grow your global success. And together we will ensure the City remains the pre-eminent capital of global financial services.
Posted November 26th, 2015 by admin