The precarious outlook for London’s funds


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It was 2006 and the City of London was experiencing extraordinary growth, gaining market share and recognition from its global competitors. If you’ve worked in the financial services industry, London was the place. U.S. investment banks, angry at the stringent regulations the Sarbanes-Oxley Act placed on their industries, moved senior staff to London, and some said they could move their headquarters too.

New York Mayor Michael Bloomberg and Senator Charles Schumer commissioned a McKinsey report. The consultants concluded that London’s regulatory approach was key: “It is easier to do business there, there is a more open dialogue with practitioners and the market benefits from high, principle-based standards.”

Within a few months the banking crisis broke out and Messrs Bloomberg and Schumer had more pressing matters to deal with. British authorities abandoned the light-touch regulation, and high-ranking American bank managers returned to New York. As the industry reformed, London’s boom stalled. Banking scandals ensued, one of which involved a JPMorgan dealer, later nicknamed the “London Whale”. UK regulators got tough and often went further than their counterparts elsewhere.

Meanwhile, some British political parties promised a referendum on membership in the EU, which financial institutions did not like either. Goldman Sachs warned against considering moving its European headquarters out of London if Britain leaves the EU. HSBC also cited this risk, along with tax and regulatory issues, as a factor in its recent decision to move from the UK.

In short, the city lost some of its charm. While most polls still show that London and New York rank head-to-head as global financial services capitals, at least one now leads New York to the top. Does this mean that after several decades in which the tide was strongly in London’s favor, the tide has now turned decisively against it?

If it does, it will slowly go back. London retains many natural benefits. It has a critical mass. It’s in the right time zone between the Asian markets closing and the American markets opening. English is the international business language. It is still considered a clean place to do business and a pleasant place to live.

But there is no room for complacency. The period of deregulation between the Big Bang in 1986 and the outbreak of the banking crisis in 2007 was unique. London was the beneficiary of regulatory arbitrage; Financial institutions moved there because UK regulators were seen as a wimp. That will probably not happen again.

Secular trends also work against London. Financial institutions in emerging markets are doing business they once gave up. The technology weakens the advantage of established centers as the ease of handling over distance undermines the value of being bundled in one location.

This poses a challenge for regulators. In their responses, they shouldn’t be unduly influenced by selfish financial institutions, but neither should they ignore them because there is a message in what HSBC had to say last month. The city’s contribution to the national economy, while often overstated by its self-interest, is still important and the UK would have much to lose in its decline. The UK’s next government should therefore develop a clear vision for its financial services industry.

A distinction needs to be made between temporary measures that reassure the public and more permanent features of the regulatory landscape. It has to ask which parts of the industry should and should be supported. Which parts should be left to the changing market? Which skills should be developed? What behaviors should be encouraged or discouraged?

The answers to these questions should then lead to a set of guidelines that support a responsible value industry. For all its flaws, the financial services sector is too important to the national interest to be left in the cheeky chair forever.

The author is a non-executive director at TSB, a UK bank. He writes in a personal capacity