There is plenty for the City of London to be positive about. Despite Brexit and the recent volatility of financial markets, there are numerous opportunities for the City to reaffirm its status as the financial capital of the world. But there is no room for complacency and, as I argue in a new report for the IEA, finance needs to remain flexible, forward looking and competitive.
Over the last year it has shown this, positioning itself well in areas such as green bonds, trading the offshore Chinese currency, Islamic finance and financial technology (FinTech). The latter is particularly impressive, with the major tech firms committing to new investments to London, to make it their global tech hub outside of Silicon Valley. The growing interaction between finance and technology means this is hugely positive. London is already in pole position to be the FinTech capital of the world.
For the City the key is where the clients will want to do business and thus where the markets will be – and what the regulators will decide. There are many niche financial centres in Europe but they are unable to provide the depth of the market that exists in London or match its infrastructure.
In fact many of the City’s of strengths are deeply embedded and largely Brexit-proof. That is, they will not be affected by the UK-EU negotiations. These include: the English language; the importance of contracts; the independence of institutions; and the use of English common law across the globe. To this can be added London’s appeal as a place where people want to live, study and work.
In the wake of the financial crisis, regulation took centre stage. Ahead of the crisis, the regulatory pendulum was at one extreme, too light. Now the regulatory pendulum may have swung to the other extreme. And like any pendulum it needs to settle somewhere in the middle, supporting growth while ensuring financial stability.
While many issues in finance are being addressed globally – through the Financial Stability Board – London needs to be aware of a future competitive threat from New York. There, some of the deregulation issues talked about before the global financial crisis are now back on the agenda.
Meanwhile, in Europe, one hotly disputed topic is the clearing of euro-denominated derivatives. About three quarters of euro clearing takes place in London; Paris has about one tenth. The EU would like the euro-clearing business that takes place in London to move to the euro area. Clearing takes place where it is most competitive, hence currency-denominated instruments can be cleared outside the country to which they relate.
Such clearing takes place within highly regulated clearing houses that allow banks and others to net their positions and reduce their overall costs. This attracts the volume of business needed to ensure markets are deep and liquid enough to operate efficiently, with costs and spreads low. As in many other areas, London has the combination of factors that gives it a cutting edge.
The media often gives the misleading impression the EU could decide if the market will move. It cannot. What the EU can do is change regulations and rules to force EU banks to conduct their business in the EU, not outside. This might be seen as protectionist and would result in a fragmentation of this market, with costs higher. It is only if the EU was able to get the clearing houses to actually move from London that there would be a concern, but that is unlikely to happen.
One area I focus on in my report is the equity market. This is often overlooked. Last year saw over 100 Initial Public Offerings on the London Stock Exchange, a year on year increase of 54 per cent, the largest rise in Europe. London is also the fifth most capitalised equity market in the world, but New York dominates.
Over the last year international competition to attract Saudi Aramco’s proposed listing has drawn attention to London’s ability to attract global listings. The UK authorities were prepared to act flexibly, highlighting the benefits of an accommodative listing policy in a competitive environment.
London must also retain the listings it already has. A current hot topic is the issue of dual listings, with firms like Unilever and BHP in the spotlight. These are two of seven global firms, each with a dual listing in London and elsewhere. The seven have a market capitalisation in London of $235 billion and elsewhere of $259 billion. The downside for London is to lose the $235 billion, the upside is to retain it and attract an additional $259 billion. This is a swing factor of half a trillion dollars.
Some may argue these issues are Brexit related, but surely they are not. Yet it would be good for London to retain their listings. Unilever is under pressure to unify its outmoded two headquarter system to either London or Rotterdam. Unilever’s decision will attract attention, whatever they decide, but it should make a strong case, like TUI or IAG before it, to keep its FTSE 100 listing.
Meanwhile BHP is under pressure to unify its corporate headquarters as this reform would boost shareholder value. Likewise, it should surely keep its FTSE 100 listing too, maintaining a London presence and remaining part of a broader financial eco-system. While it is up to those firms themselves, the UK Listings Authority and FTSE Russell must be flexible in interpreting their rules to ensure continued access to the UK markets and indexes, such as the FTSE 100, for key international companies.
What matters most is that where there are outstanding issues, the City has the ability to show leadership, with policy tools at its disposal, to remain the world’s leading financial centre.