Cicero Policy Briefer

Issue 9, February 2007

London’s Calling to the Faraway Global Financial Centres

By Terry Paul

Having worked in and around financial services for some time, I’ve seen it lurch from crisis to crisis as it seeks to develop business models which provide confidence to both markets and consumers, providing adequate return for appropriate risk. However, recent events have given me cause to think about the nature of the UK financial services industry from the global perspective.

First was the publication in November 2006 of the HM Treasury’s Supervising Insurance Groups under Solvency II report. This may have passed many by during the hectic pre-Christmas period as it found its way into the nether regions of the finance, compliance or actuarial departments. However, I believe this document to be important since it represents the Government’s attempt to stimulate UK debate on the European Commission’s Solvency II proposals, which I believe will eventually lead to the onset of global standards in capital adequacy and supervision requirements for insurers.

The European Commission is due to submit Solvency II proposals in July 2007, with implementation planned prior to the European Parliament elections in 2009. In developing capital standards for European Union nations, the Commission (via the Internal Markets and Services DG) is also conducting discussions with the US Senate, since US subsidiaries will be operating in European Union nations and will therefore also be subject to Solvency II proposals. Following the logical extension of cross-border capital requirements, and the importance of these standards as EU firms seek to expand into India, China and other emerging countries, perhaps now is the time for UK financial services firms to fully engage in what the EU is proposing, and to ensure that the eventual directive fits closely with the business models of UK insurers.

In this regard—and this may come to a shock to many—the Financial Services Authority is held in extremely high regard by the European Commission officials and MEPs involved in financial service issues, and is viewed as playing a good innings in discussions on Solvency II. So next time you lament the onset of FSA regulation and its direction, I suggest you think again!

The second event which caused me to look at the UK financial industry from a global perspective was the recent McKinsey report Sustaining New York’s and the US Global Financial Services Leadership, written for the Mayor of New York City, Michael Bloomberg. The McKinsey report looks at a wide set of issues but specifically sets out reasons why New York is falling behind London, and makes recommendations to reverse the decline of the New York financial services industry, and (by implication) stop the onward march of London as a global financial centre:

“There is an urgent need for concerted but balance action at the national, state and City levels to enhance the competitiveness of the US financial markets and defend New York’s role as a global financial centre.” 1

It is London’s superlative business environment which makes it a world beater in the financial services industry. London is extremely competitive and taking on New York in terms of skilled individuals, legal environment—and most importantly, regulatory environment. For example, business leaders interviewed for the report ranked ‘regulation responsiveness’ and ‘overall regulatory environment’ as the third and fourth most important issues. A strong regulatory system was seen as vital in providing market confidence. However, a regulatory system needs to adapt as markets and products innovate. In this respective the UK, with its single, principles-based financial regulator in the FSA, is viewed as vastly superior.

The report proposes a National Agenda, which sets out a “financial services action plan” for New York to regain the competitive advantage from London. However, not to be outdone, HM Treasury launched its own study into London’s competitiveness last October, the High-Level City Group, which will look at the key areas of: the maintenance of principles-based regulation and reduction of regulatory burdens; the modernisation of the wholesale insurance market; the boosting of financial skills; the promotion of the UK-based financial sector in overseas markets; and the tax and administrative framework.

“The message that the City’s success sends out to the whole British economy is that we will succeed if we think globally. But we must not be complacent about that success.”

Chancellor Gordon Brown speaking at the High-Level Group, 18/10/06

The High-Level Group has yet to report or set out a detailed work plan with key deliverables, but I suspect that the eventual report will be a weighty affair which will become a cornerstone of a future Brown Government’s approach to the City. Just as the Wanless report2 provided the Government with the political ballast to enact reform to the National Health Service, perhaps the outcomes from the High-Level Group will hasten radical reform of the UK financial services industry, enabling UK firms to compete globally and take on foreign competition. As the Lancashire mill owners and workers found out to their cost in the early 20th century—just because global competition isn’t on your doorstep, this doesn’t make them any less of a competitor.

1. McKinsey report ‘Sustaining New York’s and the US Global Financial Services Leadership’
2. Securing Our Future Health: Taking a Long-Term View (2002)

Terry Paul can be contacted on +44 (0)20 7665 9533 or click here to email.

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