Select Committee on Treasury Written Evidence

Memorandum submitted by the City of London Corporation


  1.  London's leading role as international financial centre is widely recognised. It is currently home to over 260 foreign banks,[16] generates over $750 billion foreign exchange turnover each day (31% global share),[17] is the world's leading market for international insurance,[18] and has 554 foreign companies listed on the London Stock Exchange.[19] This view is shared by the Treasury,[20] which says London's emergence as the leading financial centre is attributable to its strong position, in terms of the size of London's markets, the scope of services offered within a small area, and its international nature. The City is and always has been a market place serving, and trading with, the rest of the world commercially. Its position in a time zone enabling it to transact with the Far East in the morning and New York in the afternoon and the English language further aids business. The result is a highly concentrated international business district with an overwhelmingly commercial infrastructure.

  2.  Comparisons are often drawn between the City of London and other cities, notably New York, Frankfurt and Tokyo. Part of the continuing appeal of London to foreign companies is its cosmopolitan status. Frankfurt and Tokyo, for example, are primarily market places for domestic participants to which foreign players are granted access. London and, to a lesser extent, New York are characterised by foreign nationals trading with each other.[21] The City is essentially a large international market place, responding to a need for governments and companies not only in Europe but from across the world, to borrow and raise capital.

  3.  Recent international trends are having an increasingly significant impact on the City as a world class financial and related business centre. Increasing imbalances have become apparent between economic growth rates achieved in continental European countries and those generated through the increasing competitiveness of emerging economies, in particular India and China. The difficulties experienced by the US economy continue to have a wide impact most noticeable on global exchange rates. With these uncertainties, the UK's continued growth cannot be assured if the economy is too heavily dependent on exports to Western European and North American markets. It has become clear over the past two to three years that increasing attention needs to be paid to Asian markets[22] and the City Corporation recognises the significance of the growth in these economies. This is illustrated by the current Lord Mayor's focus on the region and by the decision by the City Corporation to establish representations in both China and India.


  4.  Globalisation is, of course, a reality of the modern world of commerce. It is a phenomenon that is driven by increased international competition, stronger technology flows, and greater access to financial capital. In turn, it is a force that spreads goods and services, knowledge, learning and wealth potential across more of the world. In the last 10 years alone gross private capital flows have more than doubled as a percentage of GDP and such flows and the trade and investment they stimulate help drive growth in the world today. They reflect the internationalisation of investments flows due to the reform of exchange controls, cheaper travel and the great advances in communications and technology. It could be argued therefore that modern finance, in its many competitive forms, is the underlying driver of globalisation because international trading profits enable huge investments to be made in skills, innovative technology and in particular rapid information and communications systems.

  5.  Research carried out for the City of London Corporation by the Centre for Economics and Business Research[23] highlights that world trade as a ratio of world economic activity has risen from 11% in 1960 to 27% in 2005 and explains further that in 1960 the 15 countries that made up the European Union (up to May 2004) enjoyed 30% of world trade (excluding trade between the 15 countries). With the growth in trade across the world, this share slipped back to 20% in 1980 and has remained roughly at the same level since.

  6.  The emerging economies of China and India, among others, clearly present new opportunities further to enhance London's position, but also new challenges that mean London cannot afford to be complacent and future success can never be taken for granted.[24] China has increased its share of all goods exported from near 0% in 1960 to 5% in 2000 and to 7% in 2004. As yet, other emerging economies such as India, Russia and Brazil are finding it harder to become such notable exporting countries, though as a whole, emerging economies' share of world trade has increased dramatically.[25]

  7.  The emergence of new major goods exporters such as China has had a number of significant economic implications for developed economies such as the European Union. Apart from impacting upon the EU's share of the world export market, it has also had an effect upon the way domestic markets operate. It has coerced developed economies into re-evaluating their manufacturing markets, shrinking them in parts and raising the quality in others to be able to compete. Their emergence has also lowered world prices of goods that are produced by large emerging countries, such as cotton and electronic equipment, but at the same time has raised the prices of goods imported by such countries, such as energy, other commodities and even many traded services.

  8.  Emerging economies at present hold a small share of the finance and insurance export market, for example in 2002 China exported €0.3 billion, India and Brazil €0.5 billion each and Russia €0.3 billion.[26] Indications are, however, that they are growing fast. Indeed between 2002 and 2004, it is estimated that these four countries increased their exports of finance and insurance by 32%.[27] The fast growth in wholesale finance trade in recent years in emerging economies highlights the potential for further growth in such countries.

  9.  Financial markets in emerging economies are currently comparatively small when compared with those in developed economies such as the US and EU. For example in 2004 the domestic equity market capitalisation of China's Shanghai and Shenzhen stock markets stood at €360.4 billion compared to the US exchanges equivalent of €13,141 billion and the London Stock Exchange equivalent of €2,307 billion. In Asia, the largest bourses outside of Japan remain those of Hong Kong and Taiwan. However the Indian stock exchanges in aggregate had a domestic market capitalisation in equities of €603.4 billion in 2004, compared to Hong Kong's €693 billion. They are amongst the fastest growing, with domestic market capitalisation having risen 238% between 2001 and 2004. This compares with growth of 15% on the New York Stock exchange, 29% on NASDAQ, 32% on the London Stock Exchange, 29% on Euronext and 12% on the Deutsche Börse over the same period.[28]

  10.  In general, however, the Indian and Chinese financial markets remain small compared to those in the US, Japan and the EU. Fast Indian growth has failed to raise the stock market growth of emerging economies as a whole above that of developed countries. Indeed the percentage growth in domestic market capitalisation of emerging economies between 1995 and 2004 has fallen short of that in developed economies. The likelihood is of faster emerging market growth in coming years. Dynamic economic growth in economies such as India and China will eventually feed through to more mature and advanced financial markets: for example, currently some €1.4 trillion worth of private savings resides in deposit accounts in China. Much of this is likely to feed through to equity and bond markets over the next 15 years, as the wholesale financial market reforms.

  11.  Foreign investment is also helping the growth of financial markets in the emerging economies. According to the World Bank, China and India are by far the largest net recipients of portfolio flows to developing economies. China received a net $8.5 billion in 2004 and $6.8 billion in 2003 whilst South Asia, largely India, received $6.0 billion in 2004 and $7.3 billion in 2003. Between 1997 and 2004, China and India benefited from net portfolio equity inflows of €34 billion and €28 billion respectively. South Africa also benefited from net equity inflows of some €30 billion during this period, though these were mostly in the 1990s.[29]


  12.  The Chancellor's announcement in March of a new International Business Advisory Council for the UK is welcome. According to the Treasury, "The Council will advise the Chancellor and Secretary of State for Trade and Industry ... over the next three years on how to respond to the challenges and opportunities of globalisation to ensure the UK continues to be one of the top locations for international companies' high value-added activity".[30] This group goes some way in illustrating the significance attached by the Government to the growing impact of globalisation.

  13.  In November 2005, the City of London Corporation published research, conducted by Z/Yen Limited,[31] based on a survey of opinion of professionals in the financial services industry in over 20 countries. Senior decision makers were asked about the key components of competitive advantage, and how the world's major financial centres ranked against these criteria, therefore providing a detailed overview of practitioners' perceptions of London's position.

  14.  The results of the survey showed that the regulatory environment ranked highly among the factors considered most important in assessing the competitiveness of an international financial centre. The regulatory environment is considered much better in London and New York than it is in other competitors such as Paris and Frankfurt and slightly better in London than in New York. There are generally two comparisons made about the regulatory environment in London and New York. The first concerns the number of regulatory bodies, some respondents to the survey forwarding the view that there are too many regulatory bodies in USA and that there is a lack of consistency between them. In the UK, however, the Financial Services Authority (FSA) appears generally well regarded and benefit is seen in there being only one main regulator overseeing the financial services industry in London.[32]

  15.  The second comparison about the regulatory environment in London and New York concerns the philosophy of regulation. The FSA favours an environment where principles of regulation are published and there is a degree of discretion as to how these principles are applied. The FSA also favour a risk-based approach to regulation where financial institutions concentrate their compliance efforts in areas where there is the highest risk. In the USA the regulatory philosophy is based around more clearly defined rules and is described as more "prescriptive". In general it would appear that the regulatory environment in USA is regarded as acceptable, but the approach adopted by the FSA found more favour with respondents.

  16.  The issue of European regulation continues to be a priority for the City. The better regulation agenda has received widespread support from practitioners in the City and beyond who have been calling, for some time, for both less and better legislation, and a genuine policy shift towards achieving more considered regulation. There is a growing realisation that the most effective legislation is produced in consultation, at an early stage, with key practitioners and stakeholders. This was one of the key findings of the report by the UK Better Regulation Task Force launched at the UK Presidency Better Regulation Conference in September 2005.[33]

  17.  In advance of the UK Presidency of the European Union, City practitioners were consulted by the City Corporation over the issues they would like to see raised during the UK's tenure. One of the matters raised was the need for effective and consistent implementation of Financial Services directives across the EU as a whole. This is key in realising the potential benefits of economic integration from EU financial services legislation while avoiding costly burdens on business.

  18.  The level of support for financial services and Government responsiveness to the concerns of the industry was ranked mid-way by practitioners in the Z/Yen study[34] in terms of importance as a factor in an international financial centre's competitiveness. London and New York were seen as having governments which were more responsive than Paris and Frankfurt. Singapore was also thought to have a responsive government. On the other hand, other respondents felt that the financial services industry in Tokyo was badly let down by its government and that Tokyo's standing as a financial centre had suffered as a result.

  19.  A previous study carried out in 2003[35] reported a widespread dissatisfaction with the Government over financial services matters and a feeling that promoting the financial sector was not sufficiently high on the political agenda with other governments more adept at advancing their financial sector's interests. Whilst a number of the respondents to the 2005 survey considered that there was room for improvement in the Government's attitude, the strength of feeling reported previously did not seem to be present. Indeed several respondents said that they found the attitude of European Governments "too interfering", and preferred the more "laissez-faire" attitude in the UK.[36]

  20.  One criticism that did emerge from London practitioners in the survey was the feeling that too many of those involved in Government did not fully understand the concerns of the industry. It was acknowledged, however, that generally the Treasury was reasonably supportive of the industry and the Government was not going intentionally to undermine such an important part of the UK economy.

  21.  On another aspect of Government intervention, respondents ranked the corporate tax regime eighth in importance as a factor of competitiveness. 91% of respondents thought the Corporate Tax regime was important, very important or critically important. Perhaps unsurprisingly, few respondents scored any financial centre as excellent but London fared well with 74% of respondents rating it as good compared to 64% awarding New York a similar rating. The research showed, however, that there was a general feeling that corporate tax was less of an issue than it once was and quoted a Director from a European investment bank—"These days the big banks are all multinational and are clever enough at declaring profits sensibly—this means that corporation tax is less of a competitive issue than it once was".[37]

  22.  The availability of skilled personnel was ranked as the single most important factor in the competitiveness of an international financial centre in both the 2003 and 2005 surveys. Both London and New York have good reputations for the availability of skilled staff.[38] Based on this research, it is difficult to avoid the conclusion that London and New York's reputations as global financial centres, at least in part, derive from the quality of the workforce. Whether the quality of the workforce is a cause of these cities becoming leading centres or whether skilled workers are attracted to London and New York because of the size of the financial sector within the cities is the subject of some conjecture. The availability of high quality personnel is, however, clearly a key factor in maintaining the superiority of London and New York over other centres.

  23.  A number of European banks have decided to centralise their European operations in London. A variety of reasons have been given, most based on the availability of skilled personnel and particularly the flexibility of the labour markets in the UK.[39] The flexibility of staffing was a common thread amongst a number of respondents. This is important because banking is highly cyclical and it is seen as necessary to be able to increase and reduce staff numbers regularly.

  24.  Separate research undertaken by Z/Yen Limited,[40] also revealed a strong feeling among practitioners that London was the most suitable place in Europe to centralise their operations because of the flexibility of the labour market. One respondent talked of London having a "just-in-time" workforce—well trained and available when required, but easily reduced when necessary. This contrasts with views given of Paris where reducing staff numbers requires trade union consent which can add significant time and cost if workforce changes are proposed. Several respondents also made the point that London is the "English speaking centre" for nationalities, such as Australians, New Zealanders and South Africans and that many of these people are highly qualified and have worked in banking in their home countries.

  25.  Growing EU labour regulation has previously been seen as a key threat to London's position[41] and the 2005 research carried out by Z/Yen offered the stark warning that "this threat remains with the UK's adoption of the EU's Social Chapter and the steady flow of labour market regulation making themselves felt".[42] The research also found however, that this is unlikely to drive jobs away from London towards other European centres whilst these centres remain even less attractive—"The current feeling in London is, however, that the Government is acting responsibly in the adoption of EU labour legislation and that London's competitiveness is unlikely to be badly damaged."[43]

May 2006

16   Source: Bank of England Back

17   Source: BIS Back

18   Source: International Financial Services, London Back

19   Source: London Stock Exchange/World Federation of Exchanges Back

20   HM Treasury Budget 2006 Press Notices, PN04, "Strengthening London's position as the world's leading international financial centre", 22 March 2006 Back

21   The Competitive Position of London as a Global Financial Centre, Z/Yen Limited, published by the City of London Corporation, November 2005 Back

22   Alan Johnson, Secretary of State for Trade and Industry said in a speech to the Transatlantic Business Conference on 30 March 2006 "The emergence of China and India is potentially the biggest economic development in a thousand years" Back

23   The Importance of Wholesale Financial Services to the EU Economy 2006, cebr, published by the City of London Corporation, April 2006 Back

24   In this regard, it is worth noting that the City of London Corporation has commissioned SAMI Consulting and Oxford Analytica to explore the impact of China and India's long-term economic development on the Square Mile. The project will consider alternative scenarios concerning the potential development paths of India and China and assess the possible impacts (both positive and negative) upon the City's financial services sector. The research is due for publication in Summer 2006 Back

25   The Importance of Wholesale Financial Services to the EU Economy 2006, ibid Back

26   World Trade Organisation, International Trade Statistics 2005, OECD Statistics on International Trade in Services 1993-2002, cebr analysis Back

27   The Importance of Wholesale Financial Services to the EU Economy 2006, ibid. Back

28   ibid. Back

29   ibid. Back

30   HM Treasury Press Notice 19/06, "Chancellor establishes International Business Advisory Council for the UK", 21 March 2006 Back

31   Competitive Position of London as a Global Financial Centre, op cit. The study was conducted to update research previously carried out for the City of London by the Centre for the Study of Financial Innovation and published in June 2003 entitled Sizing up the City-London's Ranking as a Financial Centre. This research similarly sought practitioners' perceptions of London's competitive position as an international financial services centre Back

32   Competitive Position of London as a Global Financial Centre, op cit Back

33   Get Connected: Effective Engagement in the EU, Better Regulation Task Force, September 2005 Back

34   Competitive Position of London as a Global Financial Centre, op cit Back

35   Sizing up the City-London's Ranking as a Financial Centre, Centre for the Study of Financial Innovation, published by the City of London Corporation, June 2003 Back

36   Competitive Position of London as a Global Financial Centre, op cit Back

37   ibid Back

38   ibid Back

39   ibid Back

40   Strategy Canvas Survey (for Global Investment Bank), Z/Yen Limited, February 2004 Back

41   Sizing up the City-London's Ranking as a Financial Centre, op cit Back

42   Competitive Position of London as a Global Financial Centre, op cit Back

43   ibid Back

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