THE IMPORTANCE OF FOREIGN BANKS TO THE CITY OF LONDON
Text of speech by Mark Boleat, Policy Chairman, City of London Corporation to Association of Foreign banks, London, 16 June 2015
The City is the world’s leading international financial centre, and by the City I mean not just the square mile, or indeed London, but the whole of the UK. It is home to over 250 foreign banks employing thousands of people and contributing significantly to tax revenue.
This position is not by accident, although it has benefitted to some extent by acts and omissions of other finance centres. Rather, it reflects a unique combination of circumstances, including an open and welcoming environment in which being British confers no advantage, a globally competitive tax and regulatory regime, a world beating judicial system and the application of the rule of law, the English language, a favourable time zone, and being a great place in which to live and work – in which education and culture play an important part. And, it also reflects British membership of the European Union, allowing banks and other financial institutions based in London to operate throughout the whole of the EU without separate authorisation in each country.
But Britain should not be complacent. A number one position is not a given, and maintaining it can be more difficult than achieving it, as any top sports team or business knows. Public policy needs to take account of the competitive position of the UK.
We have just got over a General Election, with an unexpected result of a majority Conservative Government. This has removed from the worry list some of the anti-business policies that Labour was promoting, and from which Labour leaders are now quickly dissociating themselves.
So what are the issues public policy issues that concern the banking sector and particularly foreign banks in Britain? The first is the bank levy. One can understand the political attraction of this as a method of raising tax revenue. The banks remain a popular target and some recovery of the costs to the taxpayer of the financial crisis from the banking sector is justified – but the levy goes much wider than the banks that received taxpayer support. And there are concerns about the impact of the tax in pushing business outside the UK and therefore reducing tax revenue – a point the Conservative Party made effectively in respect of a 50% top personal rate of income tax. In effect, the levy imposes a tax of more than 20 basis points on deposits held in Britain. My understanding is that the entirely predictable result is that some business that would have been booked in London is now booked elsewhere. The arbitrary and unpredictable nature of the levy, particularly the most recent increase, is also a source of irritation for firms – and undermines a key attraction of locating in the UK – a stable business environment in which the tax regime is a significant component.
This may be an audience of foreign banks, but of course the tax bears disproportionately on UK-based banks as it is levied on their worldwide deposits. It is no surprise that HSBC is reviewing its location. From its point a view this is entirely sensible. But from a London point of view we do not want to see HSBC as a member of the Association of Foreign Banks. And it would be a huge loss to Britain and the British taxpayer if HSBC did decide to relocate.
So – a message for government – please review carefully the impact of the bank levy, something which is compatible with the manifesto commitment of keeping the bank levy in place.
Similar points can be made about regulation, although here the issue is more international. A strong regulatory response to the financial crisis was inevitable and wholly justified. And the circumstances in which this had to be done meant that there was no time for the luxury of cumulative impact assessments or for an analysis of unintended consequences. But seven years on, we do need to stand back and look at the big picture. The banking sector is now in far better shape than it was pre-crisis – much higher capital and liquidity, better governance and risk management and improved resolution procedures. But all these measures carry with them costs – a higher price for financial products and reduced access to financial services. And it is perhaps inevitable that the regulatory pendulum has swung too far. Was it really the intention to reduce massively correspondent banking or to make opening a bank account so difficult, or to reduce liquidity so much in wholesale markets, or nearly to kill the perfectly sound concept of securitisation? And should the UK always seek to have the most intrusive conduct of business regime and toughest regulations on executive pay?
Now is the time for a study of the cumulative impact of regulation – at global, EU and national level. And so it was very welcome to hear what Jonathan Hill, Britain’s EU Commissioner, had to say in a speech in London on 17 April.
“So there will be less new legislation in the future and more focus on bedding-in the reforms of recent years. There will be an even greater focus than before on proportionality. I am also looking at how we can examine the cumulative effect of what we have introduced in the past.
Over the last five years, we had to legislate at speed while the fires of a crisis were burning all around. It was a remarkable achievement, in particular on Banking Union. We need financial stability because that is the basis for sustainable growth. But we must also recognise that in a Europe where, despite encouraging signs of recovery, we have so many people out of work, a lack of jobs and growth is now itself the biggest threat to financial stability we face.
So I think it makes sense to step back and ask ourselves whether we managed to get everything exactly right all of the time; to take a look at the combined effect of our legislation, to see whether there have been unintended consequences, to check whether we have always achieved the correct balance between stability and growth.
And if the evidence does show that the rules are not proportionate to the risks posed by different types of institution, or if it shows that in certain areas the combined effect of difference pieces of legislation is working against the Commission's priority of jobs and growth, then we should have the confidence to adapt the existing framework.”
And similarly it was welcome to read the article by Governor Carney and Bertrand Badre, CFO of the World Bank Group, in the FT on 3 June. They noted that in response to stricter regulatory requirements some banks are pulling out of correspondent banking relationships and said it would be wrong for regulators to ignore the adverse consequences. The FSB has asked the World Bank Group to gather evidence on the extent and consequences of any retreat of correspondent banks.
Perhaps the time is right for a similar stock taking in the UK.
A second concern is immigration. Jobs are created for British workers by allowing skilled and talented people from other countries to come here and to give us the benefit of their expertise and energy – foreign banks in London know this better than anyone. But the current climate of opinion is almost “immigrants are not good for the country” and the recent clamp-down on visas for skilled workers from non EU countries reflects this. Business must protest about this, but equally business must play its part in changing the climate of opinion by contributing evidence to and engaging in the public debate.
And finally, the most important public policy challenge we face today, is the forthcoming referendum on the UK’s membership of the EU.
The view of foreign banks in London is clear –
“The UK’s interests, with regards financial services, are best served by continuing to be an inner member of Europe” – Association of Foreign Banks, Balance of Competences submission.
“Citi has chosen the UK base from which to head operations for many reasons, two of the most significant are 1) London’s position as a global financial centre, and 2) UK’s access to the Single market. We believe the first is in no small part due to the second” - Citi, Balance of Competences submission.
“The UK is not only an important player in Europe, but as an EU Member State is an attractive place to do business”, JP Morgan, Balance of Competences submission.
“The Single Market is a key attraction for the UK as a gateway to Europe”, Normura, Balance of Competences.
The debate over the next year will be political and emotional, but it is a debate in which business must absolutely play its part. Individual business leaders will have their own views and may choose to be actively involved in the debate. But each significant business can usefully assess its own position. What would Brexit mean for it? Indeed what has the threat of Brexit already caused? What reforms does it wish to see? Protecting the integrity of the Single Market for the Eurozone “Outs” is essential. The Chancellor made that point in his Mansion House speech last week, and it is very welcome that this will be a key part of the discussions that Britain will be having with the other EU member states.
Deutsche Bank has announced that it is establishing a taskforce to examine the consequences for it of Brexit. It is doing what I suspect every bank is doing or will do, but few have chosen to publicise. And foreign banks, and indeed all corporates, will contribute massively to the quality of the public debate by publicising, either individually or through trade associations, the results of their analyses. This should not be accompanied by advice on how to vote in the referendum. That is a matter for individuals, but the more evidence-backed, unbiased, hard information that is available to the electorate the better.
And so to conclude. Foreign banks are a vital part of the British financial sector – providing jobs and financial services and tax revenue through the UK. The UK is the world’s leading financial centre. To keep in that way the factors that have made London – and the UK – so competitive must be kept that way.