Culture change needed to guard City’s global leadership

The City is blessed with many gifts: timezone, language, people and legal system. But the self-inflicted scandals and crises of recent years have tarnished the Square Mile’s reputation, resulting in its status being questioned. Those gifts are still intact, but only a wholesale change in culture can enable the City to safeguard its title as the world’s leading international financial centre. Philip Moore reports.

  • 26 Sep 2012
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Remember the dire warnings at the end of the 1990s about London’s prospects? Jim O’Neill does. "In the days immediately before the launch of the euro, it was fashionable to argue that Frankfurt would take a lot of market share from London," says O’Neill, chairman of Goldman Sachs Asset Management. "Look what happened to that theory."

The argument had widespread support at the time. The Economist cautioned in February 1999 that "after the euro’s first month, London is still the top dog among Europe’s financial centres. But it may not stay that way unless Britain joins the single currency."

Member of Parliament John Redwood, who chairs the Conservative Party’s Economic Competitiveness Policy Group, also recalls the predictions of London’s imminent demise. "I remember being the recipient of a lot of heartfelt advice that if Britain didn’t join the euro, all trading in the new currency would take place in Frankfurt and Paris," he says.

These warnings proved groundless. London not only survived the arrival of the single currency — it prospered, just as its champions said it would. None was more confident about the outlook for London than the late Eddie George, governor of the Bank of England at the time of the new currency’s launch. He is reported to have shrugged off its threat by saying that "the euro is just a bigger Deutschmark".

Sure enough, Frankfurt has failed to capitalise on its location as the European Central Bank’s headquarters to mount a credible challenge — so far.

FX king

Proof of London’s resilience is perhaps most strikingly visible in foreign exchange trading, one area where the Square Mile was expected by some to pay a heavy price for the UK’s exclusion from the euro.

Yet data from TheCityUK at the end of August show that London’s share of global FX trading rose from 32% in 2002 to 38% in April 2012. That puts it well ahead of the US (18%), Singapore (5%) and Tokyo (5%), all of which have lost market share over the same period.

As to the broader threat from Europe, London-based bankers say Europe has been huffing and puffing in the City’s direction for decades, but has scarcely managed to disturb a weather cock, let alone blow down the door.

Today, they say, the European threat comes less from any initiatives that Frankfurt or Paris may be making to strengthen their credentials as financial centres.

Instead, it comes from regulatory and tax pressures. The proposed financial transactions tax, for example, enthusiastically backed by the new French president, François Hollande, among others, would raise an estimated €50bn, 60%-70% of it squeezed out of London, by some calculations.

The House of Lords EU Sub-Committee on Economics and Financial Affairs was very clear about the potential impact of the FTT — on Europe and London — in a report published in March. "The proposals place the City of London under severe threat and are likely to force financial institutions to relocate away from the UK and the EU as a whole," it warned.

Another new element that could marginalise London is the likely consolidation of the eurozone, with its own banking union.

The UK’s decision to stand aside from the EU’s attempts to solve the euro crisis, rather than helping, has put it in a weak position to demand that it remains the financial centre for the euro.

Nevertheless, on balance, bankers appear relaxed about the threats to London’s pre-eminence as a financial centre, not least because all the City’s wannabe competitors in the EU will be affected by the same regulatory tourniquet. "I think the City will continue to thrive because it won’t just be London that is subject to greater regulatory pressure," says Patrick Foley, chief economist at Lloyds Bank.

An accident of geography

One of London’s competitive trump cards is an accident of geography. "Until London is physically towed into a different time zone, it will remain the world’s leading financial centre," says one senior London banker.

O’Neill agrees. "One thing that won’t change is people’s need to sleep," he says. "I’m in London rather than New York because from here I can communicate with people in so many different parts of the world throughout the working day."

There are plenty of other arguments that underpin London’s leading position. One of these is the UK’s legal system. "It’s worth remembering that 50% of the world’s commercial contracts use English law as their foundation," says Chris Cummings. He is chief executive of TheCityUK, created in 2010 to champion the financial and professional services industry internationally.

"If you’re a Russian wanting to do business with somebody in China, being able to do so using English law gives both parties confidence," he adds.

Another invaluable asset London has built up in recent decades is its reservoir of people and infrastructure. "No other financial centre has anything approaching the concentration of talent, capital or ancillary infrastructure that London has," says William Fall, global head of financial institutions at RBS — though many New Yorkers would snort at the claim.

Cummings echoes this view. "I’m not sure people grasp the value of the cluster concept London has developed," he says. "The seven stages of the life of every financial transaction can all be completed within the Square Mile. You don’t get that in Paris or Hong Kong."

Bankers say London’s people enjoy a competitive edge both qualitatively and quantitatively. "Innovation may have limited resonance in the current market environment, but the City of London’s greatest strength remains its ability to adapt within a changing regulatory framework," says Paul Staples, head of UK corporate finance at BNP Paribas in London.

This all leaves most City workers confident that London faces no immediate danger of being dethroned as Europe’s leading financial centre.

"Will the City survive? Absolutely, it will," says Stuart Popham, chairman of TheCityUK and vice-chairman of EMEA banking at Citigroup in London. "To my mind, the more relevant question is whether it can retain the percentage of the world’s business that it is doing today. That is far less certain, and will be driven mainly by macroeconomic factors. But the government should do all it can to maintain the attraction of the UK."

City driver

Each percentage point of market share matters a good deal to the UK, given the importance to the economy of the financial services sector. According to TheCityUK, financial services contributed £115bn to the UK economy in 2010, accounting for 8.9% of total economic output. This compares with 8.4% in the US, 5.8% in Japan, 5.3% in Germany and 5.1% in France.

UK professional services "closely associated with the financial sector, namely accounting services, legal services, management consultancy and maritime services" contributed a further 4.6%.

Critically, much of this economic contribution is non-UK business conducted by financial services companies based principally in London. According to TheCityUK, "the UK is the largest centre for cross-border banking with 19% of international bank lending in September 2011. It was also the largest centre for cross-border borrowing (21%). London has the most foreign banks [251 at the end of March 2011], ahead of New York, Paris and Frankfurt."

In other words, the concept of "Wimbledonisation" is alive and well. This is the term coined by Stanislas Yassukovich, after the sale of Kleinwort Benson to Dresdner Bank in 1995, to describe a City that hosted a prestigious international tournament without having a national champion capable of winning it.

EC1 or SW19?

Wimbledonisation also looks as though it may be poised to take a firmer hold on London that at any time over the last 10 or 15 years, given the recommendations of the Independent Commission on Banking at the end of 2011. "London will survive but the UK banks will play a smaller role, because ring-fencing will make it more difficult for them to be major players in investment banking," says one banker.

The likelihood of the UK banks playing a diminished role in the market has been strengthened now that Bob Diamond, who has probably done more to reverse the process of Wimbledonisation than any other banker, has been thrown to the wolves. Think what you will about his role in the Libor scandal: Diamond transformed Barclays from a plodding also-ran into one of the most successful investment banks in the world.

With the stakes so high for the UK economy, however, the risk for London is complacency — especially at a time when there appear to be more threats to the City than at any time in recent memory. Linked to the challenges posed by regulation and tax, for example, are broader cost pressures on the financial services industry.

"A degree of offshoring is already taking place as profits are reduced and ROE falls," says Popham. "In the first wave, we saw a number of administrative, functional jobs being relocated to lower-cost centres such as India. Now we’re starting to see some of the higher level jobs go as well. It’s not a torrent, but it’s noticeable."

The pace of globalisation, too, which is moving the world’s centre of gravity eastwards, is bound to mean cities such as Shanghai, Hong Kong, Singapore — and even Mumbai and Dubai — gaining market share in the medium term.

After Libor

Foremost among the challenges facing London, today, however, is repairing the damage done to the City’s reputation by a succession of self-inflicted disasters, the most recent of which have been the Libor scandal and mis-selling of interest rate swaps to UK SMEs.

There is nothing new about concerns being raised over the probity of the City of London. Again, it is instructive to wind the clock back to November 1999, to a sombre and introspective speech delivered by Howard Davies.

"I think we have to recognise, sadly, that the City’s image is not all it might be," said Davies, a former deputy governor of the Bank of England, then the first chairman of the Financial Services Authority. "What is happening to City standards over time?" he asked. "Are ethical standards in the City on the decline? Are they really much worse than they were in the past?"

These questions are every bit as relevant today as they were in 1999, when Davies had plenty to be stern about as he rattled off a list of what he called "accidents" that had tarnished the City’s reputation. There had been the demise of the fraudulent bank BCCI and the collapse of Barings. There had been Blue Arrow, Guinness, Barlow Clowes and Robert Maxwell. And there had been the Hammersmith & Fulham local authority dabbling in interest rate swaps with a nominal value 25 times the capital base of the authority as a whole.

Old friends or new enemies?

In many ways, however, the threats that the City faces today are very different from those of 1999 — and, arguably, far more intractable.

They are probably best summarised by Tim Skeet, managing director in the financial institutions group at RBS. A Londoner who has worked for a cosmopolitan list of banks since arriving in the City in 1981, Skeet admits to "verging on pessimism" about the City’s future.

"For the first time in living memory, it feels as though politicians and those responsible for regulating the City have adopted a much more rigorous and intrusive approach to the financial services industry," he says.

True enough. After all, time was that the City could look for support to the Conservative Party, long regarded as its natural friend. That no longer seems to be the case, with the business secretary in a Conservative-led coalition bewilderingly hostile to the City. Few bankers will say so in public, but there is widespread fury at Vince Cable’s belligerence towards the City. "For him to have used the word ‘cesspit’ to describe the City, given his position, is ridiculous," says one. "If we had had a strong leader, he would have been removed from his job."

Lukewarm support

More broadly, however, London bankers say the coalition government has been surprisingly lukewarm in its support for the City.

"There hasn’t been a particularly strong endorsement of the financial services by this government," says one. "This means that no financial institution making a decision about where in the world to invest has a clear idea of which way government policy is moving from one month to the next. That is in marked contrast to its policy on corporate tax, which is much more supportive."

Traditionally, London could also depend for support on the Bank of England, seen as a stalwart ally. No longer. If Vince Cable is public enemy number one for many in the City, Bank of England governor Mervyn King is not far behind. "King’s tone towards the City over the last 18 months has been more antagonistic than anyone believed possible," says one London banker.

In the past, the City could also look to the broadsheet newspapers for balanced and objective coverage of its affairs. Some doubt that now.The mock-up of the bosses of all four UK High Street banks behind bars, for example, which appeared in one of the Sunday papers soon after news of the Libor scandal broke, was crass and vitriolic.

It was sections of the press, say some market observers, that were as responsible as any other party for the downfall of Bob Diamond. "My belief is that the UK regulators were not planning on taking further action against Bob Diamond until the build-up of the political-media firestorm," says Ian Gordon, analyst at Investec in London. "I believe Bob Diamond was ultimately forced out by the regulators as a face-saving device in response to public reaction to the Libor story."

In its Libor report, the Treasury Select Committee, chaired by Andrew Tyrie, lends weight to this argument, saying that "regulators should not decide the composition of boards in response to headlines".

Healing wounds

With all this said, it behoves all in the City to remember that the UK government had to provide, at peak, £955bn of support to the banking sector, according to the National Audit Office, when the financial crisis exposed the industry’s weaknesses and follies.

Views are mixed on how the City should set about rebuilding the trust it has lost. O’Neill says only time can bridge the abyss that has opened up between the City and the general public. "The emotions surrounding the issues will only fade with time and some sort of broad-based economic recovery in the UK," he says.

At TheCityUK, Cummings believes the process of rehabilitation has already begun, and that history may view the Libor scandal as a turning point that altered the culture of the City for good. "We may look back to Libor as the end of a period of excess that began with Big Bang," he says.

Many senior London bankers agree. "I think much of the culture of the City has changed since the beginning of the financial crisis," says one. "Banks have made a big effort to remove the cowboy elements in recent years."

James Garvey, head of capital markets at Lloyds Bank Wholesale Banking & Markets in London, also believes the financial services industry is committed to long term change. "There is a genuine desire among the banks to change their culture and to repair the damage done in recent years," he says.

That, Garvey adds, is changing the fundamental character of banking in a number of ways. One is that it is making banks look much more like utilities. "I think what politicians and taxpayers want is a secure and transparent banking industry that offers reliable and high quality service delivery," he says.

Garvey says, however, that the challenge for the City will be to move towards a lower-profile, utility-style model while not losing its capacity to innovate. "Industries make progress through innovation," he says, "and there is a risk that we create a banking industry that frowns on all forms of innovation. That is not surprising, when you think where innovation took us. But we must not lose the capacity to deepen the capital markets or to create hedging solutions for customers by discouraging creativity."

Losing some glamour

Whether innovation becomes a casualty of lower pay in the banking industry remains to be seen.

"Much of the glamour has gone out of banking, which is probably a good thing," says one London banker. "In the past, we attracted too many people to the industry for the wrong reason. The graduates joining now are realising that there won’t be the same level of compensation that there was in the past, which means they aren’t coming into the industry with expectations beyond the possible."

That can only be healthy if it kills off some of the most outrageous excesses of the past. The City can certainly do without episodes such as the £44,000 lunch enjoyed by a quintet from Barclays Capital at a London restaurant in 2002.

Champion coconut needed

If the City is to persuade the powerful and hostile court of public opinion that excesses of this kind will not be tolerated in future, it needs a strong voice to put its case.

The problem, say bankers, is that very few people are prepared to risk having public opprobrium heaped upon them by standing up for the City publicly. As one banker says, it is understandably difficult to find anybody willing to argue the City’s corner on a BBC current affairs programme, given today’s anti-banker Zeitgeist. "It would be like volunteering to be a coconut and have things thrown at you," he says.

Even identifying a suitable figure to stand in this firing line, say bankers, looks like a tall order today. "When I was growing up in the City 25 years ago, there was no shortage of well-respected individuals from the banking or institutional fraternity who could act as a trusted voice for the industry," says one. "Today, the City lacks a champion who could present the case for the defence consistently and authoritatively. In other words, we need more than the occasional contribution of Boris Johnson to the Evening Standard."

Volunteering to stand on a soapbox for the City today may sound like a thankless and even self-defeating exercise. But one banker says there is an encouraging precedent in the way private equity nursed its reputation back to health some years ago.

He says that under Simon Walker, who became chief executive in 2007, the British Private Equity & Venture Capital Association (BVCA) successfully rebuilt a case for private equity, whose reputation was badly damaged at the height of the leverage boom.

"Walker was very open about the unpalatable aspects of private equity, but at the same time he successfully mounted a solid case based on its positive features," he says. "Today, we need somebody to do the same for the broader financial services industry."
  • 26 Sep 2012

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 317,793.98 1355 8.72%
2 Citi 301,114.13 1092 8.26%
3 Barclays 259,580.63 846 7.12%
4 Bank of America Merrill Lynch 258,842.43 934 7.10%
5 HSBC 224,273.23 905 6.15%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 29,669.98 55 6.95%
2 UniCredit 28,692.62 136 6.73%
3 BNP Paribas 28,431.90 139 6.66%
4 HSBC 22,935.49 112 5.38%
5 ING 18,645.88 118 4.37%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 14,593.71 79 10.38%
2 Goldman Sachs 11,713.19 63 8.33%
3 Morgan Stanley 9,435.23 48 6.71%
4 Bank of America Merrill Lynch 9,019.27 40 6.41%
5 UBS 8,763.73 42 6.23%