• Dr Gerard Lyons

The executive summary of my strategy paper on the City

Executive Summary

The conclusion of this report is that there is a need for a strategy and vision towards the City and UK financial services. This is policy recommendation A.

The report addresses the consequences of the 2016 Referendum result, future prospects in a post-pandemic world and offers proposals aimed at addressing immediate challenges facing the City and financial services to ensure continued success. It recognises that we should continue to heed the lessons of the 2008 crisis and not lose sight of the need to ensure financial stability.

The main message is that the UK’s departure from the EU provides a golden opportunity for the City. However, it is not just leaving the EU, but what we do now that we have left that is key.

While there are inevitable near-term, predictable challenges from leaving something we have been in for over four decades, these are overwhelmed by the opportunities, provided we act to garner these.

The City, itself, should not be immune from criticism but there has been a policy of benign neglect in Westminster towards UK financial services for much of the time since the 2016 Referendum.

In normal times this might not matter. The City often prefers it when politics stays well away. However, on this occasion, the City needs a Government that is prepared to go into battle for it.

The latest signals from this Government suggest room for encouragement. At the same time, the City needs more voices from within to champion it. The strategy should include the City’s role in delivering economic growth

The future strategy towards UK financial services should have two overriding aims: the first is to strengthen the link between the City and the economy. This is an exciting prospect, ensuring that the City and financial services adopt a lead role in addressing economic opportunities, helping to rebalance the economy and deliver strong, sustainable UK growth. This forms the basis of policy recommendations B to H.

One policy proposal is closing the funding gap faced by small and medium sized firms. Incredibly this, ‘the Macmillan Gap’, was first identified 90 years ago and still exists today. In 2019, according to the Bank of England, it was a mammoth £22 billion. It is remarkable it has not been a policy priority that has been delivered upon before, but it should become one now.

Another policy proposal to bolster future growth is for regional hubs across the UK, boosting local economies and providing a pull-factor to onshore back-office and other services to cities and centres across the UK. These proposals would support, directly, the government’s levelling up agenda, while helping bolster UK growth prospects.

The levelling up agenda, too, can be supported through funding infrastructure investment and, very importantly, a greater focus on financial inclusion and banking the unbanked. The City can also help deliver upon the UK’s global economic vision.

While the pandemic will trigger change, it is also clear that two pre-pandemic economic drivers will play a dominant future role: the digital and data revolution; and the shift in the balance of power to the IndoPacific that stretches from India in the west to the US in the east. While the UK, naturally, should have a sensible post-Brexit relationship with the EU, this should be alongside addressing domestic economic issues and positioning itself to succeed in the changing and growing global economy.

The City and the financial services sector can help the UK economy, domestically and globally. Action is required to support and boost the City’s global competitiveness.

The second aim of a future strategy towards financial services should be to strengthen the City’s competitiveness. Policy recommendations I to X propose ways to address immediate challenges and to seize opportunities.

The UK is facing an aggressive competitor in the form of the EU that is seeking to undermine the position of the City. While the UK should embrace open markets, the authorities here must stand their ground and push-back against the EU’s protectionist approach. It is time for the UK to push back with a consistent approach and a clear, positive message that changes the terms of the debate that is often pessimistic and wrong about prospects for the City.

This report outlines proposals to ensure that London remains the major financial centre of Europe and one of the leading financial hubs in the world, with its main future competition likely to be from New York and centres across Asia.

The success of the City depends upon three dominant features: its inherent characteristics; the regulatory environment; and being “the” place where clients want to conduct business because of its liquid, deep and broad markets. This report outlines what is needed to ensure that the UK is well positioned in each.

The City’s inherent characteristics provide a strong foundation. English Common Law is, perhaps, the most important of these characteristics and should be valued as it underpins sophisticated financial services. If one was pessimistic about Brexit, these characteristics might be termed Brexit proof. In contrast, if like me, one is positive about the opportunities afforded by Brexit, then these inherent characteristics provide a strong foundation on which to build. The regulatory environment has been a vital success story of the City. There is a need to ensure that this is still the case in the future.

For a 21st century leading financial centre there should be a series of overriding themes, highlighted by policy proposals J to M.

It is vital, too, that the lessons of the 2008 global financial crisis are retained, including the need to ensure financial stability. The UK needs to outline clear regulatory principles and continue to play an important role in endorsing and promoting regulatory standards at a global level. It will.

The UK should not be a rule-taker and should set its own approach within the framework of the highest international standards. The bias should be towards less burdensome regulation that holds back growth without enhancing stability. The focus should not be on gold-plating or on a race to the bottom but on smart regulation that makes sense in the areas to which it applies.

Protecting consumer rights is essential. In future, regulatory success should be measured against the impact on the economy and on London’s competitiveness, as well as achieving financial stability.

We should aim to keep the cost of regulation down but also aim to take regulation to the next level, with real time regulation as the standard. All this should be within the context of appropriate Parliamentary scrutiny.

Ultimately, success will be based on London being seen as the most attractive place where people and firms want to conduct business in and from. This report encourages the UK to embrace open markets. Deep and liquid markets are vital.

The UK’s competitive position, compared with the US in the 1960’s, helped London to become the home of the offshore dollar market known as the ‘euro-dollar’ market, where the term euro meant international. Now, the EU’s approach is leading to fragmented markets in euro-denominated products. This provides an opportunity, with the City as an attractive venue for parallel markets in euro-denominated instruments - a legitimate offshore trading centre of euro-denominated securities. This should see the ‘euro-euro’ market grow now in London, like the euro-dollar market all those decades ago.

The City’s infrastructure is first-class. Very importantly, there is a need to assess the resilience of the UK financial eco-system and not take anything for granted.

One area of strategy should be a risk assessment of how policy can help. Take the matching engines, important contributors to London’s success. The likely loss of the one in Basildon, influenced by political pressure from overseas, as well as costs, should trigger a policy focus on ensuring all is being done to retain these. Likewise with clearing houses. Similarly with data centres, where investment is huge across the globe.

Policy should be focused on ensuring that this remains the case, with policy recommendations U and V highlighting the importance of retaining matching centres, developing a cloud-hub and investing more in data capacity.

The good news is that the tide is now turning in Westminster’s approach towards the City. This year has already seen the Kalifa and Hill Reviews, focused on technology and on revamping the approach to listings, respectively.

Encouragingly, as this report identifies, the City can position itself well in a number of the already identifiable growth markets such as Financial Technology (FinTech), Green Finance, Islamic Finance, electronic and automated trading and perhaps even digital currencies. In all of these, though, far more needs to be done, and in the face of intense competition the City needs to ensure it has all the tools and regulations in place to be able to specialise fully in each of these areas.

This report recommends a review of both MiFID II and Solvency II. An unintended consequence of MiFID II has been a collapse in spending on research, and this demise needs to be addressed, as independent research has been one of many hallmarks of the City’s success. At the same time, however, the need for transparency on fees, contained within MiFID II needs to be retained, as it reflects the importance of transparency in financial services and should help build people’s confidence in UK financial services.

The structure and remit of Committees in the UK Parliament needs to be amended to reflect the importance of financial services and the changes that are now merited having left the EU. Policy recommendation Y advocate the creation of a specialised committee of both Houses of Parliament to look at the specifics of financial services legislation. These new committees would need to engage more, on a rule-by-rule basis with the regulators, and not take a hands-off approach. Finally, policy recommendation Z echoes the first recommendation of the recent Hill Review, for the Chancellor to make an annual statement about the City.

A new structure needs to be created around this, to ensure all aspects of the City are represented, perhaps there could be a semiformal, quarterly meeting to which all relevant City groups are invited. Perhaps this should be entrusted to produce a regular ‘Barriers to Business Report’ to inform the policy debate.

This is a fast-moving environment. For instance, since the initial draft of this paper, only a few weeks ago, one of its initial suggestions, the idea of establishing a task force for digital currencies has already happened, and one concern raised, about safeguarding the City’s infrastructure has, unfortunately, already materialised with news that the matching centre in Basildon is to be moved to Italy. This reinforces the need for action – both in Westminster as well as in The City where there is the need for more cheer-leaders to push the case for London.

Realism about the challenges and ambition about the future are needed, helped by confidence in a clear vision and in ensuring that London remains competitive. Delivering upon a clear strategy will help ensure that financial services contribute towards the UK’s future economic success and that the City will continue to thrive as Europe’s leading financial centre and one of the world’s main financial hubs.