For many years, London has been perceived to be one of the most important financial centres in the world. However, it is now facing stiff competition from other cities in the West, as well as several emerging economies, to retain its position as a leading global financial centre. There are a number of factors putting pressure on London at the moment, including the struggling EU economy and the fallout from the Libor rate-fixing scandal. Whatever the reason behind London’s decline, any perceived long-term shift could have a significant impact on the City’s ability to attract business and investment in the future.
At Kinetic Partners, we recently conducted our Global Regulatory Outlook survey of financial services executives and nearly half (49%) of respondents cited New York as the “current pre-eminent global financial centre.” London was slightly behind with 44%. However, it is over the next few years when we believe London’s position is going to face challenges from abroad. When asked where the most influential financial centre would be located in five years’ time, only 26% of respondents thought London would hold this title.
New York lost some ground as well, with just 40% believing that New York would still be at the top of this list in 2018, but that nevertheless puts New York far ahead of London. Despite the introduction of a raft of stricter regulations in the US following the 2008 financial crisis, the financial services industry has largely adapted to these developments. To remain competitive, the UK’s success in building on its reputation for introducing effective, yet balanced regulation will have a profound impact on London’s ability to attract business in the future.
Many businesses want to be located in a leading financial centre alongside other similar businesses, as this gives them access to greater opportunities, resources and better networks. For this reason, more than 75% of those who took part in our survey said commercial opportunities were the most important factor when it came to deciding where to base their business. London will therefore need to continue to invest in the business, management and technical skills of its workforce if it is to avoid losing any more ground to its competitors.
One reason for London’s predicted fall from grace could be the perception that Europe exercises too much influence over how UK businesses are run. After all, firms in the UK are not only subject to rules made in Westminster, but increasingly to those made in Brussels, leading many firms to believe that it is easier to be located elsewhere. This dual layer of governance also makes it more expensive to be domiciled in the UK, adding yet another reason to relocate. Of course, this is a similar challenge faced across EU territories, but London’s size means any loss of business EU-wide will inevitably impact the city.
A recent example of this issue is the Alternative Investment Fund Managers Directive (AIFMD), which will take full effect this summer. AIFMD regulation is not only complex in its own right, but offers several alternatives for funds and their Manager sitting outside of the European Economic Area (EEA). To market and distribute into the EEA, a number of options for both funds and fund managers under AIFMD must be considered. One option for funds and their Managers is to continue to market to investors in specific European countries under States’ domestic private placement regulations (where these exist) but the provisions of AIFMD still apply. Of course, some may simply decide that the regulatory cost of marketing and distributing to European investors does not make commercial sense, so will target investors in other parts of the world.
Over time, private placement regulations may be phased out (either because a Member State chooses at its own volition to do so or because the second stage of AIFMD’s provisions is switched on – the so called Third Country Passport), which will make the picture clearer. In the short-term, however, the confusing regulatory environment, new requirements on the majority of funds looking to market and distribute into the EEA and the lack of economic growth across Europe may well harm London in particular as the main financial services centre in Europe.
It is not just regulation that is posing a threat to London, however. Cities in emerging markets are also beginning to attract more businesses and investment. When asked to name the leading emerging financial centre in 2018, almost half of the firms that we surveyed (48%) named Shanghai. If this prediction comes to pass, the emergence of Shanghai as a future global financial centre will pose a major challenge to the dominance of Western cities.
When asked to name the leading emerging financial centre in five years’ time, respondents also cited Hong Kong (10%) and Singapore (6%). The governments in these markets are already well aware of the benefits of attracting global investment, and have already taken measures to attract as much of this business as possible.
For all these reasons, London and other traditional financial centres will have to concentrate resources into making sure they continue to proactively attract investment, business and the right skills and expertise for the industry. Senior executives will decide where to locate their business based on the most favourable regulatory regime, cost and where their target market is. Policy makers and industry leaders in London need to consider these three elements to attract the next generation of businesses. There is no room for complacency.