The competitiveness of the UK's financial services sector is more likely to be undermined by the uncertainty surrounding future regulation of the industry, than by further aftershocks from the recent crisis. That is the view of leading industry figures featured in The Future of Financial Services, published to mark 20 years of the CBI/PricewaterhouseCoopers LLP (PwC) Financial Services Survey.
London’s position as a leading financial services centre has not been dented by the financial crisis, according to those interviewed for the publication. However, the economic shift towards the East and the risk of unilateral regulatory action taken by UK authorities pose two very serious threats.
Speaking ahead of an event to launch the report and celebrate the CBI/PwC survey's anniversary, Richard Lambert, CBI Director-General, said: "A responsible and innovative financial services sector is of vital importance to the UK, both to meet the needs of businesses and consumers and to help the country pay its way in the world. It’s one of our most important areas of global comparative advantage, and a crucial component of our future prosperity. This means we must learn the right lessons from the catastrophe that hit parts of the wholesale banking sector in recent years, and build a regulatory and tax structure that encourages healthy competition and sustainable growth."
Mark Hannam, partner and Northern financial services leader, PricewaterhouseCoopers LLP, said: "The shift in the global economy towards the East will present significant challenges for the UK’s financial services industry and for London as a centre. Too much or inappropriate regulation or tax will also have a negative impact on incoming investment to London.
"In terms of who the dominant forces will be, we see the global players retaining their dominance, but we also expect to see hedge funds and private equity firms seeking to exploit the niche areas left by traditional investment banks."
Ian Powell, chairman and senior partner, PricewaterhouseCoopers LLP, said: "London has retained many of its historic advantages throughout the turmoil of the last 18 months, but the financial services industry is increasingly globalised. Continuing to attract talent and capital will be essential if the UK industry is to maintain its leading role.
"During the past two highly eventful decades, the CBI/PwC Financial Services survey has faithfully charted the ebb and flow of the industry. In doing so, it has become one of the most prominent and closely observed barometers of financial services in the UK."
In the CBI/PwC report, Michael Spencer, Chief Executive of ICAP, said: "What is potentially damaging to London is if the regulatory burden becomes too burdensome.” Lord Levene, Chairman of Lloyd’s of London, voiced concern about what he described as "politically motivated changes to the tax system. Stuart Fraser, Chairman of the Policy & Resources Committee, City of London Corporation, said: "London's strengths are fantastic. But you can’t constantly bash it and tax it and expect it to stay that way." Stephen Green, Chairman of HSBC Holdings, said: "London will lose market share, though it won’t diminish in importance. This is not because of the financial crisis, but because of shifts in the global economy."
Turning his attention to the CBI/PwC Financial Services Survey, Richard Lambert said:
"It has taken the dramatic events of the last couple of years to bring home the real importance of this survey. As one of the first indicators of troubles in the financial sector back in 2007, it earned its place as one of the most keenly watched surveys during the crisis and subsequent recession.
“With the lessons of how events in financial markets can ripple through to the real economy now very much entrenched in people’s minds, I am confident it will remain an important indicator for at least another 20 years."
The Future of Financial Services report gives many pointers about the coming decade in the sector. Key themes include:
Government intervention and regulation:
Further waves of regulation are anticipated and the UK government is expected to remain active in the industry for some time to come. There is widespread consensus that the only real long term solution to the crisis will come from co-ordinated global action rather than on a territory by territory basis.
John Varley, Chief Executive of Barclays, echoed the comments of many, saying: "I think governments are going to be on the shoulders of the industry for the next 30 years – and with some justification." Sir Andrew Likierman, Dean of London Business School and a Non-Executive Director of Barclays, feared that the UK authorities would respond to pressures from continental Europe. He said: "I am very concerned that the British are regulating their own banks in a way that could well put the city at a disadvantage." However, Lord Turner, Chairman of the Financial Services Authority acknowledged the importance of a level playing field but added that "there was no global law-making power", so it "was up to individual jurisdictions."
Customers and trust:
There was widespread concern that trust between key sectors of the industry and their customers had been eroded, as a result of the crisis, though there were differing views on how to regain confidence.
Stuart Fraser, Chairman of the Policy & Resources Committee, City of London Corporation, thought customers would be less likely to buy innovative products, saying that: "The degree of complexity will naturally diminish, because the professions were too trusting in accepting products they didn’t understand." However, Peter Clarke, Chief Executive of Man Group said investors "want clarity in the proposition and they want proximity to the asset. But they are willing to take on complex trading strategies – complex solutions to complex problems." Bankers believed there would be more focus on the customer experience and less on products. Stephen Green of HSBC said the job of a company was not to maximise profits from one quarter to the next, but to grow the business sustainably over the medium and longer-term. He said: "That means focusing on what is sustainable in customer trust and confidence."
The future of the financial services industry by sector:
The financial services experts also shared their thoughts on what the shape of the financial services industry might look like in the future.
On Banking...
John Varley of Barclays said: "We will see a smaller number of banks playing a bigger part in the global industry over the next 20 years." Stephen Green, of HSBC said: "In the next five to 10 years, we can expect the emergence of new Asian competitors, particularly from China. The majority of the top 10 banks in five years’ time will come from one of the two jurisdictions capable of hosting very large institutions – the US and China."
There was some disagreement over whether retail banking should be separated from investment, or ‘casino’, banking.
Philip Augar argued that it would be good to return to "Captain Mainwaring Banking", where narrow banks collected cash from one set of customers and lent it to another. He said: "Opponents argue that this would mean products would cost more, capital would become more expensive and global liquidity would shrink. On balance, I would say that would be fine." Most industry leaders disagreed with this position. Michael Spencer, Chief Executive of ICAP said: "None of the four banks brought down in the UK were brought down by casino banking. They were bankrupted by appalling lending policies, vainglorious acquisitions, shocking funding models and 125 per cent mortgages."
On Building Societies...
Lord Turner pointed out that some of the biggest casualties of the credit crunch had been demutualised building societies which had tried to capitalise on deregulation to grow bigger. Graham Beale, Chief Executive of the Nationwide, saw the possibility of an increased role for mutuals. He said: "I think there is a genuine desire among the tripartite authorities to create a second or even a third big-ticket mutual." He mentioned some European mutual models which are collectives of up to 150 institutions and said: "We are at a very early stage of exploring opportunities in the UK to mirror such arrangements."
On Insurance...
Tim Breedon, Chief Executive of Legal & General, saw a new role in managing the risks that accrued from the £1 trillion of final salary pension liabilities. He said: "The life insurers are extremely well-positioned to help in moving the risk currently on company balance sheets to the capital markets and the insurance sector." David Nish, Chief Executive of Standard Life saw consolidation around many different aspects of the life insurance value chain. Lord Levene of Lloyd’s of London, said: "Traditionally our biggest market has been the US, followed by continental Europe. The burgeoning eastern market presents another big opportunity."