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17 March 2014

Z/Yen: Latest Global Financial Centres Index

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The latest Z/Yen report indicates that London has been knocked off the top spot and is now ranked 2nd in the International Financial Centres league table. TheCityUK's Chris Cummings says this should be 'a strong wake-up call for Europe's policymakers', as London is Europe's financial centre.

Foreword by Executive Chairman Professor Michael Mainelli

We all knew a Global Financial Centres Index like this might come, one where London lost the top spot. From the beginning, London never had a statistically clear lead over New York, and Hong Kong and Singapore have been steady gainers. Over fifteen GFCI editions, the gap between the two leading Western centres and the two leading Eastern centres narrowed to less than 30 points. So, while New York now has the top spot, it is with a shaky, again statistically insignificant, 2 point lead.

...For London this loss may be significant. London needs a strong reputation as a place all can come to freely to raise capital at a low cost. Critically, London needs a reputation that everyone who comes will be treated fairly and can compete fairly. Without the large domestic economies behind New York and Hong Kong, London needs to act more like a Singaporean city state with a global economy, or have the backing of a European Union ‘domestic’ economy.

Although we are independent compilers of the index, given that the GFCI originated in London, it is hard for us to say that London seems to be slacking. Since the financial crises of 2007, New York hasn’t done anything particularly well, but in a number of areas no one in London has accepted responsibility for regulation or self-regulation. Despite some regulatory restructuring, which only appears to have delayed reform, London appears ill-served in domestic regulation with examples such as RBS’s Global Restructuring Group scandal, the dragged out Payment Protection Insurance scandal, or the mis-sold swaps scandal. Domestic regulation has not tackled an oligopolistic banking market; that’s been left to the EU.

London’s powerful wholesale financial markets, which leverage its strong brand, generate disproportionate benefits in jobs and exports. London suffers when global financial news tarnishes that brand – London-IBOR, the London Whale, the foreign exchange scandal only now starting to bite, with rumours circulating about other index, benchmark, and commodities scandals. In fact, it seems increasingly apparent that authorities were aware of, yet tolerated, the LIBOR scandal well into 2012. If the regulators are unimpressive, they are certainly not inexpensive. Some claim that the majority of jobs created have been in compliance departments or compliance providers, accountants or actuaries or lawyers. A Middle Eastern businessman states the problem plainly, “though deals have become vastly more expensive, I don’t feel any safer.” Francis Underwood said, “There are two kinds of pain. The sort of pain that makes you strong, or useless pain.” London has a chance to choose which kind of pain this fall from the top will be.

There is much more to GFCI 15 than the top four centres. European centres outside Switzerland should be questioning their strategies. Offshore centres face enormous problems. The Middle Eastern centres seem to be doing well despite changes in the energy industry. Top Asian centres continue to soar. Innovation is hotting up in areas such as international peer-to-peer systems, financing cities, or alternative cryptocurrencies, which may give levers to forwardthinking centres. The GFCI analyses facts against perceptions. Facts are facts, perceptions are perceptions, but sometimes perceptions are facts, or facts are perceptions. GFCI 15 may be a landmark change in perception, that the top places are vulnerable; and that perception may soon change the facts again.

Full report

TheCityUK's Chief Executive Chris Cummings comments:

“The UK benefits greatly from London's position as one of the world's leading international financial centres.  The sector contributed £65 billion in taxes to the Treasury just last year and it employs over 2 million people, two-thirds of who are based outside London; creating high value jobs across the country.  More than a third of the taxes paid by the sector come direct from highly mobile firms who have been attracted to the UK as a business base but who could swiftly move their operations if the UK becomes less attractive.

“The UK needs to vigorously engage with other EU Member States now to make Europe a more competitive place to do business.  The centre piece of this work must be policies that are focused on stimulating sustainable economic growth and creating high value jobs.

“While one-third of the UK's financial exports go to EU countries two-thirds are to other markets.  We need to be able to compete globally and continue to attract foreign direct investment if the UK is to prosper.  Last year the UK's export earnings from financial and related professional services were £61 billion, more than all other exporting earning sectors combined.  This is why the UK cannot afford to drop down the global rankings as financial services help offset the deficit in goods exports and means the UK can pay its way in the world.

“These results lay rest to the fiction that firms will leave London to head for other EU member states.  The truth is that if they do less in the UK it is other parts of the world who benefit.  It is now obvious that a strong London means a strong EU better able to finance the needs of businesses across the continent.”

Full press release

© Z/Yen

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