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Moving Past Recent Turmoil: What is Becoming of the UK's Financial Services?

Sortie(s) de crise : Quel devenir pour le secteur financier du Royaume-Uni ?
Bernard Offerlé

Résumés

L’article mesure l’impact des dernières crises économiques sur le secteur financier du Royaume-Uni. La première partie explique la place déséquilibrée qu’occupe la finance dans le PIB britannique et elle évalue les problèmes et les défis que pose la situation actuelle à court et moyen terme. La partie suivante présente les rapports officiels et leurs différents projets de réforme et elle poursuit l’analyse dans le contexte plus large des changements de la réglementation dans le cadre de l’Union européenne. En conclusion, on essaie de faire la distinction entre ce qui a effectivement déjà été réalisé et ce qui demeure au niveau du simple discours politique. L’étude s’achève en soulignant la nécessité de poursuivre la recherche par une étude incluant les autres places financières internationales de premier plan.

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  • 1 See Richard Saville, Bank of Scotland: A History; 1695-1995, Edinburgh: Edinburgh UP, 1996, 416-41 (...)
  • 2 Quoted in Gabriele Steinhauser, “New treaty to save euro splits European Union,” The Guardian, Dece (...)

1The United Kingdom was still in the midst of fixing the remnants of the 2007 financial crisis when another crisis broke out. In 2007, the UK felt somewhat isolated while queues started to form outside the branches of Northern Rock – originally a building society – in what was going to become the first bank run in the UK since the collapse of Overend, Gurney and company in 1866.1 In 2010 it seemed as if the economic crisis was more of a euro zone problem and PM David Cameron promptly pointed out in December 2011 how lucky Britain was to have shunned the single currency: “We’re not in the euro and I’m glad we’re not in the euro,” he said. “We’re never going to join the euro and we’re never going to give up this kind of sovereignty that these countries are having to give up.”2 Yet, laying all of the blame on the euro zone and making euro-member countries the proximate danger only aims to please the most fundamentalist among the Tories’ eurosceptics. With 40% of British exports going to the EU (European Union), such schadenfreude is mere perversity and Britain has to watch closely what goes on across the (English) Channel and what broth is being brewed in Brussels.

  • 3 Graham Bannock, Ron Baxter, & Evan Davis, Dictionary of Economics, London: Penguin Books, 1998, 84
  • 4 See Frances Coppola, “The futures of retail banking,” Pragmatic Capitalism, April 29, 2013, <http:/ (...)
  • 5 Tim Harford, “Black-Scholes: The maths formula linked to the financial crash,” BBC News Magazine, (...)
  • 6 See Independent Commission on Banking (ICB), Final Report, Recommendations, September, 7, 2011.
  • 7 See Financial Times, “Wheatley's Libor detoxification,” September 30, 2012, <http://www.ft.com/intl (...)

2The UK is accustomed to being in a unique position in financial matters. It became a world leader in October 1986 when the cosy gentlemen’s club of the City of London was transformed by a series of changes that came to be referred to as “the Big Bang.”3 As a result, London’s financial industry was reborn and became the financial powerhouse it has been since then. In a gradually ever more globalised world, banking culture had moved on and brought retail banking closer to investment banking because that is where the fattest profits were to be made4 after econometrists had decided to disregard all notion of risk thanks to the latest most sophisticated mathematical models.5 It all gives ground to the growing demand for more formal separation between retail and investment banking.6 The trend also introduced new entrepreneurial practices that gave rise to cut-throat competition and unstable alliances among the different financial centres worldwide. The constant need for innovation gave birth to incredibly complex “derivatives” that hardly anybody could assess with accuracy. In addition to basic failings like a computer glitch at RBS (Royal Bank of Scotland) which denied customers access to their money for long hours, a slew of scandals have recently overwhelmed the City of London like the LIBOR – London Interbank Offered rate – and the PPI – Payment Protection Insurance – scandals, serving only to confirm the average high street bank customer’s impression that banks have mutated into rigged casinos.7 One may therefore wonder whether the UK’s reputation as a world financial centre has been seriously dented by recent events and developments or if it can still be reborn once again.

3This paper will attempt to assess what lessons have been drawn since 2007 and what may lie in the pipeline for the future. Part one will look at the role of financial services in rebalancing the UK economy. Part two will examine what efforts are being made to sort out the remaining problems.

Financial Services and the UK Economy

  • 8 TheCityUK, Key Facts about Financial and Professional Services, January 2014.

4Unsurprisingly, the official literature points out all the benefits financial services provide to the UK economy. TheCityUK structured its January 2014 report on UK Financial and Professional Services around providing people with peace of mind, underpinning business investment and growth, a central role in addressing major policy challenges, supporting wealth generation across the UK.8

5With over 2 million people employed in financial and related professional services across the UK, i.e., 7.4% of total UK employment, the financial sector is indeed among the country’s major employers. Moreover, it must also be noted that it is not only London that thrives upon financial services but Scotland as well as other parts of England spreading from the South West to the Scottish border as shown in Map 1.

Map 1

Map 1

Source: TheCityUK, Key Facts about Financial and Professional Services, op. cit., 13.

6In 2012/13, the financial services as a whole made a total tax contribution of £65bn, which represented 12% of total government tax receipts, with banks making up the sector’s largest tax contributors. Because of the tax weight of financial services in the UK, one can wonder whether the UK is not on the way to being limited to and subsumed into a huge financial economy. Even though the latest financial crisis may have not have put paid to the problem or even significantly curbed the trend it has become obvious that the issue urgently wants addressing.

  • 9 Ibid. 16

7Probably even more striking is the central role held by UK financial and professional services in the global economy with their leading role in global markets because, among other factors, the UK is a choice location for international financial firms and their customers. Beside attracting more FDI (Foreign Direct Investment) than any other sector, financial services also contributed £174bn to the UK economy in 2012. In aggregate, they represented some 12.6% of UK GDP, with exports taking up a substantial share of this – nearly one third of GDP contribution arises from the services provided to overseas clients9.

  • 10 See “United Kingdom's share of cross-border bank lending in international financial markets from 19 (...)
  • 11 See Bank for International Settlements, Triennial Central Bank Survey. Foreign exchange turnover in (...)

8The financial services have traditionally been most prominent in international bank lending (17% of the world total in 201310) and in foreign exchange as they represented the largest world market with an average daily turnover of more than $2.7bn (40.9% of global foreign exchange market turnover) in April 2013, which actually amounted to more than New York and Tokyo combined11. The sector is also a management fund market larger than that of any other country bar the US. Other specialty fields include insurance, private equity, hedge funds, derivatives, the bullion market, carbon markets, etc.

Competition, regulation and… reform?

9Both regulators and service providers admit that the situation needs improving although they disagree on the scale of the reform.

London’s leading role as a world financial centre

10The UK is both the leading global financial services centre and the single most internationally focused financial market place in the world because it has an unrivalled concentration of capital and capabilities.

Table 1: Areas of Specialism and Importance in International Financial Centres

City

Specialisms

Amsterdam

Pension management; financial logistics

Dublin

Fund management and administration; aircraft leasing

Frankfurt

International banking, insurance; derivatives exchanges; fund management

London

International banking; fund management; trading in securities, derivatives and commodities; private equity and hedge fund management; carbon markets; maritime finance

Luxembourg

International banking; fund management

Madrid

Stock exchange; links with Latin America

Milan

Banking

Paris

Insurance; Commodity exchanges

Source: Europe Economics, The Value of Europe’s International Financial Centres to the EU Economy, Practitioner Policy Paper, City of London, July 28, 2011, 4.

  • 12 The government dismantled the FSA in April 2013 and gave the Bank of England control of macro prude (...)

11Financial London is internationally recognised and valued for many reasons like the LSE (the London Stock Exchange). However the City of London is also home to many institutions. Beside the Bank of England and the FSA (the Financial Services Authority) until recently,12 the City offers banking and asset management activities, Commodities Exchanges like the LME (the London Metal Exchange) and LIFFE (the London International Financial Futures Exchange) as well as clearing houses and the ICE (the Intercontinental Exchange) which serves the global market for agricultural, credit, currency, emissions, energy and equity index markets.

  • 13 See Financial Times, “The challenge of great exchanges,” February 14, 2011, 8.

12The future of the LSE has been made uncertain by planned mergers like that between the Deutsche Börse and the NYSE (New York Stock Exchange). The objective of such moves is to become the world’s largest platform for trading in stocks, derivatives and clearing while signalling ambitions to reach fast-growing Asia. Such deals are tough going because the winner would probably end up in a dominant market position.13

13The LSE thinks it still has what it takes to go it alone. It has plans to diversify organically but it still has to prove it can work well enough and thereby convince its investors, or potential acquirers that carrying on without a big deal is a decent alternative to a negotiated agreement. It remains interesting however that independent analysis suggests that the LSE’s future as an independent exchange – despite its future trading initiative – is far from secure and that the exchange is now back to square one.14

Competition

14The key word in deciding whether London’s leading role is threatened is competition. For a general approach, it suffices to take two specific examples, since the day-to-day running of financial resources boils down to practical issues.

  • 15 An investment fund which meets all of the requirements of Shariah law and the principles articulate (...)
  • 16 See David Oakley, “Europe: London and Paris battle for business,” Financial Times, December 13, 201 (...)
  • 17 Ibidem.

15Shariah-based funding15 for landmark projects in the UK capital market has broken new ground especially after the political upheaval in Egypt, Tunisia and Libya spread to other parts of the region and many Muslim investors now consider London as the best place to invest money. Yet, Paris is now challenging London,16 first simply because of France’s Muslim population of 3.5m – twice that of the UK – and it is also looking into legislation to allow the issuance of sukuk, or Islamic bonds and would like to see more Islamic financial products developed in Paris. Yet all this takes time and although Paris has made much progress in the past few years, London looks unlikely to be ousted from its position of strength, even though Muslim investors have increasingly shown a reluctance to switch their investments across the English Channel17 because of France’s traditional preference for integration over communitarianism.

  • 18 See Josh Noble & Alex Barker, “UK's euro trade supremacy under attack,” Financial Times, December 2 (...)
  • 19 Financial Times, “Britain vs the ECB,” September 20, 2011, 10.
  • 20 See Alex Barker & Jeremy Grant, “Britain to sue ECB over rules on clearing,” Financial Times, Septe (...)
  • 21 See Alex Barker, “UK faces clash with Brussels on City,” Financial Times, September 11, 2012, <http (...)
  • 22 See Josh Noble & Alex Barker, “UK's euro trade supremacy under attack,” op. cit.
  • 23 See Alex Barker & Gerritt Wiesmann, “Eurozone disquiet at ‘great British sideshow,’” July 3, 2012, (...)
  • 24 See Philip Stevens, “A bad time for Britain to say Auf Wiedersehen,” Financial Times, October 10, 2 (...)

16Another interesting element is that given the financial turmoil in 2012, major European “continental” countries objected to euro transactions being managed by a non-euro -zone country.18 In effect, the ECB wanted the London-based central counterparty clearing houses that clear significant volumes of euro-denominated financial products to relocate to the eurozone.19 On the face of it, this policy seems at odds with the fundamental principle of the single market by which business can be conducted from wherever within the EU. However the UK is not part of the euro zone so it raises issues as to Britain's full commitment to the EU's more continental ideals of how close and united Europe should get. Consequently, the UK treasury has considered starting proceedings against the ECB through the European Court of Justice.20 Yet, as is often the case in such matters, all this takes time and there is hope that the politicking posturing will not survive the unavoidable delays imposed by legal procedures. In the mean time, the suspicion among eurosceptics is that this is yet another continental European plot to sabotage the City of London.21 The row is more of a political nature as there is no technical reason to prevent euro deals to be handled from a non euro ‘offshore’ financial centre. The tension stems from deep-grounded exasperation on both sides of the Channel.22 There is a feeling in continental Europe that the Cameron government is stubbornly opposed to deeper economic and political eurozone integration.23 David Cameron clearly demands special privileges and protections for the City of London, a strategy which is viewed, more especially in Germany, as a veiled attempt to destroy the essential fabric of the single market, the fundamental basis of the EU’s acquis communautaire — the French term commonly used in English as EU jargon for the accumulated legislation, legal acts, and court decisions which constitute the body of European Union law.24 The need for the Cameron government to play to the UK eurosceptic gallery now also threatens to include limiting the free movement of people, another major pillar of the EU’s constitution, let alone the mention of a two-tier EU budget which would let off Britain with contributing less to the European Union but also move Britain to the sidelines of EU live action.

  • 25 The European Banking Authority was set up in 2010 and started operating in January 2011. It is base (...)
  • 26 See Financial Times, “Britain opts for the empty chair,” Letters, December10/ December 11, 2011, 8. (...)

17The unease that euro affairs are being dealt with by a non euro country became even more acute when the European Banking Authority (EBA) was being set up25. The UK has no intention of joining a new institution whose sole existence poses a threat to London's traditional supremacy as a leading international financial world centre. The objective of a strong EBA indeed caused alarm in the UK as it was unlikely that such major reforms would leave the City of London unaffected in the contentious matters of supervision.26 At stake was the transfer of jealously guarded national powers to the European Central Bank (ECB) for supervising all eurozone banks in a move that purported to seal full commitment to a formal banking union for the whole of the EU. That concurrently rekindled the angst caused by the ongoing British desire to be both inside and outside the Union without unnecessarily handing over any of the country’s national prerogatives. Logically enough, when David Cameron took the cudgels for the City, continental Europeans were too inclined to claim that the brand of capitalism traded in the City nurtured the latest financial crises. It must be highlighted however that the oversight of clearing houses obviously needs a co-operative approach and that supervision is to work much more efficiently when managed at EU level.

Regulation

18In spite of the perceived idea across Europe that Britain is submissively subject to free trade and laisser faire, laisser passer Financial London has always been regulated – and in places possibly more than financial centres like Switzerland for example. Yet it is also true that a large part of the City’s attraction lies in its “light touch” regulatory framework. The financial crisis has certainly raised the question as to whether more regulation may still be needed.

  • 27 The Tobin tax is a tax on foreign exchange transactions originally proposed by Professor James Tobi (...)
  • 28 See George Parker, “FSA backs global tax on transactions,” Financial Times, August 27, 2009, <http: (...)

19One first example is the (in)famous Tobin tax which has long been championed by development economists as well as the French governments as a means of funding the developed world.27 So far the tax has been opposed by the UK’s financial industry. However, as early as September 2007, support for the Tobin tax was found in circles above all suspicion. Lord Turner, the FSA’s chairperson, then shocked the establishment by backing the idea of a Tobin tax, arguing that “a ‘swollen’ financial sector paying excessive salaries has grown too big for society.” Adair Turner went on to add that “the FSA should be very, very wary of seeing the competitiveness of London as a major aim” as he claimed that the City’s financial sector had become a destabilizing factor for the British economy.28

  • 29 See John Plender, “Long-term investors would benefit from Tobin tax,” Financial Times, September 27 (...)
  • 30 Ibid.

20Yet, support from the head of the FSA does not mean that the British government officially approves of the move. When the European Commission proposed a sweeping new financial transactions tax in September 2011, the British government’s response was to threaten to veto it unless Britain was allowed to opt out.29 Given the importance of the City of London to the British economy, the concern remains that business might leave the EU and migrate to less “Tobinesque” territories with a more favourable tax jurisdiction. Conversely, it may also be noticed that the UK’s current stamp duty on share transactions is akin to a Tobin tax of sorts and it adequately achieves the aim of taxing financial transactions, although such taxes probably only work in the context of largely captive markets as is the case with sterling equity financing.30 As most often observed however, reality tends to prove much more evasive.

  • 31 For an update on Europe’s Financial Transactions Tax, see the European Commission’s website <http:/ (...)
  • 32 See Mike Ekberg, “Who regulates is less important: what matters is effectiveness,” Financial Times, (...)
  • 33 See The Economist, “Chained but untamed,” a special report on international banking, May 14, 2011, (...)

21It is probably true that financial transactions require a clearing venue and a legal system enforcing contracts – something that offshore jurisdictions cannot provide without the big economies’ blessing. Yet, without US support – which does not exist – the EU will struggle to impose a transaction tax on, for example, derivatives unless it throws up transatlantic barriers that amount to starting a financial war. So the question remains as to whether Tobin-type taxes would be very efficient, if they can ever be made to work31. Some argue that most of the purposes they are supposed to achieve are better pursued through other taxes. The general idea is that regulation perceived as over-regulation could strain the cost of credit and as already covered above, the competition factor cannot be overlooked in such sensitive matters. Still, the laissez faire, laissez passer philosophy persists in the basic law that “who regulates is less important: what really matters is effectiveness.”32 It has become clear however that although the City of London needs some protection, this should not translate into full protectionism. It is also fair to emphasise that Britain’s Weltanschauung has also moved on with the times: “For long the most enthusiastic champion of financial deregulation, Britain is now following a different route and ponders on whether banks’ retail arms should be so regulated that they become little more than public utilities.”33

Reform

22The Conservative / Libdem government has acknowledged that the financial sector needs fixing and it has consequently commissioned a certain number of reports to address the issue. This type of fairly academic report often makes interesting reading although the recommendations are not always followed up with much action.

23When Northern Rock collapsed in 2007, Britain had no planned procedures for dealing with failing banks apart from nationalising them. So the government appointed an Independent Commission on Banking (ICB) chaired by Sir John Vickers (a former Chief Economist at the Bank of England and at the Office of Fair Trading) to look into banking reform. The commission released an interim report in April 2011 followed by the final recommendations in mid September of the same year:

  • 34 Independent Commission on Banking, Final Report, Recommendations, September, 7, 2011.

The recommendations in this report aim to create a more stable and competitive basis for UK banking in the longer term [….] These goals for UK banking are wholly consistent with maintaining the UK’s strength as a pre-eminent centre for banking and finance, and are positive for the competitiveness of the UK economy. They also contribute to financial stability internationally, especially in Europe.34

  • 35 See Financial Times, “Ring fencing is a snake-oil remedy,” Letters, September 9, 10.

24The report is divided into two parts covering “Financial stability” and “Competition” respectively. Overall, the general thrust of the report focuses on “ring fencing”, i.e. separating retail banking services from the casino operations otherwise known as proprietary trading, where banks use their own resources to play the market, an activity which may verge on a conflict of interests when the bank’s desires for profits may run against the interests of its customers. The report actually only recommended setting up some sort of firewall within the same business and did not aim to downsize the “too big too fail” banking establishments. The report’s findings were somewhat disappointing because they did not come up with innovating ideas. Ring fencing was too reminiscent of the US Glass-Steagall Act that dates back to the mid 1930s. If retail and investment bank subsidiaries are owned through the same equity, ring-fencing can only be a “snake-oil” remedy since “retail” cannot escape contagion from a collapse in confidence in the overall bank group.35

  • 36 See Financial Times, “Mad bankers and Englishmen,” August 31, 2011, 12.

25At first, the ICB’s banking reforms came under heavy fire from the banking industry with, for instance, the now famous buzz phrase from John Cridland, the head of the CBI (Confederation of British Industry): “Further banking reform would be ‘barking mad’.”36 Business leaders stick to the traditional and too-often heard argument that too much regulation might damage the British financial services industry’s competitive edge. The fact is that the ICB only propounded a fairly moderate approach as it had let off the banks lightly and ducked radical reforms. For example, it never supported the total formal separation between retail and investment banking.

  • 37 See Philip Augar, “The price and perils of taking on the banks,” Financial Times, September 8, 2011 (...)

26It cannot be denied that banking reform somehow has proved rather elusive because of various factors that have created much disappointment. The deepening of the economic crisis first fuelled real disappointment and did not stop the UK’s powerful banking lobby to shield behind gloomy economic prospects for justifying its dithering attitude ingranting loans to small businesses. Then, the British government’s line of defence never really struck a chord overseas,37 especially among its leading EU partners that did not fail to notice the collapse of Iceland and Ireland, two other countries with an oversized banking sector. Moreover, the too-big-to-fail issue – which is widely responsible for triggering off the financial crisis – still has not yet fully been addressed, which leaves the door open for another Lehman Brothers type of collapse in the medium or longer run.

  • 38 See Patrick Jenkins, Sharlene Goff, & Megan Murphy, “Flight delayed,” Financial Times, April 15, 21 (...)

27Conversely the fairly relaxed response of leading UK banks to the various proposals to strengthen the sector prompted queries about their negative attitudes and has cast doubts on the credibility of the threats that they would move their operations offshore.38 Finally, the expected higher costs imposed on customers and taxpayers through the crisis resolution process are still to be dispelled, although transitional risk may be an acceptable price to be paid to avoid systemic risk in the future and should not act as a barrier to change.

  • 39 Department for Business Innovation & Skills (BIS), The Kay Review of UK Equity Markets and Long-Te (...)
  • 40 Department for Business Innovation & Skills (BIS), The Kay Review of UK Equity Markets and Long-Te (...)

28The Kay Review of UK Equity Markets and Long-Tem Decision Making was the second major report commissioned by the government with a view to reforming the UK’s financial industry. As had been the case with the Vickers report, John Kay and his team also published an Interim report (in February 2012)39 followed in July of the same year by the Final Report which was most widely commented upon.40 The report examined investment in UK equity markets and its impact on the long-term performance of UK quoted companies. As requested by Secretary of State for Business Vince Cable, the report studied how capital market discipline contributes to the achievement of control and accountability and more generally if it enhances the competitiveness and long-term performance of British business. The report’s recommendations included many areas such as the time scales considered by boards and senior management in evaluating corporate risks and opportunities or how to ensure that shareholders and their agents give sufficient emphasis to the underlying competitive strengths of the individual companies in which they invest and whether the current functioning of equity markets gives sufficient encouragement to boards to focus on the long-term development of their business etc. The report’s recommendations aimed to encourage more collective action by institutional shareholders via the establishment of an investors’ forum, better disclosure of costs in the investment chain, transparency and fairness around the lending of securities and better alignment between pay and long-term performance to company directors and asset managers. In a nutshell, the Kay report mainly criticised the City’s short-termism.

  • 41 Department for Business Innovation & Skills (BIS), Ensuring Equity Markets Support Long-Term Growt (...)

29In November 2012, the government published its own response to the Kay Review.41 The government welcomed and accepted the Kay Report, it endorsed ten principles for equity markets which market practitioners, government and regulatory authorities should take into consideration, and the report’s directions for market participants which follow from these principles. The report’s recommendations, and the good practice statements, aimed to deliver more collective action by institutional shareholders via the establishment of an investors’ forum; better disclosure of costs in the investment chain, transparency and fairness around the lending of securities and better alignment between pay and long-term performance for company directors and asset managers.

30The commentators’ response to John Kay’s report was more mixed. Although they acknowledged the report’s cogency, some railed against the UK equity review’s beautiful, if old-fashioned vision presented by the report:

Dig a little deeper though and the vision – which includes an attack on the efficient markets hypothesis – is flawed. The report wants unhappy investors to engage with managers rather than sell shares. But for most executives, a falling share price is far more persuasive than an irate phone call. The report also calls for an end to quarterly reporting to discourage short-term trading. Finally, the report takes a UK-centric view of equity investing – investors and issuers can and will take their business elsewhere if London becomes a more opaque and expensive place for the industry to do business.42

31So, to improve regulation of the financial sector and protect customers as well as the economy, the Government finally enacted the Financial Services (Banking Reform) Act 2013 which came into force on April 1st, 2013. The Act makes fundamental changes to the way financial services are regulated by setting up several new bodies with the view to managing and containing risk more effectively. The reform covers the following broad lines. Oversight of the UK financial system as a whole was handed back to the Bank of England through a new Financial Policy Committee within the Bank. Supervising all the firms that manage significant risk as part of their business was entrusted to the Prudential Regulation Authority. The Financial Conduct Authority was set up to protect consumers and ensure that all financial business is conducted in the interest of all users and participants. Finally, the Chancellor of the Exchequer was granted clearer responsibilities to direct the Bank of England where public funds are at risk and in the event of a serious threat to financial stability.43

Conclusion

32Although the financial crisis has now been around for years rather than months it is still rash to claim the situation is clear-cut. There seems to be a lot of talk and hot air and not really convincing action at all both at national and international levels, at G20 summits in the case of the latter for example. In most cases, it seems more like a game of one step forward, two steps back. Bankers’ bonuses present a telling example. It was the financial crisis’s most visible aspect, at least the element the general public could directly perceive and understand, and it made the people at large furious and the situation aroused much cynicism. It must be said that is has been made easier for shareholders to curb bonuses if they feel they are undeserved. Yet, for the most part the fundamentals have not been drastically reformed and it is very much back to business as usual, albeit in subdued or more subtly disguised forms which are being advocated in the ubiquitous name of the need for keeping cut-throat competition under control.

  • 44 See Brooke Masters & Tom Braithwaite, “Bankers versus Basel,” Financial Times, October 3, 2011, 9.
  • 45 Jamie Dimon, JP Morgan Chief, for example, has always considered the Basel III bank rules to be ant (...)
  • 46 For an update on the transposition of Basel III regulatory standards into domestic regulations, see (...)
  • 47 See Alan Beattie, “Basel III fears overblown says IMF study,” Financial Times, September 11, 2012, (...)
  • 48 André Santos Oliveira & Douglas Elliott, Estimating the Costs of Financial Regulation, IMF Staff Di (...)

33What also makes reform a slow and arduous procedure is that the UK is not dealing with a mere national issue but a situation that embraces global markets with many independent law-making national institutions and governing bodies. Closer to home, it must not be forgotten that the EU has a say in financial matters and it has among other things appointed a pan-European super watchdog, ESMA (the Paris-based European Securities and Markets Authority) to oversee financial and securities markets. At international level, the Bank for International Settlements (BIS) makes up an additional decision-making tier. As the central bankers’ bank, the BIS’s remit is to co-ordinate international banking rules and regulations. As is most frequently the case, the more countries partake in the negotiations, the more arduous reaching a consensus becomes and therefore concrete results take a long time to trickle down. The financial and banking interests of Europe and the US diverge while Britain does its best to steer a middle way. However progress is being made through the gradual improvement of the various Basel agreements, named after the Swiss city where the BIS is based. Basel III mainly focuses on the standards and practices which ensure that international banks maintain adequate capital to sustain themselves in periods of economic uncertainty.44 The US has never managed – or wished – to implement the first two accords and it is no way certain that it will fully comply with Basel III.45 The latest agreement only marks further strengthening of the capital and liquidity ratios required by the previous Basel agreements (I & II). The agreement's phase-in arrangements will take some time before they are fully implemented46 and will therefore need close monitoring to make sure there is more to it than mere political manouvering. A question mark remains as to the impact of such measures on the real economy,47 even though some argue that the fears are overblown: “Banks appear to have the ability to adapt to the regulatory changes without actions that would harm the wider economy.”48

34Highly competent as they may be, central bankers stand aloof from the real needs of the people who feel they have been fooled by bankers who never hesitate to force their clients into schemes that the general public finds hard to decipher, as in the case PPI mis-selling by some of the most famous high street banks like Lloyds or the LIBOR scandal. Consequently, politicians felt they had to jump into the arena. Yet, the politicians’ short-term objectives run against the strategies long thought out by bankers in the cosiness of their plush offices, and these constrasted approaches do not mix well and fail to produce convincing results. Moreover, it must be underlined that rules only apply to formal banking establishments and not to so called “non banks”. Further tightening of the rules is bound to encourage the growth of the shadow banking sector (see Appendices 1 & 2).

  • 49 Financial Times, “City of London owes its dominance to the EU,” Letters, December10/ December 11, (...)

35The light touch approach brought in by Margaret Thatcher’s drastic reforms allowed London to gain prominence in the financial world, but this relaxed approach is now feared by some, even in Washington, of all places. In 2012 and 2013, many allegations affected London’s financial institutions and naturally, this has badly tarnished the City’s image and reputation even further. However there is no reason why London should not continue to thrive as a world financial magnet if the lessons from the past are learnt. Despite all the talk in Westminster, it must not be too rashly forgotten that the City of London owes it dominance to the EU for a significant part.49

36The risks of international banking have fallen on London simply because the City is one of the largest world financial centres. It would be unfair to say that most loopholes have now been closed, for there is still – and always will be – room for further improvement. The current risk is that the politicians take over the responsibilities that should be assumed by the official regulators.

37And finally, it must not be overlooked that the financial sector’s centre of gravity is bound to shift towards Asia in the next decade. Although Astbury Marsden’s latest “Preferred Location report” shows that almost a third of UK-based investment bankers would rather work in Singapore,50 one may take comfort from the idea that London still ranks as the third favourite location – with New York in second place.

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Bibliographie

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Annexe

Under scrutiny: a selection of “non-banks”

Hedge funds Investment pools for wealthy and institutional investors. Regulators worry about their large and growing role in debt markets and whether a big fund manager failure could destabilise its bank lenders

Commodities funds investment places large bets on movement of commodities prices. Use of derivatives and leverage mean they could sustain huge losses compared with real assets.

Private equity groups raise long-term funds from institutional investors for direct investment. Regulators are concerned that the largest in the US are acting more like banks, entering fields such as debt trading and hedge funds. They also fear that highly leveraged buy-outs that go bad could dent bank balance sheets.

Money market funds take short-term money from investors and buy commercial paper and other securities. When money was pulled out during the crisis, funds dumped assets and stopped buying more leaving many corporations unable to roll over short-term borrowing.

Securitisation is the pooling of assets such as mortgages into securities that sliced up and sold to different types of investor. Lenders pass on loans quickly, giving them few incentives to ensure they are repaid. Limited information on underlying assets makes them illiquid and hard to value.

Source: Financial Times, “Under scrutiny: a selection of ‘non-banks,’” February 3, 201151.

Emerging out of the shadows

Leveraged finance
Banks and specialised collateral debt obligations, which have traditionally provided the bulk of leveraged loans in Europe, are retrenching. Private equity groups try to fill the gap with their own leveraged loan arms. But bankers say Europe will eventually have to move to the US model of financing such debt, mostly with bonds […]

Broker-dealers Broker-dealers buy and sell securities for themselves and for their clients. While the businesses were once synonymous with investment banks such as Goldman Sachs and Bear Stearns, “broker-dealers banks” have become an endangered species since the crisis. Standalone broker-dealers are not guaranteed an easy time either. […]

Hedge funds Hedge funds’ market influence remains far lower than its peak in 2007 thanks to significant cuts in financing available from banks. Some small, niche firms have sprung up to take advantage of their greater capital flexibility in credit-constrained environments, however: either by directly lending to SMEs or sharing risks on bank balance sheets through complex derivative transactions — for lucrative fees. […]

Money market funds Money market funds take investor deposits and buy short-term debt issued by government companies and banks. For convenience they always trade at a fixed $1 per share price.

Insurers The long-term and illiquid nature of insurance liabilities is a good part of the reason life insurers came through the crisis unscathed.

Banks find this extremely attractive as a potential source of funding for illiquid assets, but development has been slow because of regulatory uncertainty for both banks and insurers. […]

Blue-chip lenders The move by some non-financial companies into the sphere of lending in the wake of the financial crisis is not without precedent. Big western industrial groups have long had financial arms. The trend is shifting to China as companies seek to earn higher returns on their excess cash. […]

Mortgage servicing Mortgage servicing rights (MSR) are contractual agreements common in the US where the originating lender sells off the fee-based business of collecting payment from the borrower and sending it to the lender. Banks, facing new limits on their ability to count MSR as capital, are selling them off in droves. […]

Peer-to-peer lenders Peer-to-peer lenders enable individuals to lend to each other and to small businesses via websites. They initially launched in the UK in 2005 and have taken off in the US and Germany and, to some extent, China. Typically they account for a few hundred million pounds or dollars a year. […]

Governments The British government has been an active participant in the lending market, but the government is also going to lend directly to medium-sized companies through the new Business Finance Partnership. Elsewhere there are few examples of government investing directly in this way, although the US does have a large network of so-called Community Development Financial Institutions […].

Source: Financial Times, “Emerging out of the shadows,” April 10, 2012, 19.

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Notes

1 See Richard Saville, Bank of Scotland: A History; 1695-1995, Edinburgh: Edinburgh UP, 1996, 416-417.

2 Quoted in Gabriele Steinhauser, “New treaty to save euro splits European Union,” The Guardian, December 9, 2011, <http://www.guardian.co.uk/world/feedarticle/9987405>, checked on March 1, 2015.

3 Graham Bannock, Ron Baxter, & Evan Davis, Dictionary of Economics, London: Penguin Books, 1998, 84.

4 See Frances Coppola, “The futures of retail banking,” Pragmatic Capitalism, April 29, 2013, <http://pragcap.com/the-future-of-retail-banking>, checked on March 1, 2015.

5 Tim Harford, “Black-Scholes: The maths formula linked to the financial crash,” BBC News Magazine, April 27, 2012, <http://www.bbc.co.uk/news/magazine-17866646>, checked on March 1, 2015.

6 See Independent Commission on Banking (ICB), Final Report, Recommendations, September, 7, 2011.

7 See Financial Times, “Wheatley's Libor detoxification,” September 30, 2012, <http://www.ft.com/intl/cms/s/0/e36c0228-0970-11e2-a5e3-00144feabdc0.html#axzz2SjFBQHpV>, ckecked on March 1, 2015; Financial Times, “UK banks — the PPI burden,” October 29, 2012, <htt2012, p://www.ft.com/intl/cms/s/3/ca66746c-21d4-11e2-b5d2-00144feabdc0.html#axzz2SjFBQHpV>, checked on March 1, 2015 ; and Patrick Jenkins & Brooke Masters, “London’s precarious position,” Financial Times, July 30, 212, 7.

8 TheCityUK, Key Facts about Financial and Professional Services, January 2014.

9 Ibid. 16

10 See “United Kingdom's share of cross-border bank lending in international financial markets from 1992 to 2013” <http://www.statista.com/statistics/323887/uk-financial-markets-share-cross-border-lending>, checked on March 3, 2015.

11 See Bank for International Settlements, Triennial Central Bank Survey. Foreign exchange turnover in 2013, September 2013, 14 <http://www.bis.org/publ/rpfx13.htm>, checked on March 3, 2015.

12 The government dismantled the FSA in April 2013 and gave the Bank of England control of macro prudential regulation and oversight of micro prudential regulation. In the new system, the Bank of England becomes the top regulator with a new Financial Policy Committee (FPC) monitoring the economy and examining the macro-economic and financial issues which can threaten stability. See James Barty, Reform of the Bank of England, London: Policy Exchange, December 2012, 5-9.

13 See Financial Times, “The challenge of great exchanges,” February 14, 2011, 8.

14 See Jeremy Grant, “LSE goes back to square one,” Financial Times, July 1, 2011, <http://www.ft.com/intl/cms/s/0/3c6368a0-a408-11e0-8b4f-00144feabdc0.html#axzz2SjFBQHpV>, checked on March 1, 2015.

15 An investment fund which meets all of the requirements of Shariah law and the principles articulated for “Islamic finance”. Shariah-Compliant Funds must follow a variety of rules, including investing only in Shariah-compliant companies, appointing a Shariah board, carrying out an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity. […] Shariah-Compliant Funds have expanded in popularity only recently, even though the concept was first developed in the late 1960s. The concept requires considerable effort to implement, since much attention must be paid to compliance with the Shariah principles, both at the fund operations level and for all underlying investments. Shariah-Compliant funds are prohibited from investing in companies which derive income from the sales of alcohol, pork products, pornography, gambling, military equipment or weapons. Shariah allows for a small portion of an investment's income to come from prohibited sources, though a Shariah-Compliant fund cannot profit from this income. Instead, it must separately account for these earnings and donate them to a charity. See Investopedia, Definition of “Shariah-Compliant funds,” 7-22, <http://www.investopedia.com/terms/s/shariah-compliant-funds.asp>, checked on March 1, 2015.

16 See David Oakley, “Europe: London and Paris battle for business,” Financial Times, December 13, 2010, <http://www.ft.com/intl/cms/s/0/f6b651dc-064b-11e0-976b-00144feabdc0.html#axzz2SyEMmOtJ>, checked on March 1, 2015.

17 Ibidem.

18 See Josh Noble & Alex Barker, “UK's euro trade supremacy under attack,” Financial Times, December 2, 2012, <http://www.ft.com/intl/cms/s/0/736bd72a-3c9a-11e2-a6b2-00144feabdc0.html#axzz2SVqEAXE2>, checked on March 1, 2015.

19 Financial Times, “Britain vs the ECB,” September 20, 2011, 10.

20 See Alex Barker & Jeremy Grant, “Britain to sue ECB over rules on clearing,” Financial Times, September 15, 2011, 1.

21 See Alex Barker, “UK faces clash with Brussels on City,” Financial Times, September 11, 2012, <http://www.ft.com/intl/cms/s/0/3d0d75f8-fc12-11e1-af33-00144feabdc0.html#axzz2SVqEAXE2>, checked on March 1, 2015.

22 See Josh Noble & Alex Barker, “UK's euro trade supremacy under attack,” op. cit.

23 See Alex Barker & Gerritt Wiesmann, “Eurozone disquiet at ‘great British sideshow,’” July 3, 2012, <http://www.ft.com/intl/cms/s/0/5d02dc24-c515-11e1-b8fd-00144feabdc0.html#axzz2SjFBQHpV>, checked on March 1, 2015.

24 See Philip Stevens, “A bad time for Britain to say Auf Wiedersehen,” Financial Times, October 10, 2012, <http://www.ft.com/intl/cms/s/0/dc9e3acc-1200-11e2-bbfd-00144feabdc0.html#axzz2SVqEAXE2>, checked on March 1, 2015.

25 The European Banking Authority was set up in 2010 and started operating in January 2011. It is based in London. See the EBA’s website <http://www.eba.europa.eu>.

26 See Financial Times, “Britain opts for the empty chair,” Letters, December10/ December 11, 2011, 8. And “The UK and the banking union”, in Jean Pisani-Ferry et al., What kind of European banking union?, Bruegel Policy Contribution, No. 2012/12, 2012, 8 <http://www.bruegel.org/publications/publication-detail/publication/731-what-kind-of-european-banking-union>, checked on March 3, 2015.

27 The Tobin tax is a tax on foreign exchange transactions originally proposed by Professor James Tobin in 1972. It has been suggested that such a tax would not only help to control these flows but also be a useful source of revenue. The tax could also more widely embrace international financial transactions (See Graham Bannock, Ron Baxter, & Evan Davis, Dictionary of Economics, op. cit., 410).

28 See George Parker, “FSA backs global tax on transactions,” Financial Times, August 27, 2009, <http://www.ft.com/intl/cms/s/0/08943b5a-926a-11de-b63b00144feabdc0.html#axzz2SVqEAXE2>, checked on March 1, 2015.

29 See John Plender, “Long-term investors would benefit from Tobin tax,” Financial Times, September 27, 2011, <http://www.ft.com/intl/cms/s/0/39051e9c-e83c-11e0-9fc7-00144feab49a.html - axzz2SVqEAXE2>, checked on March 1, 2015.

30 Ibid.

31 For an update on Europe’s Financial Transactions Tax, see the European Commission’s website <http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm>, and Financial Times <http://www.ft.com/intl/in-depth/financial-transaction-tax>, checked on March 1, 2015.

32 See Mike Ekberg, “Who regulates is less important: what matters is effectiveness,” Financial Times, Letters, December 10, 2010, 12.

33 See The Economist, “Chained but untamed,” a special report on international banking, May 14, 2011, 3.

34 Independent Commission on Banking, Final Report, Recommendations, September, 7, 2011.

35 See Financial Times, “Ring fencing is a snake-oil remedy,” Letters, September 9, 10.

36 See Financial Times, “Mad bankers and Englishmen,” August 31, 2011, 12.

37 See Philip Augar, “The price and perils of taking on the banks,” Financial Times, September 8, 2011, 9.

38 See Patrick Jenkins, Sharlene Goff, & Megan Murphy, “Flight delayed,” Financial Times, April 15, 211, 7.

39 Department for Business Innovation & Skills (BIS), The Kay Review of UK Equity Markets and Long-Term Decision Making, Interim Report, February 2012.

40 Department for Business Innovation & Skills (BIS), The Kay Review of UK Equity Markets and Long-Term Decision Making, Final Report, July 2012.

41 Department for Business Innovation & Skills (BIS), Ensuring Equity Markets Support Long-Term Growth, The Government Response to the Kay Review, November 2012.

42 Financial Times, “UK equity review – blurred vision,” July 23, 2012, <http://www.ft.com/intl/cms/s/3/1792961c-d4cd-11e1-bb88-00144feabdc0.html - axzz2SyEMmOtJ>, checked on March 1, 2015.

43 For full details of the Financial Services (Banking Reform) Act 2013, see <http://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_en.pdf>, checked on March 1, 2015.

44 See Brooke Masters & Tom Braithwaite, “Bankers versus Basel,” Financial Times, October 3, 2011, 9.

45 Jamie Dimon, JP Morgan Chief, for example, has always considered the Basel III bank rules to be anti US: “I would not have agreed to rules that are blatantly anti-American. Our regulators should go to Basel and say: ‘if it’s not in the interest of the US, we’re not doing it” (Braithwaite, 2011). For an update on Basel III implementation by the US, see Federal Reserve Board, Basel Regulatory Framework, <http://www.federalreserve.gov/bankinforeg/basel/USImplementation.htm>, checked on March 1, 2015.

46 For an update on the transposition of Basel III regulatory standards into domestic regulations, see Bank of International Settlements, Monitoring adoption of Basel III standards and reports to the G20 <http://www.bis.org/bcbs/implementation/bprl1.htm>, checked on March 1, 2015.

47 See Alan Beattie, “Basel III fears overblown says IMF study,” Financial Times, September 11, 2012, <http://www.ft.com/intl/cms/s/0/d04fe33c-fc26-11e1-ac0f-00144feabdc0.html#axzz2SjFBQHpV>, checked on March 1, 2015.

48 André Santos Oliveira & Douglas Elliott, Estimating the Costs of Financial Regulation, IMF Staff Discussion Note (SDN/12/11), IMF, September 11, 2012, 3.

49 Financial Times, “City of London owes its dominance to the EU,” Letters, December10/ December 11, 2011, 8.

50 See “Singapore – Preferred location,” <http://www.astburymarsden.com/our-thinking/article/0/singapore-preferred-location>, checked on March 1, 2015.

51 <http://www.ft.com/intl/cms/s/0/6431e2e0-2f09-11e0-88ec-00144feabdc0.html#axzz3T97C8dqD>, checked on March 1, 2015.

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Bernard Offerlé, « Moving Past Recent Turmoil: What is Becoming of the UK's Financial Services? »Revue LISA/LISA e-journal [En ligne], vol. XIII-n°2 | 2015, mis en ligne le 20 mars 2015, consulté le 29 mars 2024. URL : http://journals.openedition.org/lisa/8255 ; DOI : https://doi.org/10.4000/lisa.8255

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Auteur

Bernard Offerlé

Bernard Offerlé est maître de conférences à l’Université Paris Ouest Nanterre la Défense où il enseigne l’anglais de l’économie, de la finance et de la gestion. Ses recherches portent sur l’économie britannique contemporaine. Il a notamment publié Économie politique britannique, les années Thatcher (L’Harmattan, 2002) et English for Economics and Management (Ellipses, 2007).

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