The future of the financial services industry in the UK
Tensions between the public and bankers were already at breaking point after the financial crisis, but the recent LIBOR scandal has the potential to push these tensions over the edge. People have been describing them as “dishonest”, pushing for more regulation and inquiries to hold the senior executives accountable. This, however, is a dangerous game. We should ensure that this never happens again, as the authority of the LIBOR rate around the world has helped to secure London’s place as the world’s financial centre. However, we need to be careful as to how this is dealt with, so that London can keep this place for many years to come, or this short term problem could have disastrous long term consequences.
London is very important to the UK, and with the current state of the economy, we cannot afford to lose the bankers. Currently, financial services accounts for 8.9% of UK GDP ((TheCityUK)), provides a massive source of the UK’s services trade surplus, as well as providing £63 billion in tax revenue for the government in 2011 ((Reuters)), enough to pay for defence and transport spending. This alone is a massive part of our society, but once you consider the indirect impact of the industry, such as the jobs supported as the bankers purchase Aston Martin cars, supporting jobs and providing more tax in terms of corporation tax and VAT. With this in mind, although bankers might not be popular, they are a crucial part of our economy, our country and our future. Our country cannot afford to lose the industry, and it is currently one of the only shining beacons in an otherwise fledging economy.
Therefore, how the government and the public treat the industry in the next few months is very important. HSBC ((HSBC in clearest warning over relocation)) and Barclays ((Barclays could move overseas)) have already threatened to relocate their headquarters in the past, to places such as Hong Kong, or New York, with the Mayor, Michael Bloomberg, welcoming them with open arms. Previously, the tensions have been over costs or regulation, but in the end, both banks decided to keep their Headquarters in London, at least for the short-term, with the government giving HSBC various concessions. With the LIBOR scandal leading to a potential inquiry, the government are now likely to apply more regulation, red tape and costs to the banks, which will again get them thinking about moving once again. People might say that this is an open threat, but we have seen big corporations; such as AON, who are moving from Chicago to London; move before, so it’s not an impossible scenario. With increased tensions, it will also become more difficult to get other companies to move to London and increase investment in the area.
Obviously, Bob Diamond, del Missier and the traders involved need to be punished and while we need to ensure that this never happens again, we have to tread carefully. Crucially, the public seem to forget that at the same time the bankers made mistakes, the regulators, such as the Financial Services Authority, made even bigger mistakes, by first allowing the rate fixing to take place, and second, not realising what had happened. It took investigations by the United States to alert us to the problem. This, to me, needs to be addressed first and foremost, because if the FSA had functioned as expected, then the rate fixing would have never happened in the first place. There is no confidence in the market, without the confidence infrastructure behind it. The fact that the scandal has taken place now, could actually be a good thing, with regulation still on the table, allowing the industry to recover and be protected in the future. However, this will be difficult with regulation set by the European Commission, who are more bothered about Germany and France than London. Therefore, it might be a good idea to leave the EU, so that we can control our own industry again.
As the World’s Financial Centre, it is clear that London and the financial industry is a great asset to our country, one which we cannot afford to lose. The relationship between the industry and our country hasn’t always been perfect, especially recently, but how we treat this “bump in the road” will have even lasting consequences. In particular, one way that I think would beneficial to both parties, is an idea suggested by Allister Heath, editor of City A.M., injecting capitalism back into the banks. He suggests that we should allow the banks to go bust, as the current safety net has allowed the bankers to take risks without the risk, as well as consumer reforms, by implementing Andrea Leadsom’s idea of portable bank account numbers ((Andrea Leadsom’s Blog)) so that there is increased competition. Combined with a secure regulator, these changes could help to solve the City’s problems, so that it can continue to thrive in London, with both the industry and the public seeing the long term benefits.