26 October 2006

FT: How London can remain in the top league

What are the lessons of Big Bang, the deregulation of the London Stock Exchange that happened 20 years ago? Competition was the cause of it. Competition will remain the theme. Protectionism does not pay. Trade and the national economy thrive where barriers to competition are dismantled. You cannot compete if there are rules that tie your hands when your competitors in the US or Europe or Asia are not shackled in the same way. It is no good, now that wealth creation depends on being internationally competitive, trying to stop foreigners from buying into national enterprises. It is better to welcome their capital investment in the UK economy.

London has done well from Big Bang because barriers to competition were dismantled and London attracted a large concentration of competitive talent and capital from all over the world. Of course there are other things about London that have attracted people. People there, in the words of a recent commentator, “think globally”. London has a reputation for probity based on sound regulation. It is a centre where you can trust that your business will be done quickly, honestly and reliably. It is an important hub for international transport. Personal tax rates have come down from the absurd levels of the 1970s. London is a stimulating place, with a rich cultural life. It is a great place to live.

Can London keep its place at the top? To do so, we must remember the lessons that Big Bang and its aftermath have taught us. The competitive challenge will grow stronger. It is not enough to rely lazily on London’s obvious advantages, such as its time zone and the English language, now the international language of finance. Other financial centres envy London’s success and would like to emulate it.

Which government with an eye to increasing local prosperity, which mayor of a city with a financial business, would not want to? The competitive response of stock exchanges in Europe to the Big Bang reforms shows that we cannot relax.

So we have to remain on our toes. Government and its agencies must, wherever they have the power, keep the barriers to competition low and the attractions of London high. Tax rates for both companies and individuals must be competitive. Knowledge, skill and imagination can emigrate. So can headquarters. So too can business, as was shown by the US’s interest equalisation tax, which exported the eurobond market to London in the 1960s. There are already signs that some businesses are thinking of relocating to less highly taxed countries. While I am on the subject of tax, stamp duty and the unbelievably complex rules on capital gains tax both do their bit to reduce the depth and liquidity of the London market. Stamp duty on shares should be abolished and capital gains tax should be simplified to a flat rate on short-term gains.

Regulation must be as light as is compatible with nurturing trust. Over-zealous and risk-averse regulators are prone to the laws of unintended consequences. Continuous assessment of the value of regulations is essential to make sure that they are not driving business away or reducing competition or damping innovation. Regulators must be prepared for coping with serious risks that might damage London’s reputation. Systemic risk is more unpredictable today than it was when business was concentrated in fewer hands and sophisticated instruments for laying off risk had not been invented. Competition law and practice must keep up with the fast-changing scene. A large share in the UK market often looks small in relation to the global market.

Security must remain a high priority. Every effort should be made to improve the quality of education and lifelong learning. The learning of other languages should be encouraged. Cultural excellence must be encouraged – penny pinching on museums, the performing arts and the Royal Parks will damage London’s attractions. Businesses and wealthy executives should help with investment to meet some of these needs. It will pay them to be part of a continuing success story.

Financial businesses will face four big challenges. First, they will need to invest increasingly in the training and development of their people, not just their executives but their boards as well. Second, they will need to grapple with the sky-high pay packets that successful executives (and some unsuccessful ones) now enjoy and the power that they have when they threaten to leave. Third, they will need to be on top of the rapid advances in technology, which are making systems obsolete almost as soon as they are installed. Fourth, they need to be wholly on top of their risks. Do all the boards of financial companies receive a proper analysis of their companies’ risk positions and their potential effect? Do all the directors truly understand the analysis? Some businesses will find it difficult to compete. They will need to remember the dangers of escalation theory – it is sometimes better to stop investing in a business that suffers competitive disadvantage.

If people, from those in the government downwards, remain alert to all these things and take action accordingly, London will still be in the top league in the world of international finance in 20 years’ time. I hope, with somewhat less confidence, that I might be around to write about it.

By Sir Nicholas Goodison

© Financial Times