City of London: Policymakers urged to seize once-in-a-generation opportunity to make UK financial services sector more competitive

22 July 2022

UK leaders and financial regulators have been urged to focus on innovation and competitiveness to ensure UK financial services continue to benefit customers and clients across the globe, whist boosting the sector’s ability to finance growth across the economy, in a new report published today.

 The new State of the Sector report – a world first – has been developed in partnership between HM Treasury and the City of London Corporation. It provides a robust evidence-based assessment of the competitiveness of UK financial services drawing on both independent metrics and wide consultation with the industry. Repeated annually, it will be a mechanism that helps to improve competitiveness year-on-year.

The report – which delivers on a key recommendation of Lord Hill’s UK Listing Review – shows where the UK is world leading and what steps have been taken to improve the overall environment for the sector so far. It also highlights that flexibility in regulation should not lead to a ‘race to the bottom’, but instead identifies areas for further reform and opportunities to improve competitiveness.

 These include:  

• Talent: The UK is a world-leading financial centre because of its access to unrivalled pool of expertise, talent and skills.  We need to ensure the UK remains an attractive destination for global talent, by considering a route that would allow international workers to enter the UK for short-term, productive activity without requiring a visa.
• Innovation: the UK is a leading global fintech hub. More than half of its unicorns are fintech firms – a higher share than in any other financial centre. But it needs to develop expertise in digital skills. The financial services sector can complement Government efforts via industry and educational partnerships.
• Regulation: The UK is perceived as having the world’s preferred regulatory regime for financial services. But the UK’s regulatory framework must stay agile, coherent and competitive while delivering better outcomes. Including the aim to improve the speed of Financial Conduct Authority (FCA) authorisation turnaround times.

The report also identifies a number of other opportunities that will be key for the continued competitiveness of British financial services. These include:

• Providing employers with different ways to pay the Immigration Skills Charge and allowing medium sized employers to pay the same fees that currently apply to small employers.
• Supporting and investing in apprenticeships. Skills need to be developed across the entire sector – in firms, regulators and Government – to offer better products and services and get supervision, regulation and policymaking right.
• Supporting new ways of working to open the financial services sector to a wider and more diverse talent pool. Government can explore the benefits of cross-border remote working, which could offer businesses an even wider talent pool and position and advertise the UK as a truly open and global market.
• Establishing and following clear principles and strategy for regulatory reform. This will keep the UK aligned with global standards, while introducing regulation that is better tailored to its domestic markets. Reform of Solvency II, the implementation of Basel 3.1 and the future of clearing activity in the UK will be critical moments for the UK to demonstrate its approach.
• A clear commitment to set out how the FCA and Prudential Regulation Authority will deliver on their new growth and competitiveness secondary objectives and monitor progress. For example, they could make comparisons with regulators in other jurisdictions, such as the Monetary Authority of Singapore, and undertake more promotional activity.
• Maintaining and enhancing the UK’s open approach to market access. This can be achieved through bilateral and multilateral mechanisms such as trade agreements, mutual recognition agreements, regulatory cooperation, and through the regulation of branches of overseas firms in the UK and the UK deference framework. This could build on the well-regarded Overseas Person Exclusion (OPE) in ways consistent with maintaining market integrity and financial stability.

Figures in the report demonstrate the UK’s strength in financial services but also areas of competitiveness that could be improved:

• The UK’s international financial reach continues to be unmatched. In 2020, against the backdrop of a challenging year, the UK’s financial services trade surplus increased by 8% year-on year to £63bn. This surplus was higher than the US’ net financial services exports and higher than the value of France, Singapore, Germany and Hong Kong’s surplus combined.
• Amid proposed changes to the UK’s listings regime, the London Stock Exchange (LSE) saw an uptick in the number and value of IPOs in 2021.
• From 2004 to 2019, the UK’s volume of global FX trading more than quadrupled and went from being twice as big as the US to almost three times its size.
• The UK is capturing the biggest share of international bank lending and borrowing. This demonstrates the UK’s global connectivity and flow of capital. But between 2018 and 2021, the UK’s market share declined from 17% to 15%, whereas France’s market share increased from 9% to 13%.
• The UK is Europe’s largest and the world’s second largest hub for asset management and had £11tn assets under management in 2020. But the UK’s global market share held steady between 2019 and 2020, whereas the US’ share increased.
• The UK saw strong growth in private equity and venture capital investment activity. In 2021, financial services firms in the UK secured £37.5bn in PE and VC funding. Representing a 48% year-on-year growth, this was more funding than businesses secured in Singapore (£7.7bn), Germany (£5.8bn), and France (£5bn), but less than in the US (£111bn).

Policy Chairman of the City of London Corporation, Chris Hayward, said:

“Financial and professional services are an asset to the UK. The sector drives growth, supports investment and accounts for more than 2.3 million jobs across the country – two thirds of which are outside of London.

“This new annual report underlines the UK’s many strengths as a world-leading financial centre but, importantly, it also highlights areas where action needs to be taken to boost our competitiveness. 

“Seizing these opportunities will not only benefit the sector but the future prosperity of the UK economy as a whole. This includes strongly delivering on the new competitiveness objective for regulators in the Financial Services and Markets Bill. We look forward to working with HM Government and all parts of the sector to achieve this vision.”

City of London

© City of London