London’s dominant status in financial services may no longer be assured.
Its dominance in global finance aside, London is worrying once more about the prospect of being knocked from that position.
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The City of London maintains its superiority in finance in various ways: geographical advantage; a highly trained and well-educated workforce both in finance and in such ancillary roles as law, accountancy, and consultancy; an often replicated common law system; a business environment favorable to trading and capital markets; and a hospitable and interesting place to live as well as work. London leads in bond and foreign exchange trading and cross-border lending. Asset managers control a decent share of global hedge fund assets and private equity. Lighter touch regulation and economies of scale enable it to best other potential global competitors, particularly in Asia.
But there are some things for it to worry about. Some insurance business has moved to Bermuda and other warm climates. Dublin and Luxembourg are attracting fund management, and Switzerland is attracting private banking clientele. In addition, some firms’ back office and IT businesses have gone elsewhere. What remains of the United Kingdom’s post-crisis bank tax still makes bond trading unduly expensive and could prompt a bank migration to a more hospitable environment. A spate of scandals has not helped either. The LIBOR tampering, the JP Morgan “London Whale” trading losses, and the alleged involvement of a London-based day trader in the 2010 US “flash crash” have all put black marks on London’s reputation to some degree.
London’s smaller role in advising on debt and equity issuance owes itself to European firms’ greater reliance on bank rather than capital market financing. Eurozone weakness has also affected growth in that area. As banks exit certain areas of money management, insurers, sovereign wealth funds, and money managers that do not need to be based in London are taking their place. Asia’s economic ascent and more welcoming attitude toward banking and finance may shift the center of financial gravity more toward that region. European Union rules permitting London-based firms to do business anywhere raise the prospect of a “Brexit” from the EU, which could weaken Britain-based financial firms’ access to eurozone countries and limit European employees’ rights to work in Britain.
Changing regulation, more accommodating business climates, and a shift in regional economic strength could place London’s superior position in financial services in jeopardy. London has managed to defeat risks in the past, but this time could be different.