John McFarlane delivered his inaugural Chairman’s speech at TheCityUK’s Annual Dinner on Wednesday 11th November 215
My Lord Mayor, Your Excellencies, My Lords, Secretary of State, Ministers, Aldermen, Sheriffs, Ladies and Gentlemen, it is indeed a privilege for me to welcome you here at the Mansion House for our annual dinner.
Having spent almost two decades overseas, it reminds me how fortunate we are to have the Lord Mayor of the City of London, the livery companies, the Mansion House and the Bank of England, all alongside the glass and steel of modern financial and professional services. I am reminded every day of this contrast in our own million square foot building, incongruously portraying the portraits of my predecessors going back to the 17thcentury. Those offices stand in Canary Wharf, itself a symbol of re-invention and of a previous Government's desire to support innovation, attract investment, and provide a "second cylinder" with the City of London, to power London's growth as the global financial centre.
A little pomp and circumstance - that the UK executes brilliantly - still goes a long way today, as we saw with therecent visit of the Chinese President, hosted by the Cityof London, and of course this week’s visit of the Indian Prime Minister.
And I am pleased that the Secretary of State is able to join us here this evening. His expertise in my own sectorof banking, together with his time in Asia, means he is particularly suited to the task of shaping an economy as we compete globally in challenging circumstances.
It is also a particular personal honour for me to take on the important and strategic role of the chairmanship of TheCityUK. I trust that in the next three years, I can build on the excellent contribution of my predecessor Sir Gerry Grimstone, and you will have read we will continue to work closely together going forward. Alongside Chris Cummings and the team, he has led the evolution of TheCityUK into a respected partner for governments, contributing practitioner expertise to the business agenda.
I am also very pleased that Paul Manduca has taken on the Chairmanship of the Advisory Council of the TheCityUK.
And I would like to thank Accenture for their valued support this evening.
My own career began in manufacturing, followed by 40 years in banking and insurance. I therefore want to take forward the significant work done under Gerry’s chairmanship, but I also want to use my own experience to reflect the real purpose of our industry – to serve the economy as a whole, both here and elsewhere.
Why the financial and related professional services industry matters
The aftermath of the global financial crisis has probably overshadowed the importance of the work that we do, but I would like to reinforce how key we are to the UK economy.
We are a vast employer in our own right. Over 2 million people - one in 12 in the private sector - work in our professions across the nation, two-thirds of whom operate outside London. In the last 18 months alone, we have added an additional 130,000 people.
London and the City of London are the centre of gravity, but this is far from being a London story. Twenty towns and cities in the UK have more than 10,000 people employed as our colleagues. The Northern Powerhouse will be built as much on our sector as on any other.
Our sector also makes the largest contribution to the Exchequer - £66 billion pounds in tax receipts last year alone.
But of course we are more than that. We are the engine behind real long term, sustainable growth in the economy as a whole.
And of course it is an international story.
We are the world’s leading financial centre, and its most international one. We are open to all - one third of the £6 trillion of assets managed here in the UK, are held by international investors.
Last year we had a record trade balance of £67 billion pounds in our favour.
We have the advantages of the rule of law, language, timezone, our place at the heart of Europe, as well as a trade and trading history that reaches back as far as the records show.
The Chancellor and the Governor said as much today.
We CAN see a bigger, more competitive City and build that strength on a race to the top, not the bottom.
This isn't just what we do well - it's what we do better than anyone.
That is why talent across the globe is attracted to the UK.
Today the Bank of England is led by a Canadian. A Frenchman leads The London Stock Exchange. New Zealanders head one of our largest banks and insurance companies. And Barclays will soon be led by an American.
London is the world’s leading financial centre, and our priority is to keep it that way.
But there is work to be done
I sense we are at a tipping point. Concern in the sector is high, and in response the tone from the authorities has softened. Will good intentions be enough? It is certainly a step in the right direction. However in the end it tends to be the economic realities that determine the outcome.
It is too easy to be complacent in our leading position, historical advantage, and that we are the gateway to Europe, notwithstanding they are real.
We all know that over time, things do change. One would not easily have foreseen Apple’s emergence as the largest company on the planet, or Dubai as the largest airport in the world by passenger numbers.
The logos of the leading financial and professional firms in the world are on the top of our buildings. However, make no bones about it, our number one status is being challenged. Business will gravitate to where economic activity is greatest and where it can be best accessed. Firms do have a choice – they will inevitably locate and operate in the countries and markets that are the most attractive and at the lowest cost.
Erosion is gradual and by the time we realise it, it's often too late.
In reality, we do have current and emerging disadvantages:in taxation, levies, regulation, and immigration constraints. They might be justifiable in domestic political terms, but it will be increasingly difficult to do so internationally. London is also one of the most expensive cities in the world.
We are aware competing countries are particularly active in promoting their own advantages and, for example in Ireland, are having some success in attracting international firms. We are also conscious that some international firms in the City are reconsidering the location of their head offices and businesses. And we all know that EVERY firm is constantly considering relocating jobs and business activities to countries that offer a superior mix of taxation, regulation and cost.
We would therefore like to work with the government and regulators to review our strategic position, including its relative strength and weakness, and to stimulate change where required to ensure the UK remains the most attractive, the most compelling and the most cost-efficient location of choice for British and foreign companies.
Staying the same will simply not cut it in tomorrow's digital world.
Need to choose
Accordingly we have real choices to make:
- In the light of public concern, how can we keep our borders open to talent and population growth essential for economic growth?
- What will we end up doing with respect to European membership and influence?
- And will we have the courage to take a longer-term and more balanced view towards a competitive and predictable regulatory and public policy environment that gives our sector the maximum potential to build locally and compete globally?
A skilled workforce is critical. One only needs to look at the number of new technology giants in the US who have been founded by people who went there on student visas to see how important it is to stay open to the brightest talent.
Without an environment that is open to investment, that allows firms to bring their people to the UK at all stages in their career and which attracts the best undergraduates to study here, we will fade from the top table of world centres.
This evening, I’d like to make the case for going further. Now is the time to encourage the deep pool of talent so necessary to this country’s global success by removing further barriers to intra-company transfers as well as welcoming the brightest foreign students.
A choice on Europe
And on Europe?
There is strong support for EU reform, to remove unnecessary interference, bureaucracy, and legislation that we now suffer, and to return local decisions to national parliaments.
There is also strong support within Europe for the UK to remain and increase its influence. As TheCityUK, we should wholeheartedly be in support of a reformed Europe and the UK playing its full role at the centre of a new paradigm.
We know the EU is the biggest single market for UK exports of financial services, generating nearly one-third of our sector’s trade surplus.
We know the UK, particularly London, is Europe’s financial and the world’s time zone centre. The beating heart of Europe's capital markets can be heard every day in the City's trading rooms and investment houses. Time and again, global giants come to these shores to reach the single market.
We also know that European capital markets are a shadow of those of the US. Notwithstanding the successes of today, the future is more promising and we need to stay our ground, not retreat.
The question is therefore how best preserve and advance these advantages, and how much risk do we wish to run in potentially dislocating them?
We do have a very large number of domestic and international firms as members, and the clear majority of them feel that staying in the EU, suitably reformed, is the right choice – not just for us, working in internationalmarkets, but for our customers here in the UK. Where they would stand in an unreformed EU is less certain. So ideally reforms are achieved, we remain in a more attractive system and play a central role in its future.
We therefore wish the Prime Minister every success in his discussions.
It is imperative therefore that TheCityUK plays our part in shaping the reform agenda on the EU. We have made already some serious proposals for change, and we stand ready to help further.
As businesses we don’t have a vote, but we can communicate the views of our members and we can support the Government here in the UK – and indeed other Governments - to create an outcome that the voting public can choose with confidence.
A choice on regulation
There is an equally important choice facing us.
We have long had a careful balance in our regulatory and tax system which allows us to compete, and holds us to our social obligations.
We have been competitive precisely because we have a high quality approach that investors can have confidence in.
The deep shock of the financial crisis forced major, necessary reforms. No-one wants to see a return to the “light touch” approach that regulators had before the financial crisis. It was wrong then and it would be wrong now.
And failures of trust; LIBOR, PPI, FX – we should not be afraid to list them – raised serious questions over how some in the industry behaved, as well as whether our supervisors had the right tools to do their job.
The regulatory response to these failures has been significant and it is right that misconduct should be met with firm and decisive action.
But whilst enforcement action must fit the egregious nature of the failings, it must similarly reflect the demonstrable and fundamental change that has taken place to reform the culture, procedures and practices under which firms operate.
Financial penalties that do not meet this balance serve only to further erode public trust and remove from the economy scarce capital that can be put to use supporting growth.
But we must have the right balance. We do believe regulation has gone too far and there are unintended long-term consequences in two respects. Firstly, while there has been great progress in harmonising international regulation, national regulators do have differing approaches. As such the playing field is no longer level, which gives institutions headquartered in these countries an advantage. Secondly, where markets are over-regulated, firms will ultimately retreat and debt and equity finance needed to spur growth will be more difficult to find or more expensive.
Secretary of State, you have recognised this challenge yourself, and I noted your Department’s hard work to look, regulation by regulation, at the burden on business. I am pleased to note that European Commissioner Lord Hill has set in motion a review of European regulation to better assess its unintended consequences.
We must take the same approach to our financial sector.
Our economy will not be served well by a system of taxation which erodes slowly our ability to compete in the global market or puts at risk to the Exchequer the substantial revenues to which I referred earlier.
All businesses must meet fully their social obligations through the payment of tax, but sector-specific levies and surcharges may have longer term negative implications that we risk realising only when it is too late.
Financial and related professional services firms are like all others – they need to retain earnings to reinvest for growth, to keep pace with rapid advances in innovation and to produce a return for shareholders. It is shareholders - who have been patient for too long - who provide for our financial futures through pension funds and offer a key source of infrastructure investment.
We need to dispel the myth that shareholder return is bad for society – it is not. And neither is it true that the objectives of reasonable shareholder return and a customer oriented approach are mutually exclusive. They are mutually reinforcing – one cannot be achieved without the other.
A real opportunity
I raise these challenges candidly because while we are faced with enormous headwinds, we also face tremendous opportunity.
Managed correctly, the UK can look to the future with real excitement and hope.
We are in pole position as the pre-eminent Western centrefor Islamic finance. The sector is already worth $2 trillion dollars globally and looks likely to reach $3 trillion by 2018. We already have over 20 banks offering Sharia products here, and have nearly £5 billion of the market.
Imagine the advantage our exporters will have in reaching markets in Muslim countries, supported by banks, insurers, asset managers, and professional advisors with a real understanding of how their trade partners do business.
And we are emerging as leaders in the exciting Fintechand digital space. I believe that the new models of trading and investment that these new businesses are creating are the most exciting trend in our sector since the Big Bang. The UK can be at the centre of a new model of democratised finance, every bit as powerful as the last generation of tech innovators in Silicon Valley.
It is no accident too that London has become established as the global cyber-services capital.
So I end where I began. Our industry is a remarkable asset for the whole of the UK. We are, quite simply the best in the world. Up and down this country, over two million people are employed in the best and most international financial and professional services sector in the world.
But that is the present. Competition is not static, it is dynamic, and it wants to eat our lunch. We cannot win by remaining the same and relying on our historical advantages and our current position. Left alone our leading position will erode. We must therefore shape up to meet the relative challenges by others, to have transparent reasons why we should win and why firms should come here, and eliminate areas of obvious disadvantage in taxation, regulation and cost.
Initially I expressed these as choices, but in reality there is little choice. We must retain our international competitive advantage and access to international markets. I truly hope that as stewards of our country’s future, we will leave our inheritance stronger than we found it.
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