It’s been a terrible year for the City. Half the British banking system has been nationalised, and the other half doesn’t look safe yet. The non-domicile tax rules that made it a magnet for Europe’s brightest young financiers have been curbed. There are tough new rules on the way bankers are paid being proposed by the Financial Services Authority (FSA).
And now – presumably on the principle that you might as well finish a job once you’ve started it – the government has lifted the top rate of tax to 50%. It would have been hard to think of a more deadly blow to an already wounded financial centre. The City has re-invented itself several times in the past, and can no doubt do so again. It can find niches in stockbroking and financial restructuring, and build on the UK’s historic ties with rising economic powers such as India. But the challenges will be immense – and there can be no certainty that the City will be able to rise to them. Its standing in the world has taken a terrible series of blows.
Whatever the government may pretend, the UK has suffered more damage from the credit crunch than any other major economy. No other nation has seen runs on banks such as were witnessed at Northern Rock, nor has there been any calamity on the scale of the Royal Bank of Scotland. The FSA’s chairman, Adair Turner, has promised a tough new regime of regulation, stating bluntly “there’ll be fewer people earning less money”.
No doubt that’s true, but it suggests a regime that will be heavy-handed and intrusive. Meanwhile, non-doms will now have to pay a £30,000 annual charge, and now, a 50% top rate of tax, which will apply to any earnings from working at a London-based bank or hedge fund, regardless of whether you are British or not. That will be the fourth-highest top rate of tax in the developed world (Sweden, Denmark and the Netherlands are higher, in case you’re wondering where you really don’t want to move to). It’s simply inconceivable that tens of thousands of ambitious young bankers, motivated principally by money, are going to up sticks and move to one of the highest-tax regimes in the world.
For Britain, that matters. In the 2006-2007 financial year, the City provided 27.5% of corporation tax payments, and 13.9% of the total UK tax take – £68bn in all. Already that is reckoned to have at least halved, and is responsible for much of the red ink splattered across the government’s books.
In short, the British economy needs a thriving financial centre. It is one of the few things we are really good at. And the City has scripted more triumphs over adversity than a Hollywood screenwriter. In the 1960s and 1970s, it created the offshore Eurodollar market, recycling dollars from the oil-rich states to the rest of the world. In the wake of Big Bang deregulation, in 1986, it recreated itself as a global hub for largely foreign-owned banks.
A combination of the non-dom rule; what, in retrospect, was excessively light regulation; and the entrepreneurial spirits of its workforce, allowed it to see off challenges from Paris and Frankfurt to become the key European finance centre. Indeed, in the last three years, it was starting to pull ahead of New York as the global centre for the money markets.
All that is in the past. The foreigners will return home. The US and European banks will be slimming down their operations. And the British banks will be shadows of their former selves. But there are opportunities out there.
Stockbroking, once one of the City’s core professions, is about to make a comeback. The credit crunch has left thousands of companies with shattered balance sheets. They will need to swap a lot of debt for equity, and that will mean patiently talking to shareholders and persuading them the business is worth backing. That is precisely the job stockbrokers used to do – so there will be demand for them again.
Next, the government debt markets will be swilling with paper. The British government will soon be selling £200bn of debt a year, and other governments will be placing similar amounts. The competition for capital will be intense. Any expertise in placing that – and the City has plenty – will be in demand.
Third, the City is already the world’s major currency trading centre. The euro has survived the credit crunch so far, but whether countries such as Spain, Italy and Ireland can stand the pain of the recession without devaluing their currency remains to be seen. Splitting up the single currency could be a bonanza.
And last, the ‘Bric’ economies of Brazil, Russia, India and China will keep growing in importance. The City has always been the most international financial centre. It has already established itself as a bridge between Russia and the rest of the world. And it can do the same for India as well.
Even so, the City will be a far more English financial centre for a decade or more to come. It will be smaller, and less profitable. And it will be a long time before it claws back the prominence of the middle half of this decade.