City of London as Financial Center UMKC BA 597
Mar 26, 2015
City of London as Financial Center
UMKC BA 597
Presentation Overview
Overview & Background of Financial Centers
Skilled Personnel Regulatory Environment Business Infrastructure Access to Customers Business Environment Government
Responsiveness Corporate Tax Regimes
Corporate Tax Regimes Operational Costs Professional Services Quality of Life Factors Culture & Language Commercial Property Personal Tax Regime Final Rankings Key Trends & Conclusions
Overview
Global Financial Center:“…business is conducted
between organizations from all over world using financial instruments from all over the world.”
Overview (cont’d)
Global Financial Centers– London– New York
Regional Financial Centers– Paris*– Frankfurt*
A third Global Financial Center?– Asia*Paris and Frankfurt are expected to remain national centers
and not expand to global financial centers.
Overview (cont’d)
The City of London’s Appeal– Cosmopolitan status– Diversity– Not just a “place for domestic participants to which
foreign players are granted access.”– Trading culture – History of openness and welcoming foreign traders– Location between US and Asia
Overview (cont’d)
Problem of outsourcing/off-shoring– Loss of commoditized, low-cost jobs– Retention of key factors:
Company headquarters Key skilled employees (e.g., executives and managers) Value-added activities Product innovation Strategic management Deal making activities
Background (cont’d)
Financial Services Industry in the UK– 5.5% of GDP– Over 1 million employed– Largest trade surplus in financial services
($25.3B)– Vast majority of UK financial services is in London– Can The City of London remain a global financial
center?
Global Cities
Alpha World Cities– 12 points: London, New York, Paris, Tokyo– 10 points: Chicago, Frankfurt, Hong Kong, Los Angeles, Milan, Singapore
Beta World Cities– 9 points: San Francisco, Sydney, Toronto, Zurich– 8 points: Brussels, Madrid, Mexico City, Sao Paulo– 7 points: Moscow, Seoul
Gamma World Cities– 6 points: Amsterdam, Boston, Caracas, Dallas, Dusseldorf, Geneva,
Houston, Jakarta, Johannesburg, Melbourne, Osaka, Prague, Santiago, Taipei, Washington DC
– 5 points: Bangkok, Beijing, Montréal, Rome, Stockholm, Warsaw– 4 points: Atlanta, Barcelona, Berlin, Buenos Aires, Budapest,
Copenhagen, Hamburg, Istanbul, Kuala Lumpur, Manila, Miami, Minneapolis, Munich, Shanghai
What is a Global Financial Center?
“A global financial centre is an intense concentration of a wide variety of international financial businesses and transactions in one location.”
Hamilton, Bermuda? – International financial centre for reinsurance, but not a
global financial center
Sydney? – Australia’s international financial center, but not a global
financial center
Choosing a Financial Center
Competitive Factors– Skilled labor– Regulatory competence– Tax regime– Government
responsiveness– Regulatory “touch” – Living environment
Availability of Skilled Personnel
Most important factor in the competitiveness of an international financial center
London & New York: Rating of Good or Excellent from 98% of respondents– London Excellent: 75%– New York Excellent: 66%
Availability of Skilled Personnel (cont’d)
0
5
10
15
20
25
London NYC Paris Frankfurt
Availability of Skilled Personnel
Average Score
20.5 20.0 15.2 15.1
365 responses; Survey encompassed 18 countries
Between June & October 2005
Availability of Skilled Personnel (cont’d)
Average score: derived from respondents’ views of how each financial center ranks on the Availability of Skilled Personnel multiplied by their views on the perceived importance of the Availability of Skilled Personnel as a competitive factor
London as a Centralized Location
Series of 27 interviews, senior personnel in investment banking
Findings: “London was the only place in Europe to centralize their operations because of the flexibility of the labor market.”
Findings Continued
Interviewees thought that London was unique in that people really wanted to work in financial services whereas in other locations it was “just another job”.
London is seen as having high employment costs although some of the add-on costs are significantly less than other European centers. One of our interviewees said that he felt the high cost was offset by the quality of staff
Regulatory Environment
2nd most important factor in the competitiveness of a financial center
Opinion: Much better than Paris or Frankfurt, similar to New York City
Regulatory Environment (cont’d)
0
5
10
15
20
London NYC Paris Frankfurt
Financial Center Rankings based on Regulatory Environment
Average Score
18.1 17.0 14.4 15.0
Regulatory Environment (cont’d)
Recent Study: Banking Community in London sees excessive regulation as the most significant risk to financial services currently
Countering Argument: Generally the Financial Services Authority (FSA) is well regarded and people see benefit if there is only being one main regulator that oversees the financial services industry in London
Regulatory Environment (cont’d)
USA Regulation: Based on clear defined roles; “prescriptive”
FSA: Risk-based approach; seen as more flexible and welcomed by respondents
Access to International Financial Markets
3rd most important factor overall 44% of respondents felt that access to
financial markets was Critically Important and a further 34% felt it was Very Important.
Access to International Financial Markets (cont’d)
Access to International Financial Markeets
0
5
10
15
20
25
London NYC Paris Frankfurt
Average Score
20.6 19.8 15.6 16.3
Access to International Financial Markets (cont’d)
Paradox: Do not need to be close to markets to access them, however financial institutions still locate near them.
Geographical proximity to customers and suppliers which creates a business cluster
Availability of Business Infrastructure
4th most competitive factor Comprised of several components including:
– telecommunications – IT infrastructure – transportation links
Availability of Business Infrastructure (cont’d)
Availability of Business Structure
0
5
10
15
20
London NYC Paris Frankfurt
Average Score
18.2 18.9 15.3 16.1
Availability of Business Infrastructure (cont’d)
London & New York at 70% ranked Excellent compared to Paris & Frankfurt at 20%
Counterargument: the main financial centers have a good infrastructure and it is therefore probably not a strong competitive factor
Access to Customers
5th most important factor overall 92% of respondents thought access to
customers was Important, Very Important or Critically Important
Access to Customers (cont’d)
0
5
10
15
20
London NYC Paris Frankfurt
Access to Customers
Average Score
18.6 18 13.9 13.7
Access to Customers (cont’d)
London and New York have a clear advantage over Paris and Frankfurt in this area.
“We have offices in cities where our clients are – simple as that.” Partner, London-based Accountancy Firm.
Fair and Just Business Environment (cont’d)
6th most important factor in the competitiveness of a financial centers
Usually taken for granted.
Fair and Just Business Environment (cont’d)
Main components:– The Legal System– Personal Trustworthiness– Temptation to break rules
Fair and Just Business Environment (cont’d)
17.2 16 13.6 14.7
0
5
10
15
20
London NYC Paris Frankfurt
Financial Center Rankings Based on Fair and Just Business Environment
Average score
Government Responsiveness
7th most important factor in the competitiveness of a financial center
The best sort of government for financial services is one that does not interfere with what we’re doing. – Senior Trader – Global Investment Bank based in Frankfurt.
Government Responsiveness (cont’d)
14.5 14.9 12.3 12.9
0
5
10
15
London NYC Paris Frankfurt
Fiancial Center Rankings Based on Government Resoponsiveness
Average Score
Corporate Tax Regime
8th most important factor in the competitiveness of a financial center
Decreasing in importance since 2003 “You get what you pay for!”
Corporate Tax Regime (cont’d)
14.1 14.9 11 11.7
0
5
10
15
London NYC Paris Frankfurt
Financial Center Rankings Based on Corporate Tax
Average Score
Operational Costs
9th most important factor in the competitiveness of financial centers
Relocation or off-shoring of routine tasks has reduced importance of operational costs for global financial centers
These tasks typically account for a high percentage of an organization's operating costs
Access to Suppliers of Professional Services
10th most important factor in the competitiveness of global financial centers
I only consider two cites as the real international centres – New York and London – they have all the infrastructure, all the services and frankly all the action. – Director - NY-based Global Investment Bank.
Access to Suppliers of Professional Services (cont’d)
Providers of professional services to the financial institutions (lawyers, accountants, consultants) will tend to cluster around those institutions.
Access to Suppliers of Professional Services (cont’d)
16.9 16.9 13.1 13.1
0
5
10
15
20
London NYC Paris Frankfurt
Financial Center Rankings Based on Access to Suppliers of Professional Information
Average Score
Quality of Life
Factors: – Leisure Facilities & Culture – Important– Healthcare – Very Important– Schools – Very Important– Transportation System – Very Important– Residential Property – Very Important
Quality of Life (con’t)
Quality of Life Ranking
0
2
4
6
8
10
12
14
16
London New York Paris Frankfurt
Ave
rag
e S
core
Key Issues:– 2012 Olympics– Terrorism & Transportation System
Culture & Language
Very Important factor as a global financial center
Most people under rate its importance – London excels in this category due to its international diversity
Culture & Language (cont’d)
Culture & Language Ranking
02468
1012141618
London New York Paris Frankfurt
Avera
ge S
co
re
Key Issues:– Connection with both U.S. and Asian Markets– English is primary global business language– Many other languages are spoken in London
Quality & Quantity of Commercial Property
Considered important but not critically important Usually only important to a business when:
– There is no suitable accommodations in the city where the business needs to be
– The business is considering relocation to the city
Quality & Quantity of Commercial Property (cont’d)
Key Issues:– Was a problem in London before Canary Warf – Typically shortages in commercial property result in new
commercial developments
Quality & Quantity of Commerical Property Ranking
10.5
11
11.5
12
12.5
13
13.5
14
London New York Paris Frankfurt
Ave
rag
e S
core
Personal Tax Regime
Lowest level of importance for companies but not individuals
Most sophisticated business people can manage their tax affairs to take advantage of rules and regulations
Personal Tax Regime (cont’d)
Personal Tax Regime Ranking
0
2
4
6
8
10
12
14
London New York Paris Frankfurt
Ave
rag
e S
core
Key Issues:– Most high level executives and financial professionals can live
any where and can choose the most advantageous tax regime
Final Rankings
London New York Paris FrankfurtAvailability of Skilled Personnel 20.5 20.0 15.2 15.1Regulatory Environment 18.1 17.0 14.3 15.0Access to International Markets 20.6 19.8 15.6 16.3Availability of Business Infrastructure 18.2 18.9 15.3 16.1Access to Customers 18.6 18.0 13.9 13.7Fair & Just Business Env. 17.2 16.0 13.6 14.7Government Responsiveness 14.5 14.9 12.3 12.9Corporate Tax Regime 14.1 14.9 11.0 11.7Access to Suppliers of Professional Services 16.9 16.9 13.1 13.1Quality of Life 13.9 14.0 15.2 12.0Culture & Language 16.7 16.0 11.8 11.3Quality / Availability of Commercial Property 13.7 13.8 11.7 13.3Personal Tax Regime 11.7 12.6 9.1 9.0
Total Score 214.7 212.8 172.1 174.2
Competitiveness and Concerns
London is in a very strong competitive position– Not likely to become more competitive
Future Concerns– Government responsiveness– Tax regime (both personal and corporate)
Lowest Concerns– Business infrastructure and access to international
markets
Two Global Financial Centers
London and New York will continue to lead Compared to France and Germany, London
has more flexible employment practices “If you are in global financial services you
need to have a presence in London and you need to have a presence in New York” – Managing Director – Global Bank
Conclusions
London is one of two genuinely global financial centers– Other financial centers are national players– Shanghai maybe become a third global center
Company headquarters will continue to cluster in financial centers– Outsourcing will move commoditized activities to
low cost cities
Conclusions (cont.)
Most competitive factors– Availability of skilled labor– Supportive regulatory environment
Advantage of the “Network” effect / Critical mass– The more participants, the more liquidity, the
lower the costs– Once established, market liquidity is hard to move– Established centers of finance are difficult to
move once established
References
“The Competitive Position of London as a Global Financial Centre”, Corporation of London, Nov. 2005
Wikipedia – City of London -http://en.wikipedia.org/wiki/City_of_London
Key Facts of the City of London - http://www.cityoflondon.gov.uk/Corporation/media_centre/keyfacts.htm
Questions