City of London as Financial Center UMKC BA 597. Presentation Overview Overview & Background of...

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

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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

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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

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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