1. City of London as Financial Center
UMKC BA 597

2. 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

3. Overview Global Financial Center:
“…business is conducted between organizations from all over world using financial instruments from all over the world.”

4. Overview (cont’d) Global Financial Centers Regional 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.

5. 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

6. 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

7. 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?

8. Global Cities Alpha World Cities Beta World Cities Gamma 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

9. 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

10. Choosing a Financial Center
Competitive Factors
Skilled labor
Regulatory competence
Tax regime
Government responsiveness
Regulatory “touch”
Living environment

11. 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%

12. Availability of Skilled Personnel (cont’d)
365 responses; Survey encompassed 18 countries
Between June & October 2005

13. 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

14. 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.”

15. 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

16. 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

17. Regulatory Environment (cont’d)

18. 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

19. Regulatory Environment (cont’d)
USA Regulation: Based on clear defined roles; “prescriptive”
FSA: Risk-based approach; seen as more flexible and welcomed by respondents

20. 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.

21. Access to International Financial Markets (cont’d)

22. 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

23. Availability of Business Infrastructure
4th most competitive factor
Comprised of several components including:
telecommunications
IT infrastructure
transportation links

24. Availability of Business Infrastructure (cont’d)

25. 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

26. Access to Customers 5th most important factor overall
92% of respondents thought access to customers was Important, Very Important or Critically Important

27. Access to Customers (cont’d)

28. 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.

29. Fair and Just Business Environment (cont’d)
6th most important factor in the competitiveness of a financial centers
Usually taken for granted.

30. Fair and Just Business Environment (cont’d)
Main components:
The Legal System
Personal Trustworthiness
Temptation to break rules

31. Fair and Just Business Environment (cont’d)

32. 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.

33. Government Responsiveness (cont’d)

34. 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!”

35. Corporate Tax Regime (cont’d)

36. 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

37. 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.

38. 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.

39. Access to Suppliers of Professional Services (cont’d)

40. Quality of Life Factors: Leisure Facilities & Culture – Important
Healthcare – Very Important
Schools – Very Important
Transportation System – Very Important
Residential Property – Very Important

41. Quality of Life (con’t)
Key Issues:
2012 Olympics
Terrorism & Transportation System

42. 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

43. Culture & Language (cont’d)
Key Issues:
Connection with both U.S. and Asian Markets
English is primary global business language
Many other languages are spoken in London

44. 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

45. 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

46. 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

47. Personal Tax Regime (cont’d)
Key Issues:
Most high level executives and financial professionals can live any where and can choose the most advantageous tax regime

48. Final Rankings

49. 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

50. 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

51. 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

52. 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

53. References
“The Competitive Position of London as a Global Financial Centre”, Corporation of London, Nov. 2005
Wikipedia – City of London -
Key Facts of the City of London -

54. Questions