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 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.

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 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

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) 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) 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) 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) 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) 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)

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)

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)

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)

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) 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) 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

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) Key Issues: Most high level executives and financial professionals can live any where and can choose the most advantageous tax regime

Final Rankings

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