One of the great tragedies of the Brexit uncertainty and ongoing chaos, has been the loss of world financial capital status for the City of London. Here we’ll examine whether London has lost it’s world financial capital status, as well as looking at how it gained the title in the first place, and whether it could ever be reclaimed in the future.
Confirmed earlier this year by a Duff and Phelps report, the news of London’s loss of world financial capital status came as a huge blow to the status of the City.
The report, released last month, confirmed the news that Economic Forecasters had been predicting. In world financial status terms, London and New York have switched places in the ranking from 2018, with 52% of respondents choosing New York as the globe’s financial hub, while just 36% chose London.
By comparison, last year, 42% chose New York and 53% chose London as the world’s financial capital. The difference of the past year is clearly highlighted in the difference between the 2 reports in 2018 and 2019, being a year in which we as a nation are no clearer to any certainty post Brexit. In fact it could be said – and is being said by many political and economic forecasters and commentators – that the continued uncertainty has caused much of the downturn in confidence in the City.
But how reliable is this information, and has London really lost it’s world leading financial capital status? To answer this let’s look deeper at the report and it’s statistics. To produce their 2019 Global Regulatory Outlook survey, leading Consultancy firm Duff and Phelps asked 183 leaders in private equity, hedge funds, asset management, brokerage, banking, and policy/government their opinion on the location of the world’s top financial centre.
In fact, the news gets worse for London the further into the report you read. Duff & Phelps said Dublin, Frankfurt and Luxembourg also fared better this year as the European Union’s financial industry searches for a new hub, again a clear demonstration that London’s status will not recover any time soon.
Also mentioned in the report are other potential future contenders for the position. “Looking ahead… globalisation’s diffusion of influence begins to be apparent: 12 percent of respondents expect Hong Kong to be the world’s preeminent financial centre five years from now, a stark contrast to the 3 percent who held this opinion just a year ago.”
Sadly for the City of London, it is very obviously the case that none of those interviewed have any confidence that the former financial capital of the world will be restored to its rightful status anytime soon. All economic, political and news commentators do now agree – London has lost it’s global financial hub status, and it looks to be an uphill climb to reclaim it.
Becoming the finance capital of the world was a long journey for the City, and it was a hard-fought title that is clearly painful for City analysts and experts to admit to losing.
Since Roman times, London has flourished financially and been known as the centre or capital Great Britain’s finances. By the 1600s, the City had become renowned as a centre of excellence for business across the finance sector and in 1694, the Bank of England was formed (making it the second-oldest bank in the world, behind the Swedish Central Bank in 1668).
When the London Stock Exchange was established just over 100 years later, the city was leading the charge in terms of business and industry and its pre eminence was already beginning to emerge. While New York’s Stock Exchange was never far behind, it was always London that provided the centre for commerce, expansion, excellence and entrepreneurialism in the 19th century.
Looking dispassionately at the financial history of the City of London, one of the key events in London’s rise as the world’s premier financial hub was the legislation passed – known as the “Big Bang” reforms – by Margaret Thatcher’s government in 1986. These were intended to remove the laws that were protecting Britain’s slow-growing firms and contributing to sluggish financial markets worldwide, to make Britain and specifically London a more competitive and attractive world base.
The results were immediate. From a network of small companies with very little potential for growth, London-based businesses grew overnight to become conglomerates of huge proportions. Alongside this, we began to see the development and growth of more advanced financial practices, like virtual banking, for example.
Coming out of the 1980’s, London was insurgent, and even better news for UK businesses lay ahead. The Big Bang had created relaxed regulatory measures that allowed corporations to earn unlimited amounts of money between the 1980s and the early 2000s. Helping London further, in 2002, the US Congress tightened corporate regulations through the Sarbanes-Oxley reforms, which increased paperwork and put a cap on the local earning opportunities within the previously buoyant American market.
London’s stock markets flourished while American firms were forced to adhere to the Sarbanes-Oxley reforms. Adding insult to injury for the beleaguered American financial markets, other international markets simply sidestepped their country by taking their business to London instead.
It was through these actions that London finally bypassed Wall Street, becoming the world’s number one hotspot for trading and business ventures. Within a few years London had captured more than 75 percent of the US exchange’s public stock, and Congress was now fighting an uphill battle trying to win them back through softer regulation.
All of this makes the loss of world financial status even more cruel, particularly when most commentators would agree that it’s an entirely avoidable solution and of our making. In order for this to end and begin to be rectified, the City – and the country as a whole – desperately need clarity over Brexit.
Keith Beekmeyer from Newpoint Capital Limited, who operates in the heart of London, notes that despite the reports and surveys showing the decline of London as the financial capital of the World, the daily hustle and bustle shows that and feels like it’s still business as usual in the City of London.
Furthermore, some other commentators and analysts are suggesting that there could be a mini fightback from the Capital city, and that the glory days might not be over just yet for London. Some have suggested that the British capital will continue to dominate European financial markets for a number of key reasons.
Firstly, the strength of the local courts means that the rule of law will continue to be upheld, including those that protect creditors and shareholders’ rights. Secondly, the UK’s university education offerings in economics and finance are far superior to those anywhere else in Europe. And lastly, the UK’s regulations controlling tax and employment is designed specifically to boost the financial industry’s overall health and profit margins.
There is no denying that trade has become more challenging in London since Brexit. Tax loopholes have been closed, and companies are expected to shell out more of their profits as a result.
However, if London manages to keep its dominance over European financial markets, it stands to reason that the city may one day reclaim its title of the world’s greatest finance hub in the eyes of the global financial markets. We should therefore continue to have faith that a return to our former world leading status is possible in the near future.