A group of British-based financial services leaders attempted today to “draw a line in the sand” under the industry’s recent woes, saying in a Treasury-commissioned report that the country would remain globally competitive in the field.
At a press briefing to launch the report, UK international financial services: the future, Sir Winfried Bischoff, the former chairman of Citigroup, admitted there had been regulatory failures and called for a global system of regulation.
The report calls for greater collaboration with other financial services centres in areas such as Islamic finance and carbon trading to combat not just the credit crunch but also competition from emerging economies.
Meanwhile, it seeks a fresh perspective on the role of the industry in Britain, arguing it does not dominate the economy too much and is a leader in growth areas – for example, it says, British asset managers are the second largest investors in emerging markets, holding 11% of assets.
Since the government budget was published last month, critics have argued the new 50% rate of income tax on high earners in Britain could cause industry leaders to leave the country.
Bischoff said there had been “a good debate” on whether to address the rate in the report, and added, “Taxation is one of the factors affecting competitiveness.”
The report does not specifically address the rate, but calls for taxation to be made “stable and predictable” and places tax on a list of challenges for the industry in Britain. Others include costs and infrastructure, while strengths are said to include the legal system, language and the “open economy”.
However, Lord Myners, the financial services secretary, defended the 50% tax. “We tax with the purpose of funding the public sector requirements. The tax increase was done with a heavy heart – it reflects the need to address an emerging deficit,” Myners said.
The pair denied the country had had a “light touch” regulatory regime, but Bischoff said, “Some of it [regulation] undoubtedly was not effective… it was too focused on individual companies rather than taking a broader view.”
“Regulation in global financial services has to have a global dimension,” he added. The report says Britain should take a leading role in creating global and European Union regulatory standards.
However, Myners said ceding regulatory powers to the EU was not on the government’s agenda. “When it comes to regulation of institutions we believe that is best rooted with national regulators … the burden of coping with failure falls on society and the taxpayer in that country … to some extent you have to eat your own cooking in that respect.”
He downplayed the role of the Financial Services Authority (FSA) in the failures of banks. “On the whole, companies do not fail because of poor regulation,” he said. “Regulation does not exist to produce a zero failure outcome in terms of commercial strategies.”
However, he conceded: “We tended to look at capital in terms of being adequate to address micro or institutional failure. We need to look at capital from a macro perspective.”
The report calls for greater partnerships with other financial centres in place of a “league table” approach to international competition. Bischoff noted “the symbiotic relationship between Luxembourg and London in terms of unit trusts … and investment trusts” as a possible model.
He admitted London’s share of global financial services “may reduce”, and that the industry is likely to generate less tax revenue for the British government than it has in the past. “A couple of areas that have been significant [contributors to tax] – transaction activity in the housing market and financial services – are not going to be producing probably as much tax as they have done,” he said.
However, the report says financial services have not been too large an element of the British economy.
“Financial services amount to around 8% of output in the UK. This is similar to the US and significantly less than in other service-led economies such as Hong Kong and Singapore.”
It emphasises that the industry, which employs about 1m people, works through strong regional centres such as Edinburgh, a centre for asset management.
“Half of the value added and more than half of the jobs are not in London,” Myners said at the launch.
The team assembling the report, which started work in July 2008, was co-chaired by Bischoff and Alistair Darling, the chancellor of the exchequer. It also included Michael Dobson, the chief executive of Schroders, and Robert Jenkins, the chairman of the Investment Management Association.
The report, which Myners had admitted to the BBC had “woolly” elements, aims to provide policy guidance for the next 10 to 15 years. However, it acknowledges many unknowns.
“We don’t know the cost of supporting the banking system, because it depends on outcomes,” Myners said. “The IMF estimates are a finger in the air.”