The catalyst to the rise of the Kingdom to eminence was finance. Not global domination, not political astuteness, not even military superiority, it was pure, unabashed Finance! The ability to meet demand for sugar, the impetus to supply exotic spices for newly discovered aristocratic tastes, and the need trade up from cotton to clothing were the roots, but the greenhouse that sustained this ecosystem was finance. Finance for trading ships, finance to build up the navy, finance to transport slaves, finance for industrialisation, finance to annex, conquer, or ‘Govern’. This was the rise of the United Kingdom…and its shinning beacon of prosperity, London, the centre of the financial world.

The world, and the United Kingdom, have changed somewhat over the past few hundred years though and especially so in the last few years. Drained of the massive wealth from two world wars and robbed of a massive empire to tax, the liberalisation of the financial sector in the mid-80s by Thatcher gave a new lease of life to the British Financial industry. So much so, that today, London is arguably the leading Financial Centre of the world. As the economy diversified and the focus shifted from manufacturing to financial services, the UK financial sector matured to contribute as much as a fifth of the economic output of the UK (£126.9 billion in gross value), had a trade surplus of £38.3 billion, and provided £21.4 billion in tax receipts for the year 2013/14.

This however, was the glorious past. Now let me draw your attention to the new realities of ‘the City’ (the square mile that houses most of the Financial services in the UK). The soon to be declining hub of the Financial world suffers from many a disease, all graciously provided for by the rotting political manoeuvrings (something we Indians are acutely and unfortunately accustomed to). While there are many sundry reasons likecapped banking bonuses that possiblycontribute to this decline, they are unfit of analysis in the context of this article as theywould suffer from lack of objectivity due to the author’s obvious vested interests. This article would therefore restrict itself to discussing the three main issues that, I believe, are the leading cause of decline of this great mecca of finance: The thrust for Britain to exit the European Union, the renewed threat of Scottish independence, and the inability to hire the best from a dis-united pool.

Let’s take up the most contentious issue first,but stick strictly to the financial argument– UK’s exit from the EU. Since the beginning of the Financial Crisis in 2008, the UK has contributed £11.3 billion to the EU, rising from £2.7 billion in 2008 to £3.7 billion in 2013,no doubt a drain on an economy grappling with cuts and struggling topay down its debt. Also since the 2008 crisis, the UK’s influence over new financial services rules has decreased substantially. EU regulation is now less geared to financial services growth, since the focus has shifted towards curtailing financial market activity, irrespective of whether such activity is good or bad. There are at least 49 new EU regulatory proposals (like the now infamous Alternative Investment Fund Managers directive) affecting the City of London either in the pipeline or being discussed at the EU-level very few of which are aimed at promoting financial services trade. So in addition to the expected political posturing, these new directives have given wind to a new war within the Financial Services itself, between Investment Banks and Hedge Funds.2

15% of the $2.85 trillion hedge funds are run out of the UK but as most raise money from outside the EU, they are understandably critical of the proliferation of expensive and time consuming regulations from Brussels. The IBs on the other hand are dead against any moves to leave the EU as it would massively jeopardise their status as the entry point into the single market union and transaction hub for three quarters of European capital markets and investment banking revenue.But there is a bigger picture that needs analysing. If the UK leaves the EU, it would not only forfeit the capacity to freely originate and lead European transactions, it would also constrain its own ability to act as a one stop shop as an aggregate provider of services related to finance to over 28 million people. Such a move would, as already confirmed by many banks, would lead to relocation of offices and personal, and further diminish the UK’s ability to sustain an independent financial ecosystem. With the sector employing over 150,000 people on the sell-side alone, if Britain left the EU, it would also loose many of its biggest financial services competitive edge, its professionals.And finally, due to the eventual lack of credible opportunities, fail to attract new blood to a service that thrives on new recruits willing to work themselves to the bone.

Second, the ‘minor issue’ of Scottish independence. Although Scotland refused independence by a narrow margin in 2014 referendum, the overwhelming victory of the Scottish National Party (winning 56 or the 59 seats in Scotland) in the UK general elections is a clear indication to many that independence is surely not off the table. If Scotland were (ever) to secede, there would be gargantuan economic as well as strategic implications for the rest of the UK.The British parliament in its own report lists the perils of this planned misadventure. If significant financial institutions based in Scotland and active in the rest of the UK were to fail, that might hit the rest of the UK. There would be a need to divide financial assets and liabilities by the share of population. The continued cohesion of the current UK single market would depend to a large extent on the decisions of the Governments of an independent Scotland and of the rest of the UK. While the rest of the UK loses its revenue stream from the North Sea oil, oil companies will want to offset decommissioning costs against future tax due. Double taxation agreements between Scotland and the rest of the UK would need to be negotiated. The Sterling would fluctuate wildly. And the overall impact of the financial sector….in the words of Nostradamus, ‘Apocalypse would be upon us’.

Finally, let’s assess the current immigration woes of the Financial Sector. While the UK’s exit from the EU and Scottish Independence present a very real threat that COULD spell disaster for the UK, the immigration policies of its government are already damaging its ability to hire the best. Today, the UK has capped the ability of UK firms to hire no more than 20,000 non-European professionals a year (the financial sector gets only a small portion of this quota). Gone are the days when new recruits from the Oxford, Cambridge, London Business schools, and the like were lining up to apply for jobs in banking, insurance, or Private equity. Since you need a sponsor to get a job (of which there are few and far between), most students head to greener pastures in the US, Australia, or even Canada. Even worse, international student enrolment in premier UK institutions and courses has fallen miserably. Case in point, the2007 MBA class of 2007 at University of Oxford had 26% Indian and 25% American students, in the current class of 2014 the representation is down to 3% and 7% respectively! The point being, there is a much smaller pool for Financial institutions to choose from and this will inevitably lead to a lowering or standards in recruitment and eventual performance. The City and the UK as a whole has progressed from utilizing, even exploiting, its human resources to the fullest throughout its history. But today, the UK exhibits the worst form of apartheid, the kind that inhibits itself from maximising its own potential, the kind that breaks up its own cohesion.

The biggest bane of growth is uncertainty. Uncertainty of the future, of the political climate, of regulation. What brews in the tea cup of the City’s Financial district is just that, a perfect storm of uncertainty. Far removed from the days of the glorious past, of an exciting, invigorating, and robust financial centre that drove the world’s financial sector,the ‘Dis-United Kingdom’ is starring at the abyss. But before you write of the City, do remember, this is the land of reinvention and rebuilding. From the being the dominating force for trading goods and spices in the imperial age, to being the preeminent manufacturing core of the global economy in the pre wars era, to being the world’s foremost Financial hub, the UK has time and again reinvented itself to emerge ever stronger. The question is, how will she do it this time? How will she do it in a ‘Dis-United Kingdom’?

Abhishek Bawa

Assistant Vice President with IL&FS Global Financial Services (UK) Ltd.
Website link: http://ilfsifin.com/uk/index.html


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Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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