With poorly conceived tax regimes, increased competition from investment-hungry countries, a stalled infrastructure and a vast need for highly skilled graduates, London is in danger of losing its position as the global financial capital. This is according to a study that was commissioned by London’s new mayor, Boris Johnson, and carried out by Merrill Lynch Chairman Bob Wigley, who compiled a team of chief executives from all of London’s financial sectors to examine how competitive London remained in the global hemisphere.
Though many countries throughout Europe, North America and Asia have felt the fallout from a worldwide economic downturn, England has been one of the hardest hit.
What’s to blame
The study, London: Winning in a Changing World, noted that as recently as two years ago London was experiencing an extremely favorable economic climate that secured its position as the world’s leading financial center—but this celebration didn’t last long. "Over the past two years, however, London’s position has been threatened by the rapid development of Middle Eastern and far Eastern economies, the targeted strategies of other financial centres and New York’s reassessment of its own competitive position."
In addition to its increasing competition from other countries, London’s financial sector woes have been compounded by some recent events closer to home. The nationalization of Northern Rock, which became severely overleveraged during the mortgage meltdown and the collapses of Lehman Brothers and the Icelandic bank Landsbanki, both of which left many U.K.-based investors unable to retrieve billions of dollars worth of assets have forced many financial players out of the London marketplace.
The U.K. needs to formalize tax policies to retrieve losses and stimulate business.
This has been further exacerbated by the country’s need to formalize its tax policies, especially as they apply to non-doms (domiciles) and corporation taxes. Corporation taxes, the study said, are far too high compared with other competitors, while non-doms, or U.K. residents who earn their incomes abroad, do not have to pay taxes on these incomes, resulting in millions of British tax dollars lost.
London’s losses have resulted in its competitors’ gains. New York’s financial sector is aggressive and far-reaching, and as such, it has chipped away at London’s business community, offering companies lower tax rates, grants and incentives to relocate their businesses or funds there. Luxembourg offers investors a corporation tax exemption, while Ireland has benefited from a 12.5 percent corporation tax. In fact, Luxembourg and Ireland have wooed £420 billion of funds away from the U.K. in 2007 alone. This accounted for 38 percent of the total net-asset value in Irish registered funds, and 11 percent in Luxembourg funds.
Bermuda has targeted London’s insurance market by offering companies a zero percent headline rate on corporation tax, a closer proximity to the United States, a more sophisticated tax regime and more technological support than Britain can offer. Since 2000, Bermuda has taken 700 jobs and more than £450 million in taxes away from London, according to the study.
It is also predicted that Switzerland, with its attractive tax regime, and Paris, with its favorable wholesale finance sector, will prove to be fierce competitors to London’s hedge fund industry and overall financial sector in general.
These events, according to the study, "have struck at the heart of confidence in London. We can no longer take it for granted that our capital will be seen as a trusted place to do business against the backdrop of a competitive, predictable, constructively applied tax regime, a world-revered financial regulatory regime and an open, transparent and fair legal system."
Other factors are also contributing to the demise of London’s financial sector. A failing infrastructure has plagued London’s residents and visitors for quite some time. Heathrow has been voted the worst airport in the world two years in a row, according to a study conducted by Priority Pass, an independent airport lounge membership program. Wigley’s study further noted that the average speed for a motorist traveling in London during the day was 10 miles per hour.
The city is also reeling from a lack of qualified graduates, both locally and abroad, who will need to replace the aging baby boomers who comprise a large portion of the city’s financial sectors. The study noted that many U.K.-based universities have academic, residential and recreational facilities that are in need of refurbishments. This, combined with a lack of government- and privately-funded student assistance in the fields of mathematics, information technology and finance, has caused many universities to lose out on quality graduates who opt for the United States instead.
What are the solutions
There is still reason for optimism despite the grim implications of the study.
Though the study paints a grim picture of London’s financial future, all is not lost. In order to combat the lack of high-quality graduates the city fails to attract, it urged the government to provide more scholarship assistance programs for overseas students, which may, in turn, help the U.K. to develop a more sophisticated immigration process for highly skilled individuals. "The world is witnessing the emergence of significant new talent pools and one powerful way for London to tap into them could be to bring top Indian and Chinese universities or business schools to London," the study argued.
Refurbishing run-down facilities may also keep the U.K.’s academic institutions competitive. Updating London’s dilapidated infrastructure, including adding a third runway to Heathrow and continuing to fund the new Crossrail project, would also ease the burden placed on those who live, work and travel to London for business.
The study also believed that issues surrounding the U.K.’s tax rates and their effects on overseas profits can be sorted out and formalized if representatives from all of London’s financial sectors work together. This, the study hoped, would result in many new proposals ready for consideration by Her Majesty’s Treasury in 2009. This should create a more pleasing business landscape for investors and companies who currently do business or are considering doing business in London.
In response to the study, Mayor Johnson vowed to address these problems and their recommended solutions.
Unfortunately, the study noted that most of these solutions will not be implemented, let alone achieved, until 2010 or beyond, leaving London’s financial sector in a state of limbo and providing competing countries with ample time to court further investment opportunities. The study warned that pressure to prioritize London’s many needs, including preparing the city for the 2012 Olympic Games, may lead to further delays. It emphasized that the government and private sector needed to work together to produce both fast-acting and long-term solutions that will ensure London’s competitive financial atmosphere.