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Is London losing its edge?

By Paul Golden
29 June 2011

The UK’s rising cost of regulation and compliance, squeezed profits and a stagnant economic outlook is making the business case for wealth managers being based in London appear less and less attractive. Paul Golden spoke to commentators about London’s future ahead of PBI’s upcoming London round table.

With the fast growing economies of Asia attracting growing attention, London will have to continue to work hard to maintain a leading role in the global private banking industry if PBI's online poll is a sign of things to come.

The poll, which asks respondents to rank the top wealth management centre in five years time, places Singapore above London.

It backs up the findings from PwC's biennial private banking survey that placed Singapore and Hong Kong above London in a ranking of top five global wealth management centres.

A brain drain also threatens as UK bankers follow the money train to Asia in search of a more profitable and sustainable future.

London on top, for now

For the moment, London remains on top. It retained its top ranking in the latest Global Financial Centres Index (GFCI), published in March, for wealth management/private banking. However, tax and regulation were highlighted as a major concern to financial institutions based in London or indeed those contemplating being there.

Michael Mainelli, director of Z/Yen Group – which publishes the biennial GFCI – thinks the issue is not so much that private banks are moving out of London, but that they no longer see it as somewhere they have to be.

"I know of private banks that are not expanding their presence in London and others who are consolidating their wealth management operations in other locations," he says. "In a growing market, standing still is the same as losing market share."

Table showing perceptions of London as a financial centre - areas of competitiveness

Traditional centres fading away?

A substantial number of bankers have relocated from the UK to Switzerland in particular, Mainelli adds.

"Banking centres don’t die so much as fade away, which is what has been happening to London since 2007 – and also in New York. There are a greater variety of private banking centres than there are for other areas of financial services, so the options for relocation are increased," says Mainelli.

Asian cities including Singapore and Hong Kong made it into the top six places when respondents to the latest index were asked to indicate where their organisations were most likely to open new offices.

Lifestyle factors increase London's pull

At an individual level, lifestyle factors such as London’s cultural attractions and access to good schools are of little interest to bankers when they realise that they would pay a lot less tax in Hong Kong or Singapore, claims Mainelli.

"Personal effective tax rates are the single biggest issue for individual bankers," he adds.

Michel Dérobert, secretary general of the Swiss Private Bankers Association, says there has been limited transfer of activity from London to Switzerland in the area of hedge funds and some transfer in a totally different area of financing – physical commodity transactions – which is shifting towards Geneva.

Dérobert does not expect a significant exodus of private banks to Switzerland’s second city despite Geneva being an important private banking centre.

Strong Swiss showing

Mainelli suggests Switzerland has been proactive in attracting private banking clients.

"Since 2007, Switzerland has been making great strides – canton by canton – in targeting high net worth individuals, opening accounts and negotiating long-term tax deals. In contrast, I am not aware of any specific initiatives in Hong Kong, while Singapore has become a bit tougher on its visa regime and is targeting firms rather than individuals."

Stuart Fraser, chairman of the policy and resources committee at City of London Corporation, admits ‘banker bashing’ has damaged the perception of the UK as a welcoming business environment.

"However, there are no signs that any private banks are considering relocating at the present time," he says.

Questioned on whether London was facing the prospect of a brain drain, Fraser suggests that the depth and quality of the international and domestic talent pools in London were significant assets.

The City of London’s report Understanding Global Financial Networks, published in May, indicated that this situation is unlikely to change in the coming years.

Retaining private banking activity is an important part of a much larger agenda to ensure London retains its pre-eminence as the leading global financial centre, says Fraser.

"The recognition that the UK must be better represented at an earlier stage of the European policy-making process (80% of our regulation emanates from Brussels) has been welcomed by the industry and is something the City of London has long been calling for," Fraser concludes.