Leading City Figures Sound Warning Over UK Tax, Regulation

by Robert Lee, Tax-News.com, London

19 January 2010

The competitiveness of the UK's financial services sector is more likely to be undermined by the uncertainty surrounding future regulation of the industry and by poor tax policy, rather than by further aftershocks from the recent crisis, according to 20 leading figures working in the City of London.

London’s position as a leading financial services center has not been dented by the financial crisis, but economic shift towards the East and the risk of unilateral regulatory action taken by UK authorities "pose two very serious threats," says a report entitled "The Future of Financial Services," which was published on January 18 to mark 20 years of the Confederation of British Industry/PricewaterhouseCoopers (CBI/PwC) Financial Services Survey.

Speaking ahead of an event to launch the report, Richard Lambert, CBI Director-General, observed that the financial services industry is one of the UK's "most important areas of global comparative advantage" and a crucial component of the country's future prosperity.

"This means we must learn the right lessons from the catastrophe that hit parts of the wholesale banking sector in recent years, and build a regulatory and tax structure that encourages healthy competition and sustainable growth," he noted.

Chris Jones, UK financial services leader at PwC, said that the shift in the global economy towards the East will present "significant challenges for the UK’s financial services industry and for London as a center."

"Too much or inappropriate regulation or tax will also have a negative impact on incoming investment to London," he warned.

In the CBI/PwC report, Michael Spencer, Chief Executive of ICAP, said that the prospect of over-regulation in the sector risks "damaging" London's reputation as a global financial center, while Lord Levene, Chairman of Lloyd’s of London, voiced concern about what he described as "politically motivated changes to the tax system," such as the 50% top rate of tax due to come into force in April, and the bankers' bonus tax.

"London's strengths are fantastic," remarked Stuart Fraser, Chairman of the Policy & Resources Committee, City of London Corporation. "But you can’t constantly bash it and tax it and expect it to stay that way."

Stephen Green, Chairman of HSBC Holdings, predicted that while London will lose market share, it will not diminish in importance in global terms. "This is not because of the financial crisis, but because of shifts in the global economy," he surmised.

John Valley, Chief Executive of Barclays, echoed the comments of many, saying: "I think governments are going to be on the shoulders of the industry for the next 30 years – and with some justification."

Sir Andrew Likierman, Dean of London Business School and a Non-Executive Director of Barclays, feared that the UK authorities would respond to pressures from continental Europe: "I am very concerned that the British are regulating their own banks in a way that could well put the city at a disadvantage," he said.

However, Lord Turner, Chairman of the Financial Services Authority, acknowledged the importance of a level playing field but added that "there was no global law-making power," so it "was up to individual jurisdictions."

Chancellor of the Exchequer Alistair Darling told the Financial Times in an interview published on January 18 that while he expects his recent decisions on taxation, which have affected many highly-paid finance professionals, will lead some to seek opportunities in other financial centers with lower tax regimes, he was insistent that London remains "a good place to do business."

"People have said they will all leave London after the non-dom tax, and of course in London, and given the nature of it, people will come and go," he told the paper.

Darling went on to add, however, that "I think we have a critical mass here that you can’t find in other parts of the world, and I’m determined that it remains that way, recognizing that of course the tax is part of it, but I spoke to an American banker before Christmas, who was not very pleased with the bank bonus tax, and I said, your own country will have to do something similar. I haven’t spoken to him since Thursday."

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