Written evidence from The City UK (GLO0015)
TheCityUK is the industry-led body representing UK-based financial and related professional services (FRPS). The industry contributes nearly 11 per cent of UK GDP and employs over 2.3 million people. It is the largest tax payer, the biggest exporting industry and generates a trade surplus greater than all other net exporting industries combined. It is a national asset, as well as being the world’s leading international financial centre and Europe’s financial centre too.
1. We share the Foreign Secretary’s explanation of the ambition behind it: “We want Britain to become a global champion for free trade, a nation at the heart of world commerce, working with our international allies and partners to remove barriers and liberalise trading practices.”
2. The UK-based FPRS industry plays a crucial role in supporting this goal. In A Vision for a Transformed, World-leading Industry (Vision ), we detail how the industry can remain a world leader given the challenges it faces. These include the emergence of new economic superpowers; new technology; the need to rebuild trust; the changing needs of families and businesses; and potential disruption to trading links to Europe.
3. We identified the following goals for UK FPRS:
• London will continue to offer a full ecosystem to retain its status as a leading international financial centre
• the industry will transform itself further to be highly digitised, innovative and customer centric
• financial centres in the regions and devolved administrations will become important domestic and specialist hubs.
4. The paper includes a series of recommendations. Some are general, related to the FCO network of Posts and the building of long-term relationships. Others are industry-specific, such as a partnership approach, recognising the value of enhanced trade and investment with developed, emerging and niche markets; ensuring London is a leading Fintech and innovation centre; strengthening access to domestic and global talent; maintaining a strong and proportionate system of regulation and a simplified, stable and competitive tax system; and recognising the value of an internationally trusted legal system and world-class professional services.
Why UK-based FRPS must be a core part of Global Britain
5. To be credible, Global Britain must be built on an understanding of where the UK’s strengths lie. Financial and related professional services is the UK’s best performing industry in terms of revealed comparative advantage and the UK is the world’s largest net exporter of financial services. The industry plays a leading role in providing global finance. It acts as an enabler for all other sectors, and has therefore supported jobs and made a significant contribution to both UK and global economic growth.
6. Metrics by which UK FRPS’s global reach can be assessed, and which Global Britain should seek to build upon, include:
• London remains the world’s premier international financial centre according to Z/Yen’s GFCI survey 2018
• as a leading net exporter, Britain’s estimated trade surplus for financial and related professional services was £80.6bn (2016)
• the UK holds a top-five position in almost all sectors within the financial services industry, with particular strengths in fixed income currencies and commodities trading, commercial insurance, asset management and international listings
• the UK is one of the leading FinTech centres and the leading Western centre for Islamic Finance
• the widespread use of English law, the English courts and the English language are key factors that make the UK a global hub for international trade and investment
• the UK has high quality professional and support services. It has the largest and most developed market in Europe for legal services, management consulting and accounting.
7. In recognising that these elements enhance Britain’s global influence, it is of crucial importance to note that the rule of law and cultural influence often accompany trade and investment. This is a key expression of the UK’s soft power in international relations. For example, FRPS encompasses a range of professional services and professional bodies, which have made an important contribution to developing institutional frameworks, providing rules-based business certainty and creating best practice standards globally.
8. The expansion of Britain’s international engagement should consider ways to build upon UK FRPS influence, for example through using established frameworks from global institutions to the FCO’s global network of overseas posts to maintain and strengthen the UK’s reach.
9. Brexit will enable the UK to take a fresh look at opportunities afforded by international trade and investment. We explored some of these themes in Future UK Trade and Investment Policy (January 2017). Given likely shifts in economic power, it is also timely to review the UK’s positioning with its trading partners. At present, trade is concentrated with a small number of partners – for example, almost 70% of UK financial services exports go to the US and EU. However, the European Commission projects that 90% of future economic growth will take place outside the EU. This provides context to decision-making as Global Britain could be an invaluable means for the UK to build on its partnerships in the developed world and forge enhanced ties in developing and emerging markets.
Which regions and countries provide the main opportunities for the UK?
10. TheCityUK has described the importance of increasing the UK FRPS footprint in developed, emerging and niche markets. This section provides an overview of some opportunities FRPS could build upon.
Europe
11. Europe will remain important for the UK. Leaving the EU does not mean leaving Europe. The new relationship will need to be agreed and the industry believes it must be a bespoke deal that delivers mutual market access by embracing mutual regulatory recognition, regulatory co-operation and mutual access to talent. That is the interests of all in the European space. Creative approaches to issues, such as a pan-European capital market, will be crucial. For the EU-27 too, new alignments will need to be formed when the UK is not at the EU decision-making table. But this industry cannot be a rule-taker from the EU given the scope and scale of the industry in the UK.
North America
12. The US and the UK are each other’s largest foreign investors. This investment supports approximately one million jobs in each country. British investment in the US is substantially higher than that of other foreign investors. Meanwhile, the US is the biggest contributor of FDI to UK financial services and the biggest non-European contributor of FDI in UK professional services, accounting for 49% and 19% of the totals respectively.
13. Two of the world’s largest, deepest and most liquid capital markets are located in the US and the UK. The efficiency of the transatlantic market, and the availability and affordability of key products through freer financial flows, lower-cost products for investors, issuers and commercial end-users, and a more robust foundation for investment and jobs in both countries, would deliver benefits for industry and commerce, businesses and customers.
14. The UK-US relationship in FRPS plays a crucial role in setting global standards and driving global growth. Enhanced co-operation in developing rules and principles on issues of common concern would help achieve shared economic goals relating to third countries, including emerging markets.
15. The UK government is aware of the benefits of further co-operation and making good progress in facilitating this goal. A UK-US trade and investment working group has been established. TheCityUK is providing input to this work both directly and through the Financial Services Trade and Investment Board (FSTIB).
Asia-Pacific
16. China, Japan and India are the world’s second, third and sixth largest economies. Meanwhile, the ten members of ASEAN, with more than 625 million people, are bigger than the EU and the third largest market after India and China. Growth in Asia-Pacific constitutes a potentially very large opportunity for the industry.
17. Through the annual UK-China Economic and Financial Dialogue (EFD) and the private-sector Financial Services Summit, TheCityUK has been working with Chinese counterparts to increase bilateral trade. The FS summit themes largely align with the areas of focus that the industry has prioritised as UK strengths: green finance, insurance and pensions, FinTech, asset management, Belt and Road, and the UK as an investment destination and hub for Chinese firms. London is already the key hub for RMB internationalisation outside greater China and the industry is committed to helping China increase the RMB’s footprint. UK-based FRPS can help make a success of Belt and Road projects using London’s expertise in risk-mitigation, standards and legal underpinning.
18. The India-UK Financial Partnership (IUKFP) was established to increase trade and investment between the financial sectors in India and the UK. Managed by TheCityUK, it has been developing policy recommendations from the perspective of practitioners, feeding into the annual UK-India EFD. Since its launch, nine policy papers have been published covering the Development of India’s Corporate Bond Market, Pensions, India’s Insolvency Regulations, Infrastructure Funding, Reinsurance, Financial Inclusion, A Stewardship Code for India, Green Finance, and Internationalisation of the Rupee.
19. TheCityUK’s work on Japan focuses on FinTech, green finance, multilateral co-operation in financial services and helping Tokyo Metropolitan Government grow its global footprint in asset management. The industry also provides support for HMG’s financial dialogue with Japan. Our ASEAN work looks to influence policy and develop networks that can support trade with the region. It also supports the annual dialogue between the UK and Singapore.
Middle East and North Africa (MENA)
20. The region is undergoing considerable economic change as governments move their economies away from hydrocarbons. These changes bring a need for expertise to develop new industries.
21. The UK has a strong competitive advantage in looking to secure trade and investment revenues from the potential opportunities. MENA is heavily invested across the UK through Sovereign Wealth Funds (SWFs) as well as firm-specific foreign direct investment. Meanwhile, there is a clear opportunity for the UK to leverage its soft power through the leading expertise of UK-based businesses, backed up by leading legal and regulatory standards.
22. Some of the most promising opportunities for the UK include helping to restructure domestic capital markets to enable greater FDI; deepening the UK’s role in facilitating Sharia compliant investment in infrastructure; developing Islamic financing structures for the maritime sector; structuring, financing and providing credit research advice on Public Private Partnerships to help develop infrastructure; increasing the UK’s exposure to SWFs; and increasing the proportion of SWF assets managed by UK-based firms.
Latin America
23. The potential in Latin America is significant, with a population of close to 600 million and combined GDP at about US$ 5.61tn. Increasingly positive trade signals can be seen with the emergence of the Pacific Alliance and the Trans-Pacific Partnership with Japan, Canada and Singapore. Changing economic and political dynamics in Latin America means there is desire to boost trade with international partners.
24. Governments in Latin America have been increasingly welcoming of UK expertise and capital. With Latin markets looking to invest billions in new infrastructure, including roads, schools, hospitals and oil and gas exploration, there is great interest in UK expertise to help plan and finance these projects. Other opportunities include re-insurance, asset management and the growth of professional services, particularly in helping businesses that want to operate under English law.
Eurasia
25. We believe major and strategic opportunities for British businesses exist in the region. In Kazakhstan, the Astana International Financial Centre (AIFC) provides a hub for FRPS. AIFC is governed by English law and has drawn significantly upon UK expertise to develop its legal system and capital market infrastructure. TheCityUK has worked with the FCO to promote UK FRPS to AIFC and the Ministry of Justice (MoJ) has declared Kazakhstan one of its priority markets for exporting UK legal services. We believe further co-ordinated efforts of relevant government departments and British businesses to develop a long term strategic partnership in the region are important.
26. In Turkey, there is considerable interest from FRPS bodies, such as Borsa Istanbul and TUSIAD, in benefiting from partnerships with UK businesses. For example, UK financial expertise can help Turkey’s banking sector transform and better serve an expanding market. UK Fintech businesses can generate solutions that help Turkish financial institutions provide products to an underbanked population. Moreover, the UK, as the leading Western centre for Islamic Finance, has the capabilities to help implement Islamic finance solutions in Turkey and improve financial inclusiveness.
Sub Saharan Africa (SSA)
27. UK financial services were responsible for 34.3% of total UK FDI into SSA in 2014, generating the largest amount of earnings (£1.7bn). There are opportunities for UK FRPS to expand its influence and support growth and development objectives in SSA.
28. The industry is uniquely placed to advise governments on macroeconomic and fiscal reform with a view to supporting capital raising abilities. It can further develop SSA’s financial sector, through bolstering domestic markets, developing robust regulatory regimes and implementing Fintech solutions. Finally, there is considerable demand for infrastructure investment and the industry can support infrastructure projects by structuring new investment and developing public private partnership solutions.
Recommendations: general - FCO network of Posts
29. TheCityUK made recommendations to the Lambert Review of FCO Posts in 2015 . We believe those not only remain valid, but are a core part of delivering Global Britain. The main points included:
• To secure the effective delivery of the UK national interest, including economic security, the maintenance of a viable global network of Posts is vital. These should be recognised as a core national asset. The pattern may change over time, but full consultation with stakeholders is imperative. Greater investment in UK diplomacy and diplomatic activity is required.
• The quality of interventions with host governments relates directly to the quality of staff in Posts. This includes recognising the links between political, economic and commercial diplomacy. We welcome Heads of Missions’ greater engagement in business-related issues. This is in part linked to broad and varied multi-levelled career paths in the diplomatic service.
• Value is often focussed on a geographical basis. Multilateral Posts (UKMIS, UKDEL) are often under-appreciated. Some of the issues with which they deal can be relatively slow-moving, but they are no less relevant to UK interests. These include the global framework of rules and regulations that provide the chapeau under which international business operates. The opportunity the Posts provide for the UK to build coalitions and alliances, test and lead opinion, and to give staff exposure to concomitant skills and experience cannot be underestimated.
• Linked to the above, staffing in home departments on international issues needs to be re-calibrated.
• There is a constant need to ensure value for public money. But the FCO is a relatively small spending department and the value it delivers stretches across all government departments and stakeholders. A review of the way in which other departments can contribute towards the FCO network’s running costs according to use and need would be timely.
Recommendations: specific industry points
30. TheCityUK believes the achievement of industry goals set out on the Vision reports should form part of an integrated Global Britain approach and, in turn, will help deliver it.
A partnership approach
31. In general, a Team UK partnership approach between government, regulators and the industry providing ongoing high-level engagement is essential to build closer ties between the UK and other countries. This will include trade and investment agreements or a regulatory coherence agreements as appropriate. Further trade liberalisation will translate into enhanced competitiveness and expanded export volumes. Services must be included in all of these.
32. The government’s approach to promoting UK FRPS internationally could be better co-ordinated with the industry. Brexit presents an opportunity for the UK to develop independent trade and investment policy. Greater emphasis on joint identification of opportunities will help increase trade and investment flows.
33. In all regions, it is vital that the government follows a joined up approach. It should engage in a more proactive and co-ordinated way across departments (for example, DIT, FCO, HMT, BEIS, MoJ) and with firms and industry bodies, to jointly identify, plan and pursue opportunities to strengthen trade and investment through engagements with other markets. This should build on the work of and relationships developed by the Financial Services Trade and Investment Board, which has been a successful example of where government and the industry come together.
34. FRPS should reinforce the government’s efforts by providing greater insight into its strengths, capabilities and differentiating features. We support the concept of the Prime Minister’s Trade Envoys. Additional industry champions should be appointed within the government to enable closer co-ordination and support for the FCO’s network of posts, to market the UK as an international financial centre and to underline the benefits of English law.
Developed markets remain a key source of value to the UK industry
35. The industry should explore potential for enhancing partnerships with other leading financial centres, for example by identifying opportunities to further share expertise or establish market infrastructure collaboration to increase scale, reach and efficiency. Industry and government should collaborate to promote the UK as the centre for international business and cross border deals, highlighting areas of differentiated expertise and the clustering of firms and talent that supports deals.
Make the most of the UK’s distinctive capabilities to grow trade and investment with and support development of emerging and niche markets
36. Due to its expertise in legal services and regulation, the UK can position itself as a global leader in these fields. Helping other financial centres to develop and driving regulatory coherence towards UK standards will provide UK businesses with a competitive advantage, reduce the costs of doing business and promote the rule of law. The industry and government should promote the UK’s distinct capabilities, particularly in capital raising, structuring, advisory and legal and accounting services, and FinTech as a means to position the UK as a leading hub for emerging markets business.
37. The industry and government should identify international financial centres that are developing and provide support in establishing their regulatory and legal frameworks. There is a vital role for industry and regulators to continue to lead the shaping of international standards and norms for regulation, legal and professional services. This will help to increase the ease with which UK-based firms can export products and services. The industry should enhance and export capabilities in infrastructure funding, development finance and the use of PPPs.
Access to deep pools of the best and diverse domestic and global talent
38. Continued attraction of the best international talent is an imperative. Similarly, the industry needs to continue to assign UK-based employees to operating units around the world to both build their success and develop talent further. Brexit provides an opportunity to reassess the UK’s approach towards attracting skilled workers. The government should facilitate the industry’s access to global talent by introducing flexibility into the visa system so that changing skills profiles can be met. Regular dialogue will inform government what skills needs are not met by domestic talent pools and identify the level of immigration that is required to close short- to medium-term gaps. Making targeted changes to the visa process that reduces the time, complexity and cost of applications should be implemented. For example, reducing the length of visa forms, allow employers to apply for certificates of sponsorship outside of monthly panels and provide greater visibility into the progress of applications would all be beneficial. TheCityUK will be publishing more detailed proposals on this subject.
Conclusion
39. In this submission, TheCityUK has outlined some of the ways in which policy can help the industry expand its global reach and project UK soft power. TheCityUK would be happy to provide further detail on any issues raised in this response.
April 2018