London: Staying ahead of the chasing pack or in danger of being caught?

The London 2012 Olympics are sure to increase the global prominence and prestige of the capital and I am convinced that London will put on a great show: A show that is in keeping with – and will ultimately enhance – its status as a primary global city.  But as the athletes go to ever greater heights, lengths and speeds to win, can London maximise its own competitive advantages and hold its status as the world’s number one global financial centre?

My conclusion to this question is a confident, yes, but I accept there are a number of risks.  To explore both sides of the argument I have split my response into two blog postings. In this first one I consider the potential risks to London’s number one position whilst in the second I will discuss why I believe that London will sustain its position going forwards.

What are the key risks to London’s status and potential challenges to be overcome?  In summary:

  1. Increased regulation in the pipeline for the big UK banks (in particular, insulation of high street banking from their riskier investment banking arms) and a regulatory framework that is over and above the increasingly burdensome EU-driven regulation
  2. Slow national economic growth
  3. The competitiveness of foreign markets and a clear emergence of competing centres in the markets of the east
  4. Transport infrastructure and operational costs
  5. Reputational damage from the global financial crisis

Until a few days ago, I would have also added two further issues; High corporate taxation rates and levels of income tax.  Last week’s Budget Announcement though signals that both are to be reduced – to the extent that most no longer consider them such a pressing risk to London.

Instead, I think the greatest risks are UK over-regulation and economic outperformance in other countries or markets:

Local regulation could provide impetus to competing overseas financial centres, particularly given the clear absence of a global framework for banks. The most severe consequence for London might be a lack of future expansion amongst banking and finance companies and a gradual erosion of office space occupied.

Economic growth in the east is a “pull factor”. HSBC, for example, reported profits of $11.6 billion in Asia in 2010 compared with $4.3 billion in Europe, whilst Standard Chartered Plc, despite having its headquarters in London, makes 90% of its profits from Africa, Asia and the Middle East.  To date this has not driven locational change but if sustained it may.

Although we should not be complacent about these risks – check out my next blog entry to find out why I remain bullish about London’s future as the #1 global financial centre.