Stuart Fraser is policy chairman of the City of London Corporation, which is both the municipal government for London's ancient financial center and the political voice of the financial services community. He sees a threat to the City's pre-eminence from both excessive taxation and misguided regulation, especially regulation that takes a one-size-fits-all approach. But he also believes that properly devised regulation gives investors confidence and that there is still time to get taxation right before lasting damage is done.
The Deal: The financial services industry is facing a barrage of new regulation, both domestically and from Europe. Will that be good for London as a financial center -- or damaging?
Stuart Fraser: The U.K. and London have pretty much always been market-orientated. I think what you would call the Anglo-Saxon model is regulated markets, but leaving markets to determine economic priorities and where it's best to allocate capital. But there's a different view in some countries in continental Europe about the role of markets in the economy. There are those that would prefer to try and control them more or ban certain activities. That obviously causes a bit of a problem for an open international center like London.
It's perfectly OK, in my view, for some countries if they don't want to have their people buying hedge funds, for example. That's up to them. But to ban it all the way across [the European Union] would certainly hurt us and others. I think we need the flexibility in the legislation to be able to reflect those national distinctions.
Are we getting that flexibility as the negotiations in Brussels continue?
Progress is being made. It's built into the new European banking regulator for instance, which has the ability for national regulators to take account of local need. The concern we have is the use of emergency powers. The Council [of EU finance ministers] could declare an emergency, and they would have the right to overrule all banking regulators. Now that is obviously of concern to us. For instance, we don't believe short selling is a problem. Other people see it as an evil. We can't have somebody banning foreign exchange dealing or whatever.
What about what's happening in the U.K.? We have a Banking Commission looking at breaking up the banks, we have the Takeover Panel looking at changes to M&A rules following Kraft's takeover of Cadbury -- ideas on the table include raising the 50% minimum acceptance for a bid to succeed, or even withholding voting rights from shares acquired during an offer period -- and we have increased taxes on banks and bankers.
The Banking Commission won't report until next year. I think it's useful that we have the [financial reform] framework in the States now. [The U.S. example] in the past has been a good guideline for us, particularly with regard to the whole issue of breaking up, restricting, that type of thing. I wouldn't be surprised if we went [the U.S.] route or moved toward it. But the banking commission has 14 months or so to look at that.
I don't think there are any real moves on the takeover front. If there are, they would probably be a bit more cosmetic. The issue is that if I'm offered a price for my shares -- and it doesn't matter who's offering it, if it's a hedge fund or whatever -- and I decide that that's a fair value for the business, then I wish to accept it. Anything that comes in the way of that liberty, I think, is going to be difficult, to say the least. It would be very strange for a government to come in on that decision, unless it were for national security issues or a case like that. I don't think chocolate is.
What about taxes and caps on bonuses. Is London on the slippery slope to losing its advantage?
No, I don't think so. The government is in a difficult position, as are a lot of governments. It's got to impose very tough conditions on people in this country, and many of the lowest paid will be the biggest sufferers. It's got to show the banks are paying into the treasury. So it can't possibly reduce the highest rate of tax under those conditions. But I think it is a question of time. If, in four years' time, you have stabilized [the economy] and got everything down to a better base, you could then start implementing your longer-term plans. I do think this government is a lower-tax government. But I think political reality is: If the banks are so stupid, and this applies both here and in America, as to start paying out huge bonuses in cash again in December and January, it's going to be very politically dangerous. There's a big danger that if we have headlines again of big bonuses, what are now guidelines both here and in the U.S. could actually turn into legislation.
The EU, the U.K. and the U.S. have already got guidelines on bonuses. There is a broad consensus around these things. But what we've got to be very careful about is that we don't have legislation which isolates us, because you cannot have a trader in New York and a trader in London and a trader in Hong Kong with three different bonus systems. It just doesn't work. You'll find the one who's being paid the least asking for transfer to the other regions.
That's the question. Will London lose out to a resurgent, low-tax Asia?
Over time, London will lose market share to Asia -- there's no doubt. But as long as the market grows faster than my loss of market share, that's fine. You're not going to stop Asia. It's going to happen. The question is how soon and in what area. I go to Shanghai and advise the Shanghai government on how to make Shanghai an international city, but I think they're a long way from being that. But there's huge competition between Hong Kong and Shanghai, Singapore.
We'll always lose some younger people, because they want the broader experience, and they're prepared to put up with the inconvenience of living in some of these other places. The more mature executives, who've got family, for them London is still the much preferred place to live and work.
But there's a tipping point which says the cost of this wonderful place is just too much. We are pretty much there. We're at that point. We need to try and say quietly, over the longer term, we recognize this. We do need to be more tax competitive, but you have to recognize for the short term there are other, bigger issues for the economy. London will only lose its pre-eminent position if we shoot it ourselves.