Contrary to most expectations, we have a government. And although David Cameron might have felt he had it difficult in his first term as Prime Minister – dealing with a huge budget deficit while in coalition – this term also has its challenges. His majority is slim, there is the far from little matter of the European referendum, and then the “Scottish question”.
So what does the election outcome mean for the banking industry? Well, banks no longer need to worry about some of Labour’s proposals, such as a new bank bonus tax or bank market share caps. But we will still be kept busy under a Conservative government.
The UK’s relationship with the EU is a major concern for the industry, particularly for the international wholesale banks whose business models depend on being able to operate out of London across the EU without let or hindrance. Any challenge to our membership of the Single Market creates uncertainty for the industry. And if we were out of the Single Market altogether, it would be disastrous. I know international banks that have already put investment in the UK on hold while we decide as a country where our future lies.
The Conservatives are planning reforms to the payments system, and have asked the regulator to look at account number portability, a multi-billion pound reform to banking that virtually no customer wants. Meanwhile, the government is – very sensibly – expanding business support schemes, such as the new “Help to Grow” scheme. There is also much new regulation to either finalise or implement, with more coming down the track, such as new capital rules from Basel and structural reform rules from Brussels.
The biggest challenge to banking now is simply competitiveness. Quite rightly, since the crisis, legislators and regulators have focused on making sure that the banking system is made safer. There have been repeated tidal waves of reforms – much of it very sensible – from Brussels and Westminster, which have undoubtedly improved the stability of the industry. Capital levels are massively up, bonuses have been slashed, and internal controls and corporate governance are now much tighter. Major UK banks are having to ring-fence their retail operations. And the top 30 banks are having to pay far higher taxes, mainly through the Bank Levy, which has been increased nine times since it was introduced.
With hundreds of different reforms, often overlapping, it would be remarkable if we got them right first time. The challenge for the government now is not just making sure that we have a much more stable industry, but also one that can compete globally.
HSBC has been very vocal in its concerns, and is reviewing whether to move its HQ out of the UK. But what I find just as worrying is that, even in the privacy of their own meeting rooms, bank chief executives are warning that it is no longer worth doing business in London. In just the last few weeks, two major banks have told me they are moving operations out of London because the Bank Levy has made it uneconomic to operate here.
Another chief executive from a global systemically important bank told me it wasn’t just the Bank Levy that put a cap on their growth in London. He said that the UK was the only country in the world they operate in where they have to get remuneration approved by the regulator, and the global board was asking why they should put staff here. He said that regulations in the UK are now so complex, and the costs of making mistakes so punitive, that they often found it too difficult and expensive to operate here.
International league tables show us slipping down the rankings of financial centres. Declining competitiveness is not just a concern for the industry, but for the country. The UK has now lost its number one position as a financial services exporter, overtaken by the US. Banking remains by far the UK’s biggest export industry, creating hundreds of thousands of jobs, and is by some measures the country’s biggest taxpayer. Now is the time to make sure we aren’t throwing out the baby with the bathwater.