AFTER seven years at the top, last month London lost its place as the number one city in the Global Financial Centres Index. Is this a temporary slippage, or should we be concerned?
I have always thought of the City, and the UK, as one of the best places to invest and do business. We have a rare combination of supportive institutions and customs, which have evolved over centuries to produce an entrepreneurial culture and an excellent environment for private sector investment and job creation. However, such strengths must not be taken for granted and, indeed, should be actively nurtured. Yet there are times when it seems that politicians and regulators prefer sound bites to substance, at the risk of tarnishing our hard won reputation for sensible long-term policy making. As such, perception could become reality, ultimately making the UK a less attractive place to do business.
Four key attributes have made the UK a great country to invest in. First, we have a well-established, independent legal system; secondly, strong investor protection and a respect for minority rights are enshrined in UK company law and our corporate governance regime; thirdly, the UK political establishment is generally supportive of free market capitalism; finally, we have regulatory institutions with clear mandates, largely free from day-to-day political interference.
The first two remain intact. But we have recently seen a notable degree of political interference in business. And we are now, regrettably, also seeing regulators under enormous pressure to act in ways that gain them political or public favour, but which may not be in the longer-term interests of the country.
Of course, political involvement in business is nothing new and, to the extent that the government has a duty to ensure that companies are properly regulated and accountable, it should be welcomed. There is also a long pedigree of political intervention in business – most notably in fiscal policy – that might well be described as expedient.
Nevertheless, the scale of recent interventions, actual or threatened, is elevated. We have seen upheaval in the banking industry, albeit for understandable reasons. But here, there is a balance to be struck between having strong, safe financial institutions holding more capital, and the need for the same organisations to lend money to help boost economic recovery. We can’t have our cake and eat it. Banking is an inherently risky business. And in the same way that the only truly safe car is one parked in a garage, the only truly safe bank is one that doesn’t lend money. We need to accept some degree of risk.
In the energy sector, a well-intentioned desire to reduce customer bills may have the reverse effect in the long term. Because of the uncertainty about political interference in price setting and now a multi-year competition review, two of the largest energy producers and suppliers, Centrica and SSE, have announced reduced investment plans, which will impact the availability of electricity supply to the UK and may push up prices. The industry needs a long-term framework to stimulate investment.
The life insurance industry, another that works to extremely long time-frames, has also been impacted, with three separate announcements in just two weeks. The relaxation of rules on taking annuities and the subsequent limit on certain charges may be welcome. But to have both announced on different days, shortly followed by an FCA review of many “back book” policies, could easily be misconstrued as an orchestrated campaign to unsettle investors in the industry.
Perhaps a period of share price volatility doesn’t matter in the greater scheme of things, as long as the eventual policy decisions are fair, proportionate and sensible. But uncertainty not only delays investment decisions, it also raises the cost of capital for UK companies. In simple terms, investors can invest in many businesses around the world. If UK firms are subject to unpredictable and unquantifiable political and regulatory risks, investors may choose to put their money elsewhere, forcing UK companies and customers to ultimately pay a higher price to attract that investment capital back into a riskier country.
With European Parliamentary elections imminent and in the run up to the General Election, there will be an increasing risk of populist and short-term remarks creating policy uncertainty for the future, thereby undermining inward investment into UK business. In turn, this has a knock on effect on savers and investors, who increasingly rely on stable investment returns for income.
So is the UK still open for business? If I had to judge, the answer would be a qualified yes: the door remains open, but it would appear that the welcome mat has been rolled up for now. It would be a great shame for the economy and investors for it to be put away.
Simon Gergel is chief investment officer, UK equities at Allianz Global Investors.