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Populist politicians must stop punishing City

Stuart Fraser
AT FIRST glance it is hard to see how goings on in the City can have any bearing on the UK’s thousands of small and medium-sized enterprises (SMEs).

On one hand you have the huge multi-national banks with which the City is usually associated employing tens of thousands of people globally and issuing multi-million pound bonuses to the highest earners. On the other hand you have new small businesses located well away from central London, struggling to cover start-up costs and grow. And yet this relationship is one of mutual inter-dependence and benefits.

Financial institutions need to be based in a thriving marketplace – that is how they make their money – and SMEs are vital drivers of the UK economy in terms of job creation and growth as well as their flexibility, capacity for innovation and geographical spread.

On the flip side, the City has a vital role to play in financing new businesses and helping them to grow. Most of the biggest national and international businesses were once SMEs themselves and some were undoubtedly once heavily reliant on the financial services sector.

Providing funding for SMEs is a risky enterprise – even riskier in today’s economic climate.
In this feverish pre-election environment lending institutions are being put under extreme pressure to provide more funding to SMEs whilst at the same time being told that they must act in a more prudent manner and hold even greater amounts of capital on their balance sheets.

It is no wonder many SMEs are reporting difficulties in obtaining bank finance.

There is no doubt we need to strengthen our financial system and make it safer but, equally, we must guard against any unintended, or indeed cumulative, consequences that could flow from the vast array of regulatory requirements currently under consideration.

“Populism” demands we punish the banks even more and with every tightening of the regulatory screw politicians and regulators are encouraged to keep piling on the pressure thereby creating a virtuous circle of potential self destruction.

The “populism” about pay is now filtering down to the non-financial sector and, if left unchallenged, could begin to affect the competitive position of many major industries that create the bulk of the UK’s employment. Castigating people on pay without having due regard to the value they add is a very dangerous trend.

Stuart Fraser is chairman of the City of London’s policy and resources committee.