With the uncertainties around Brexit deadlines and extensions during 2019, confidence in London as the world’s pre-eminent financial hub has dipped even further this year. This declining confidence is further reinforced by findings from the latest Global Regulatory Outlook (GRO) report released by Duff & Phelps, the global advisor that protects, restores and maximises value for clients, which surveyed senior financial sector professionals from around the world.
The survey found that only 33% currently see London as the foremost global financial hub, falling more than 20% over the last two years. Meanwhile, New York gained momentum this year, with the majority of respondents (56%) regarding it as the world’s most important financial centre, a 33% increase over the last two years.
Even with trade talks between the EU and UK underway, the survey suggests a significant lack of optimism. When asked where the world’s most powerful financial hub will be in five years, respondents see both London and New York losing ground. While the decline for New York is relatively modest, with half (50%) still expecting it to be the leader, confidence in the UK’s future is far weaker. Just 22% predict London will still be the major financial centre in five years’ time.
However, very few respondents see any European city taking the lead as pre-eminent financial hub in five years. The outlook for cities such as Paris or Frankfurt certainly does not come close to replacing New York or London with only 1% and 2% of respondents, respectively. Rather, it is emerging centres in Hong Kong (4%), Singapore (5%) and, particularly, Shanghai (9%) that are expected to see the biggest growth.
Malin Nilsson, Managing Director of Compliance and Regulatory Consulting at Duff & Phelps, said:
“It is difficult to avoid the suspicion that three years of uncertainty since the Brexit vote has contributed to London’s fall. While London was still considered the pre-eminent financial hub in 2018, it could be that the shockwaves of the ongoing EU negotiations have started to show. If this is the primary reason for London’s changing fortunes, then the resolution of the UK’s departure could see it bouncing back. We continue to see Channel Islands firms making the most of the uncertainty by diversifying their geographical exposure across North America and Asia, and maintaining their presence in the UK and Europe, both in terms of where they have a physical presence and where they source their clients from.”
If there is any consolation for the City, it is that the UK is considered to have the most favourable regulatory regime for financial services in the world. Survey respondents rated the UK’s regulatory regime first (30%), followed by the US (26%) and Singapore (18%). However, outside of Brexit, businesses are facing issues such as the cost of compliance (21%) and the war for talent (23%). Indeed, the cost of compliance has continued to grow. The survey found that the proportion of firms spending more than 5% of their overall budget on compliance is now over a third (34%), an increase from 11% in 2018.
Malin Nilsson continued:
“We must accept the fact that much of the global regulation we’re seeing is necessary to deliver a stable market. But we cannot ignore the impact that extensive, and often uncoordinated regulatory change at the global level has had on competition and services. Whereas big banks and other financial services giants may well be willing to shoulder the regulatory burden and costs, smaller organisations and low margin consumer businesses are both likely to suffer. This is particularly relevant for jurisdictions such as the Channel Islands, where there is a broad range of firms of varying size who all face similar challenges of cost of compliance and competition for the same resources.”