Wednesday 13 December 2017

Building bridges between the City and the IFSC

The head of the City of London authority talks bankers' bonuses, financial taxes and Britain's place in Europe with Gavin McLoughlin

Alan Yarrow Mayor of City of London
Alan Yarrow Mayor of City of London
Gavin McLoughlin

Gavin McLoughlin

It begins in Dublin's plush Merrion Hotel - straight across the road from Government Buildings. I arrive early and am greeted by a young Irishman who works for the Foreign & Commonwealth Office. The Lord Mayor - not Boris Johnson - is meeting the Taoiseach and will be along shortly, he says.

Ten minutes later an entourage of seven or eight men sweeps into the room. "Ah, so this is the birthplace of the Duke of Wellington," one of them remarks in plummy tones.

The Lord Mayor is Alan Yarrow, a former stockbroker and former chairman of Kleinwort Benson's UK bank.

As we begin our conversation one of his heavies sits down at the end of the table and starts taking notes on pen and paper. The electronic revolution isn't quite complete, it seems.

Mr Yarrow is in town to promote closer links between the City and the IFSC, in order "to make sure that our offering that we make to the world has got cohesion and comes across in a co-ordinated way."

"Both Ireland and the UK are driven by what I describe as an 'economic rationale' as to why we need to be in financial services, and therefore the co-instance of interest is not only have we known each other for a long time, and you're next door, but equally we have a common interest in ensuring that certain changes take place in Europe for the benefit of industry."

And having Ireland in the UK's corner is a big plus, he says, because Ireland's membership of the euro gives this country access to a different level of communication than the UK has.

"Ireland might be a better exponent of our views than we ourselves because we have a slightly negative impact in Europe because of what's been going on historically," Mr Yarrow adds. Those views are that the level of regulation has become excessive and that the high costs of complying with it make it harder for smaller firms to mix it.

"You need a strong central government to pump in common sense when things are looking slightly euphoric, you need a relevant level of regulation. I can't say at the moment where that regulation is but I feel the level of regulation now is becoming oppressive and it's in danger of actually stifling innovation.

"You have to be big to afford the compliance cost and that in itself means that competition by definition starts to deteriorate." One specific regulation of which he's wary is the cap on bankers' bonuses, which he says makes banks more likely to fail.

"The initial point of the bonus was actually to keep the fixed overheads of the organisation down. All these businesses tend to be in cyclical industries, and they want to keep the fixed overheads down so that when they went through a recession they didn't lose the quality staff,

"It was to make sure that the individual was a profit participant…what subsequently happened was that bonuses became almost guaranteed, they became part of the fixed structure.

"I think what got lost in the wash on the way through the process of big bang was that a lot of these businesses were involved in partnerships, and in a partnership, you as a capital partner were liable to your bootlaces.

"But as soon as it became companies where they had company guarantees and so on, the individual didn't suffer."

That's why he backs the idea of clawback rules - where banks can reclaim bonuses in certain circumstances.

But despite his wariness of the bonus cap's consequences, Mr Yarrow says a situation where banks are allowed to fail has to materialise. That might be brought about by making it easier for companies to get access to non-bank sources of finance, he says.

Currently the EU is working on introducing a capital markets union, which among other things would cut costs for companies who want to list on stock markets.

"It's about shifting the dial away from the banking sector into the markets. After all, people have to learn to take risk again. Sitting there in a sort of building society mentality saying you're guaranteed isn't that healthy for people's entrepreneurial spirit."

Banking has a bad reputation. It can be difficult to see how a crowd of London bankers working together with a crowd of London bankers is good for the man on the street. So why should Joe and Jane Bloggs care about the state of our financial services sector?

"The ability for countries like ours to make money out of manufacturing when you've got labour rates so much lower than ours in the emerging economies means that manufacturing, unless it's of a very specialist nature, is quite a difficult area to be in the wider world," Mr Yarrow says.

"Our biggest opportunity as two countries to actually make our way in the world is by offering the best services to the world. And it just so happens that we've already got a good foundation in financial services.

"Inevitably banking has got a bad reputation and it deserves it, it has behaved badly, and that misbehaviour has got to be punished.

"There's nothing more disappointing than realising that markets misbehave, but I'm afraid that's all always been the history. Markets always misbehave and it's down to the managements to make sure that they actually toe the line," Mr Yarrow says.

Perhaps the biggest issue facing the City in the years ahead is whether the UK remains in the EU. It's been a tetchy relationship over the years, exemplified by the UK's vigorous opposition to the financial transactions tax (FTT) that was proposed years ago but still looks a long way from being implemented.

Mr Yarrow says the cost of the tax would ultimately be borne by the consumer, and would risk a flight of capital.

"All these services effectively are transported globally, so it's no good saying actually this is going to stick in this country.

"The danger quite simply is that people become protectionist, and protectionism isn't where we make our money. But despite the row over the FTT, Yarrow doesn't think the UK would be well served by leaving the EU. "If it did happen, would we survive, yes we would? "But the point is that both Europe and the UK would be worse off, it's lose-lose. However awkward the UK is in Europe, the fact is people understand the commercial logic in what we're trying to promote.

"If that was taken out of the change mechanism of regulation in Europe, I think the international interpretation would be that it would be bad for Europe, because it'd slip back into its sclerotic ways.

"I'm not saying they won't survive, of course they'll survive, but the fact is that the demographics don't look good. There's a falling population in a large part of Europe."

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