For the first time since London’s financial markets economy became the worldwide tour de force that it is today, signs are beginning to emerge of some of the vast institutions in the largest interbank electronic trading center on the planet considering packing up and leaving.
HSBC Holdings plc (LON:HSBA) is the latest longstanding institution to consider its future in Britain, as it faces further penalties for FX rate manipulation, and prepares to set aside a further several hundred million dollars in addition to the $618 million it has already paid to regulators in the US, UK and Switzerland on conclusion of the regulatory probe into FX benchmark rigging by traders within 6 large banks last year.
The real reason for considering moving away from London, however, is not the prospect of settling penalties, as relocation would be unlikely to remove such an impending burden.
HSBC has been the least affected out of the three large British banks which received penalties for misconduct, RBS and Barclays having by far been hit the hardest, especially bearing in mind the combination of far higher fiscal penalties from regulators and flagging results during last year by Barclays in particular.
The main factor in prompting a potential move from the Square Mile has its roots in the scrutiny that HSBC finds itself under as a result of revelations regarding its tax practices at its Swiss private bank.
At the company’s Annual General Meeting recently, HSBC Chairman Douglas Flint explained to shareholders that the bank would review its UK domicile for the first time in five years.
In the advent of the British General Election in which an increasing commercial fear across all sectors from large multinational conglomerates down to small enterprises is mounting that the entire private sector will be wrung dry should ‘Red Ed’ Miliband’s Labour Party win the election, and even more so if Mr. Miliband subsequently teams up with the staunch socialist Scottish National Party.
Michael Spencer, CEO of ICAP, has already made his perspective clear in that he may consider relocating the largest interdealer broker in the world from London to New York should a socialist government win the General Election.
The Labour Party makes no secret of its disdain for private enterprise, and has vowed to hit high earners hard, as well as the revenue-generating firms that employ such high earners.
In the 1970s, under James Callaghan and Howard Wilson’s Labour Government, the world’s industry was static, and not electronic and global as it is today, thus the anti-business policies of the 1970s resulted in the wholesale destruction of the entire British industrial sector, however today’s global, highly technological business infrastructure and ultra-low latency connectivity means that should such anti-business measures be taken, firms will simply register themselves abroad and then carry on as normal, using the same infrastructure as is currently in place.
This would mean a very small outlay for companies to complete such an administrative task, and could be enough to save their businesses, facilitating an easy exodus for Britain’s financial sector, the only really high revenue generator in the entire nation.
Even under the current government, HSBC is under pressure from its shareholders to move abroad after incumbent Chancellor of the Exchequer George Osborne raised the bank levy, an unpopular tax on bank balance sheets, in March’s Budget.
On May 5, HSBC is due to report a fall in profits as a result of the resurgent US dollar makes its effect known, as the bank reports its accounts in US dollars.
New ring-fencing rules are forcing HSBC to legally separate its UK retail bank from the rest of its business, which could provoke the bank to sell off the UK division.
Shares in the bank have risen since the bank confirmed it was considering leaving the UK, clearly demonstrating the investor perspective on Britain as a viable location for large, profitable firms.
Other nations with large electronic trading industries are different insofar as that the distribution of high revenue generating companies across all industry sectors are distributed across many cities in the nations.
Two examples are Switzerland and the United States. Zurich’s business community shares similar interests to that of Geneva, and New York, Chicago, San Francisco, Miami, Boston and several other metropolitan US cities have large global enterprises which range from technology, to venture capital, to manufacturing and medical science to giant financial institutions.
Britain differs in that one square mile of London hosts the largest interbank trading sector in the entire world, and the rest of the nation’s other large cities, of which there are a great many, do not produce any significant output that even comes close to that of the City and Canary Wharf. Indeed, quite the opposite in that there is a deal of animosity between the rest of the nation and London’s financial center, as well as a complete misalignment as one industry center bears no relation whatsoever to the others across the country.
This in itself could be a catalyst for the popularity of the Labour Party at the polls, as well as the precursor for many other firms aside from ICAP and HSBC to rethink their geographical location.
Graph courtesy of The Telegraph