6 OCTOBER 2001, Page 54


The City is dominated by foreign companies.

But, says Alastair Ross Goobey, these

assure its future

THE recent publication of David Kynaston's final volume of his history of the City of London, and Philip Augar's book, The Death of Gentlemanly Capitalism, has given me a serious attack of nostalgia, heightened by my own decision to retire from an executive role in the City. The theme of both books is that the UK financial-services industry has become controlled by non-British owners. The implication is that this is both a cause for regret and a risk for the future. While the change in ownership is undeniable, the wrong conclusion seems to have been drawn. I think it was Stanislas Yassukovich who (subject to counterclaims) coined the saying 'London is the Wimbledon of finance. We provide the best tournament, hut it is dominated by foreigners.' Does this matter?

London continues to attract most of the headquarters of financial-services companies for Europe, no matter what the domicile of the company is. Despite the claims of Frankfurt and Paris, and the establishment of the euro, those cities make only periodic gains at our expense. The Germans have managed to repatriate a substantial part of trading in their government bond market, and M. Theodore has been the driving force in the creation of Euronext from its Paris base. During 2000 there was a rather unseemly battle for control of the London Stock Exchange between Deutsche BOrse and OM of Sweden. The LSE survived intact and has recently floated; OM, in contrast, seems to have moderated its ambitions to be an operator of stock markets.

The conventional wisdom has it that London prospers for three reasons — language, time zone and critical mass. Although it is clearly true that English has become the lingua franca, it sometimes seems that the Dutch and Swedes actually speak it better than we do, while the Irish speak it more attractively. The extra hour nearer the US compared with Continental Europe helps a little, but again the Irish have that advantage too. It is critical mass that distinguishes London from the other potential financial centres. There are technology clusters — in the US on Route 128 and in Silicon Valley; in Germany around Munich, in Silicon Glen; and, in England, around Cambridge — but there is only one financial cluster in Europe: London. At any time of the day or night, there are highly qualified and motivated bankers, lawyers, accountants and public-relations consultants ready to structure and sell a deal. Their lifestyle is not enviable. If you assign your soul to the investment banks, they can claim you at any time. Such commitment runs counter to what still seems to prevail in most other European centres, where reducing working hours and retirement age are still on the agenda. It is this work ethic that enables London to capture more and more of those who want to reach the top in finance, because this is a benchmark that the (mostly American) employers use.

The days of the three-hour lunch are long gone. People used to snigger at Siegmund Warburg's lunch rules — two sittings and no alcohol — when the rest of the City was offering three-course lunches, cocktails, two wines, port and cigars, served in a panelled room by liveried flunkeys. When the zip on his trousers failed, one client of a revered merchant bank was astonished as, after a short pause, and while the meeting continued, a uniformed attendant presented him with a sealed envelope on a silver tray. Inside was a pristine safety pin. I am not convinced that longer hours and shorter lunches mean that better decisions are made, but it does at least give the appearance of productive activity.

One clear advance for London has been a political one. Thirty years ago, the class war was still being fought, culminating in the Labour party's manifesto only 18 years since — `the longest suicide note in history' — advocating socialism red in tooth and flaw. Today, the major political parties accept the role of capital and its East End factory. We have now moved on to discussing how to make managerial capitalism work properly, and this unites those of us on both the Left and the Right. The responsibilities of the institutional investment manager as agent of the ultimate owners have become clearer. As with any external regulation or monitoring, we do not want to throw the entrepreneurial baby out with the unaccountability-ofboards bath water, and we should exercise the power that Harold Wilson recognised — 'The pension funds are so powerful; they don't realise how powerful they are' — with pragmatism and sensitivity. The only justification for any such activity by investors is if it helps to reduce the relative cost of capital to companies. The evidence is mounting that investors will reduce their hurdle rate for properly governed companies.

Because the US investment banks have dictated the change in working practices, it may be that the other critical activity that keeps London in the vanguard may also have to adapt. London is still the major centre for non-US equity portfolio investment management. As with merchant banking, the investing institutions are coming under the control of US owners. Of the very large managers, only Barclays Global. Legal and General (with index-tracking bases), CGNU and Schroders are now British-owned. In the last few years we have seen Mercury sold to Merrill Lynch, Newton to Mellon. Flemings to JP Morgan Chase. and Gartmore to Nationwide Mutual, with Capital International, Alliance Capital and Fidelity all making inroads. Other companies have been swallowed up by investors based in Europe or (in the case of Henderson) Australia. As with investment banking. investment management is going to be dominated by nondomestic owners because many of the large UK financial institutions have not competed in this area on a worldwide basis, and it is not yet clear whether this has been a sensible or a foolish long-term decision. Does HSBC punch its weight in investment management (or investment banking)? One very senior British broker once affirmed that London's place as a financial centre was assured as long as huge amounts of investment assets were managed here. The assets are the honeypot around which the worker bees congregate.

There may be one other reason for London's continued success as a financial centre, and this seems to answer the 'Wimbledon' question. There are so many foreign workers in financial services in London that they can perpetuate their own communities. Although I am still unaware of a restaurant boasting that it serves Bosnian cuisine, almost every other nationality has a cultural node in London. Despite public transport, which is certainly our number one problem (as Christopher Fildes's correspondent I.K. Gricer regularly points out in these pages), our overseas guests still seem to find London an attractive posting. It is well to reflect that it must be far better to live in a country which some people are driven to cheat, lie and bribe to get into than one in which you have to cheat, bribe and lie to get out of. Not that Stani Yassukovich had to do any of those things, but he is, after all, not British by birth, and decided to follow his career here. As long as we are able to retain the residence of such people, London will prevail. Paris is beautiful but it is a relatively small city, and not, perhaps, as accommodating to foreigners; Finanzplatz Deutschland. Frankfurt, is a small town in Germany.

How are the appalling events of 11 September likely to affect this relatively positive view? Everyone is reassessing their contingency planning. Does it make sense to concentrate all your activity in one city or one district? New York was effectively cut off, both physically and electronically. but London's systems and people were able to help out. Some of those who witnessed the horrors are reassessing the balance between work and family, but that effect diminishes with the physical distance from the event. Whereas other events (such as IRA bombings) had made US employers cautious about London, the diversification of operational business risk to a friendly, well-qualified centre some thousands of miles away seems to make perfect sense, even if we all face similar perils. The reverse is true too, of course: any substantial business that concentrates its operations in one building or one district of London will find some attraction in setting up some contingencies in one or more of New York, Paris and Frankfurt.

I am a member of a golden age. Born after the end of the second world war, until now I have not faced a seemingly insoluble political problem. I had faith in the deterrent, and it was justified; the Kennedy assassination, the Falklands and Gulf Wars were short-term crises. I cannot make sensible suggestions to my successors as to the length and extent of this one. That makes it doubly appropriate to hand over the responsibility to someone else.