David Ruffley MP asks about the competitiveness of the City of London

Tuesday, 18 October, 2011

David probes representatives of the City in Treasury Committee.

Witnesses: < Mr < John Hitchins , Senior Banking Partner, PricewaterhouseCoopers LLP, < Mr < John Grout , Policy and Technical Director, Association of Corporate Treasurers, and < Mr < Matthew Fell , Director, Competitive Markets, CBI, gave evidence.

Q151 Mr Ruffley: Some questions for Mr Hitchins on the competitiveness of the City of London and how it will be affected by these proposals. The ICB conclude, and I quote, "The historical record does not suggest there is a strong link between the success of UK banks in wholesale investment banking and the success of the City." Do you share that assessment?

utline John Hitchins: It is certainly true that historically the City has not suffered from having an increasing foreign ownership of its activities. There are certain aspects of this report that will give UK-owned investment banks a potential competitive disadvantage against foreign-owned within the City. That will not necessarily impact the overall City, but it is a separate policy question as to whether we want to have national champions in investment banking.

utline Matthew Fell: Could I comment on that as well, just very briefly?

Mr Ruffley: Sure.

utline Matthew Fell: I think it is clearly right to say that the City and the UK more generally have benefited from foreign banking institutions being here, but I think it is equally true to say that it is important that we retain a strong domestic banking market, because the two of them are important for a number of reasons. First, we had a pretty vivid illustration in 2007/2008 that foreign institutions have a tendency to pull back from overseas markets in times of a crisis, which would leave UK businesses and consumers more exposed in the event of any future shocks, if we hadn't a strong domestic banking market to fall back on.

utlineSecondly, it is very important for competition reasons as well. Business is pretty clear that it wants a diverse and competitive banking market, and if you have that mix of domestic and foreign players, it is important for that.

utlineFinally, as with any other business, headquarter location really does matter for the UK's general competitiveness and our economic potential. If you think about the impact in terms of employment, investment, tax contributions and so on, we would not want to jeopardise a strong domestic market as well, not least for the cluster impacts it can have with a lot of other professional services, firms and things like that congregating around that activity, so there are good reasons why we would want a strong domestic market as well as making sure the UK stays a good home to foreign institutions.

Q152 Mr Ruffley: Back to Mr Hitchins. Martin Taylor, when I asked him about the possibility of UK banks moving their headquarters abroad, suggested that he received no representations during the course of his time sitting on the Commission from any of the likely candidates: Barclays, HSBC, Standard Chartered. Is that the assessment that your firm has as well of the situation, that it is highly unlikely that there will be any moves? In fact, Martin Taylor went further. He said he had not heard any suggestion that any UK bank would relocate abroad. What is your assessment?

utline John Hitchins: I think our assessment is that it remains unlikely, but there will be a point at which the cost-benefit equation may change and it might become worth moving overseas. There are-

Q153 Mr Ruffley: Could you say a bit more about that? Absolutely, this ICB set of proposals is but one part of the equation.

utline John Hitchins: There are a number of factors here. There is always a potentially significant tax cost in moving headquarters overseas. That is one, and that will differ significantly from institution to institution. The second issue is the regulatory cost, and we regard the argument that a bank might move overseas because they would get a softer regulatory touch somewhere else as probably unlikely, because the way regulation is changing and the way regulators are coming together, I am not sure that there is a major financial centre in which you would get "better treatment" from the perspective of the bank.

utlineWithin the Commission report, there is the possibility that a bank that has a European subsidiary could try to move its UK banking business into the ownership of that subsidiary and then branch back into the UK and avoid the ring-fence.

Q154 Mr Ruffley: Do you think that is a possibility?

utline John Hitchins: That is certainly possible. It is a hugely complex thing to do, but the ring-fence itself is quite complex. The unknown is the attitude of the regulator in the territory concerned. It might fail simply because the regulator in the territory concerned does not wish it to happen.

Q155 Mr Ruffley: Without naming any names, is PwC advising on any structure like that?

utline John Hitchins: Not that I am aware of.

Q156 Mr Ruffley: Final question. Where has that proposition come from? I understand it, and it looks an elegant way of circumventing the ring-fence.

utline John Hitchins: It comes from reading the rules that the ring-fence cannot override the European law that permits European banks to branch into the UK, so a branch of a European bank in the UK cannot be made subject to the ring-fence, because European law would trump the ring-fence. It is an obvious theoretical possibility. It is an extremely complex thing to do, and therefore the point at which someone does it is when they decide that it is not that much more complex than complying with the ring-fence.

Mr Ruffley: That is fascinating. Thank you.

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