LONDON ARENA, DOCKLANDS, THURSDAY 4 JUNE
SPEECH BY HOWARD DAVIES
CHAIRMAN, FINANCIAL SERVICES AUTHORITY

Why should London’s financial regulator be delivering the inaugural lecture for Thames Gateway Partnership?

Well, one answer is that the Gateway Partnership’s marketing information included several pictures of the FSA’s new building. Since we need a bit of help in promoting our new location, there is clearly the basis of some kind of relationship with the Partnership. It certainly helps us, as new boys on the block, if the area continues to develop. We are content to be among the pioneers, in moving our staff to Canary Wharf. But we want to feel that more people will follow us, and that we are in an expanding, prosperous community.

So what is good for the Partnership is good for us. We need to recruit people to work in Docklands. There will be vacancies in our organisation over the next six months. I am not idealistic enough to think that they will all be filled by local people, but some will. And all of them will need to feel that they are working in an area which has promise and an exciting future.

So, as far as I am concerned, there is a hard-edged community of interest between the FSA and the partners involved in this initiative.

This week, indeed, sees the formal launch of the Financial Services Authority. Monday 1 June was the date on which we took on formal responsibility for supervising the City of London’s banks. And we also took over the staff of all the old self-regulatory organisations. We haven’t yet assumed responsibility for building societies and insurance companies: that will come a little later. But as from this week we are up and running as London’s single regulator of financial services.

We are not all yet in Canary Wharf. Our building, the one next to the Tower at 25 North Colonnade, is not yet ready for occupation. So for the moment we have a toe-hold in Canary Wharf. We have a corporate headquarters at 20 Cabot Square, in a part of Morgan Stanley’s building and of course the Personal Investment Authority are resident in the Tower. Our aim was to bring everyone together to coincide with the opening of the Jubilee Line extension.

So the launch of the City’s new regulator, combined with the inauguration of this lecture series, is a good moment to reflect on the changing face of the City, and perhaps to speculate a little on how that changing face will continue to develop in the future.

This brief is, evidently, very broad. The financial services industry in the UK, heavily concentrated in London, accounts for around 7% of GDP and 1.5 million jobs, at least. So let me try to pull out one or two aspects of the way markets, institutions and indeed the regulatory authorities of the City are developing, and then link that to the physical side of the market - how the geographical definitions of the City of London are changing. Then, lastly, I would like to explore the way in which these changes interact with economic development, and indeed human capital development in the area of the Thames Gateway Partnership and its constituent organisations.

The first and most important, albeit conventional observation to make about London as a centre for financial services is to point to its continued, remarkable success. New York may be, on some measures, a larger overall centre. But that is attributable to the enormous size of the domestic US markets. If one looks at international financial business, then the dominance of London in many key areas is quite remarkable. Somewhere approaching 20 per cent of international bank lending takes place here and around 30% of both foreign exchange turnover and OTC derivatives business is also transacted in London. These measures are very significant since they relate to the kind of business which is particularly mobile in international terms: business which is attracted to whichever centre can most efficiently cope with it.

Another important measure is the relationship between imports and exports of financial services. And on that measure London is by a long way the largest net exporter of financial services, with an annual surplus of around £5bn. On this measure Frankfurt is the second largest centre, but with net exports of only around a third of London’s total.

One particularly attractive feature of London’s position is that it is very broadly based. I referred to bank lending, derivatives and foreign exchange. But one might equally well talk of London’s leading position in the metals market, through the London Metal Exchange, the International Petroleum Exchange, the eurobond market and the gold bullion market. All of these are areas in which London’s markets, exchanges and institutions lead the world.

It is also true to say, I think, that this dominant position is quite soundly based at present. Of course there are always adverse trends to which critics can point as signs of dangers ahead. There is no doubt that Dublin, for example, and Luxembourg have done well in recent years in attracting particular types of fund management and custody business. There has been the more recent loss by LIFFE of the lion’s share of the German bund futures business to the DTB in Frankfurt. And there are legitimate worries around about the potential impact of the arrival of the euro, and of the UK’s non-membership of the eurozone, on the City. Those who speak for other competing centres on the continent argue that it is unlikely that, in the long run, the major financial centre of the eurozone should lie outside it. They would say that, wouldn’t they? - is one possible response. But in staying on the fringes of the single currency there is some risk of losing ground, unless London’s institutions work hard to be euro-compatible from the start.

But London seems to me to be rising to that challenge, and a balanced view of what has been happening in recent years would certainly conclude that London has remained pre-eminent in its areas of strength and, indeed, has been building new strong-points.

It is noticeable, for example, that a number of large continental European institutions have chosen to build up their investment banking and fund management businesses, in particular, in London. The scale of the investment made here by German, Dutch, Swiss and French institutions in recent years has been remarkable.

Most major US institutions have chosen to build their European headquarters in London. And banks from elsewhere in the world, notably from Asia and other emerging markets, have also made a beeline for London as their first foothold in European financial markets. We have, for example, fourteen Korean banks based in London, from where they carry out much of their trade finance business for the whole of Europe.

But I do not believe that there is any historical determinism about this dominance of the London market. Cities have won and lost leading positions in the past. If financial dominance, once gained, was secure then the world’s financial centre might be in Babylon, or Genoa. So what are the aces of London’s competitive strengths, and how can we be sure that they are sustainable in the long run?

Analyses of the competitive positions of the financial markets are often disappointing to the rigorously logical analyst. Many forests have been cut down in the interests of publishing reports designed to identify the key success factors of financial centres in general and London in particular. The City Research Project undertaken by the London Business School, which came to a conclusion two or three years ago, was a case in point.

Many of these studies tend to conclude that one reason why financial institutions congregate in a particular place is because many of their closest colleagues, collaborators and competitors are also there. The ease of doing business in an environment in which almost all major institutions are already present seems to be the dominant factor in the equation. It is of course a circular argument. Reminiscent of the song "We are here, because we are here". It does not answer the question why we, or they, are here in the first place.

It is possible to get a little way beyond this frustrating circularity, though the search for a complete answer goes on. Partial responses, however, identify a number of factors that have a particular significance in the location decisions made by financial institutions.

One such is the communications infrastructure. This is as much to do with electronic as it is physical communications. London has benefited from BT privatisation and the stimulation that gave to telecommunications competition, so that the cost of electronic communications from London has been highly competitive in European terms for many years. And, on the physical side of communications, London’s airports with their rapid and efficient connections all around the globe, have been another attractive feature.

The second crucial influence on London’s development as a financial centre is the availability of highly skilled professional services to support financial business. For most sensible ordinary people it is hard to imagine that anyone would cross the street in order to be near a lawyer or an accountant. But banks, insurers and stock brokers say clearly that they want to be located where there is a rich supporting infrastructure of professional services, with skills particularly focused on the problems which confront them.

And of course they need skilled and qualified people in their own businesses, available at a reasonable price. That applies to traders, dealers, analysts and the like (with or without red braces) and to the essential supporting staff needed to make all this work: secretarial, IT, premises, finance and the rest of the exciting cornucopia of corporate life. London has always offered a deep pool of such staff in which institutions may fish.

Then there is the physical infrastructure itself. The availability of buildings of an appropriate shape and size, and means of getting from one to another within the financial centre - something I distinguish from its communications with the outside world.

These latter areas are ones where London’s position is not perhaps as secure as it might be. There is no doubt that in recent years City rents have, at times, risen very sharply due to the lack of premises availability in the square mile. In the late eighties prime space in the centre of the City was let for £70 per square foot. Good business for the landlord, no doubt, but a costly overhead for the tenant, and well in excess of rents elsewhere in Europe. It became clear that the only way of avoiding that kind of rapid escalation in rents was to ensure that more property was made available.

The financial centre’s march to the East has been an important factor in moderating City rents to some degree at least. Indeed earlier this week in the Evening Standard a prominent chartered surveyor was quoted as saying, "the City is in a part of London where there is a limited amount of space available. Docklands has created new space which was much needed". And, more specifically, he argued that HSBC’s recent decision to move 8,000 staff to Docklands was an important factor in "keeping London as competitive as possible".

I believe the City Corporation is now recognising that the expansion of the City’s frontiers eastwards is a sign of the City’s success, and not an indication of failure, and indeed an important guarantor of the continued health and vitality of the financial centre.

But these property arguments are probably not as significant as those related to the availability of people.

Every financial manager I talk to these days complains of the difficulty of attracting the right kind of people at an appropriate price. That is partly because the economy, overall, has been moving ahead rapidly and healthily in recent years. We are now six years into a fairly robust period of expansion, with an unemployment rate very low by European standards. And particularly low in many sub-labour markets in the South East. At the FSA we are conscious of this labour market tightness ourselves. It is particularly noticeable in information technology jobs, with the arrival of the euro and the imminence of the Millennium acting as particularly powerful stimuli in those markets. Not for some time have we seen caravans on Waterloo station concourse seeking to pull IT professionals almost physically from their train, and offer them bottles of champagne to sign up with IT consultancy operations. This is what is known as a frothy labour market.

But at this point I am sure there will be some among you who begin to wonder whether you and I are living on the same planet. Because my description of a tight labour market with potential employees able to hold out for ever more attractive compensation packages, and able to pick and choose for whom they work, is not easy to square with the social problems evident in all the boroughs and districts which go to make up the Thames Gateway Partnership. It is certainly not the case down in Tower Hamlets, or Greenwich. There remain many distressed families in those areas, and high unemployment rates, which seem to be little affected by the existence of this global economic dynamo that is the City of London on the doorstep. There now seems to be more than a river crossing’s distance between these two economies.

Just a year ago - the latest date for which we have reliable unemployment figures by borough - the rate in Tower Hamlets was just under 16 per cent, in Newham almost 18 per cent, and in Hackney 23 per cent, some 2 or 3 times the total for London as a whole.

I am sure I am right to think that those responsible for leading these communities in East London would like to see more involvement by City institutions in the economic regeneration of their areas. I am sure they find it ironic, at best, and perhaps they would use stronger words, that the world’s most dynamic financial centre should be living cheek by jowl with some of the most deprived areas of the country, with some of the most intractable social problems, without the two seeming to be able to establish significant contact with each other.

Of course there have been strenuous efforts to establish such contacts. And indeed I have made some modest attempts to do so myself in the past. I think of the extraordinary efforts of Business in the Community, with their "seeing is believing" initiatives designed to take City leaders to see the problems on their doorstep, problems of which they would otherwise remain in blissful ignorance as they move West back home to Kensington every evening. Then there are the partnership schemes put in place by many institutions and by councils themselves, to link banks with particular schools or colleges.

At the Bank of England I was involved in the Hackney Partnership where we provided a Chairman of Governors for the Hackney College and worked with it in a number of ways. There are also mentoring schemes in place at the Bank of England, where staff develop relationships with sixth formers or college students to try to persuade them to think more seriously and practically about their careers, perhaps including one in a financial institution in the City. Because of course there are always two sides to any problem of alienation, in the Marxian sense. We will inherit some of those mentoring schemes in the FSA, and are committed to maintaining them. We will also be reviewing what else we might do to involve ourselves in our new local community, once we have managed to get our people down here.

Developing this kind of activity has required a considerable degree of effort in the past. It was especially hard at the end of the last recession. I know from my time at the CBI that companies needed some persuasion, at a time when they were, overall, shedding staff and encouraging early retirement schemes, that they should also be investing in outreach programmes designed to broaden the range of their future recruitment.

But I believe that we are now, both in the economy overall and particularly in the City, in a very different position. There are severe shortages in some parts of the labour market, there is evidence of inflationary wage pressure - something which the Monetary Policy Committee at the Bank of England has drawn to our attention recently. And the City is physically on the march into the Thames Gateway area, which gives an added impetus to efforts to establish tighter links between financial sector employers and communities in which they operate.

The eastward march of the City has been a somewhat chequered experience so far. Led by visionaries in the early stages - some of whose ideas were perhaps ahead of their time, and at various points in the past resisted by the City authorities - it has proceeded in fits and starts, with some dramatic reverses and bankruptcies along the way. But the trend is now well established, and I believe that today there is a much clearer perception, in the square mile and outside it, of the need for the City to expand beyond its traditional frontiers if it is to maintain its place as the world’s leading international financial centre.

It is a pity that that general perception was not shared at the appropriate time, by those who were responsible for planning and financing London’s transport infrastructure. Transport links are absolutely crucial for economic development.

A recent study by the Centre for Economics and Business Research found that the prosperity gap between the most economically successful and most economically deprived areas of Greater London is roughly twice as wide as that for equivalent locations in Paris. And it identified that differences in transport provision were the single most important factor behind this disparity in living standards.

My own view, and I have held it for a decade, since I ran the Audit Commission, is that one reason for this dismal record is the absence of a focal point to articulate the interests of London as a whole. So I greatly welcome the establishment of a City-wide Mayoralty.

Fortunately, we can expect the Jubilee Line extension to be open one of these years - just about a decade after redevelopment began seriously in Docklands. The impact could be dramatic. A separate CEBR study for Canary Wharf estimated that the six boroughs of Greenwich, Hackney, Lewisham, Newham, Southwark and Tower Hamlets should see a total of more than 120,000 new jobs created by 2005, most of them deriving from the beneficial effects of improved accessibility, growth in the London economy and the primary and secondary effects of activity in Canary Wharf.

I noted in my brief review of key success factors for London that the availability of appropriate property, at competitive prices, was high on the list. It is clear that the square mile could not provide an adequate supply of such property, without permanently altering its character, which could well put other of its competitive advantages - its compactness, human scale and village atmosphere - at risk. The developments of areas to the north of the traditional City - Broadgate and further north into Hackney, the opening up of the south bank of the Thames, the development of Wapping and the north bank of the river east of Tower Bridge, the dramatic reconstruction of Docklands, and particularly Canary Wharf, have together completely revised our view of what the City is, and our definition of London’s financial centre.

To consider simply Canary Wharf itself, there are now 22,000 jobs located on the Wharf, of which around 60% are in financial services businesses. And that is before the arrival of most of my 2,000 staff, the opening of Citigroup’s European headquarters which will employ a further 2,500 people, and the bringing together of the various headquarters of HSBC Midland early in the next century, with a further 8,000 financial sector jobs. By the end of 2002, the numbers employed in Canary Wharf will have roughly doubled in five years to about 42,000.

Now, as I have said, it would be unrealistic to think that all of these new employment opportunities will be available to people who currently live in neighbouring boroughs. Some of these jobs will be highly specialised and highly skilled, jobs which only people with doctorates in mathematics and an inability to communicate with their fellow human beings in any medium other than algebraic equations can fill. And there will be other jobs taken by Americans or other foreign nationals. That is the nature of an international financial centre. Three of the twenty most senior staff of the FSA are non-British. They and we regard that as perfectly normal - though it would be highly unusual for a regulator in any other jurisdiction - and a sign of London’s openness as a market place.

But it would be nice to think that this huge expansion of economic activity on the doorstep of the Gateway, so to speak, could also make a sizeable contribution to solving the economic and social problems here. And that it were possible to link more closely the aims of new employers here with the strategy of skills development in the Gateway area which is now underway. Employers here have, I am sure, no built-in bias against local recruitment. Indeed most employers seem to have a bias in favour of doing so. But they are also inclined to use traditional recruitment sources - employment agencies and connections with colleges and universities which may not necessarily be the best routes through which to find local recruits. And it may also be that some of those who handle the recruiting have, at the back of their minds, particular stereotypes of the sort of people for whom they are looking, which may not always match the social ethnic skill profile of local applicants. So there is work to do on the employer side.

In the Bank of England, we began to shift recruitment effort away from exclusive reliance on agencies and towards more direct and proactive seeking of recruits from particular colleges in local areas. This kind of proactive approach to recruitment is, I think, justifiable and necessary if we are to re-engage the City with its natural hinterland.

Your own - the Thames Gateway London Partnership’s - skills strategy does incorporate some aspirations targeted at financial centres. One element of the vision statement is that the area should be "a critical satellite area" for business and financial services, supported by the aim of building an effective, appropriate and competitive labour reserve to meet international standards. These are attractive aims from an employer’s perspective, but considerable effort will be needed if they are to be brought to fruition.

The Millennium solution to any economic and social problem these days usually incorporates the word partnership. It is in danger of becoming an overworked cliché and it is often used in circumstances where it is quite clear that the interests of the one partner are entirely dominant, where the other is only involved in the enterprise because he or she has access to the chequebook, and the funds to pay. In this case, however, the word may be more appropriately used. Because the interests of financial institutions reaching eastwards in pursuit of convenient business locations, with competitively priced high quality accommodation, a decent transport infrastructure and access to trained staff at competitive rates, are pushing them to think about developing closer relationships with local authorities and education providers in those areas. This is not, therefore, a one-way partnership ride. It ends, as I began, with naked economic self-interest.

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