What Works: Success in Stressful Times. Hamish McRae
earlier, the centre of the earth for finance. The difference is that this time it is foreigners as much as Britons, and foreign money rather than British money, that have driven it to this position.10 This has led some to suggest it has been a Faustian bargain. The benefits may be obvious-not just the wealth and employment the industry generates but the intangible advantages of being the most important single place choreographing the process we call globalization. The costs-the loss of national control of a key industry and the heavy reliance on a single industry-must raise concerns.
The downside of the Faustian bargain became particularly evident after the collapse of confidence in international financial markets in the autumn of 2008. London was as hard hit as anywhere, though it is worth noting that the principal problems arose in the USA rather than the UK and that within the UK it was the two banks headquartered in Edinburgh, not London, that were hardest hit.
The damage to the global financial services industry was severe and it will take the best part of a decade to reconstruct the industry. As far as the UK is concerned the globalization of financial services has enabled the country to gain international influence in exchange for the loss of national power. Until the autumn of 2008 London’s financial services industry had been one of the great beneficiaries of this phenomenon as well as a driver of it. I am pretty confident that in the medium term it will retain that role, as it has done in the past when faced with equally severe challenges. But, as we have seen, the interaction between globalization and finance does mean that while there are lessons in the City’s success story, there can be dark twists to it too.
2. WHAT ARE THE LESSONS?
The lessons come at three levels. The simplest, and the one most closely studied in places as diverse as Dublin and Dubai, is how to create an international financial services industry. The second is how people interact to create a lasting marketplace that is flexible to new demands yet carries on a set of core values that are passed like a baton to the next generation. And finally there is the broader impact of the financial services industry and in particular how, in the case of London, it is associated with other aspects of the economic success story in the south-east of England.
As far as the first is concerned, consider the parallel with the motor industry. If a country wants to start a motor sector from scratch, it either encourages some of its existing industrial companies to set one up or it goes and gets in foreign companies to do it instead. South Korea took the first path; Slovakia the second. You just need expertise, which you can buy, and reasonably cheap labour. But with finance things are more complicated. Why should international financial organizations come to a new place to set up a business? How do you develop the pool of talent? It is much easier to build a motor industry or indeed lose one to foreign competition, than it is to build and retain financial services. A car factory is a car factory; a financial centre is a complex web of different skill-based businesses that takes years to develop. That is one reason why London has fought off challenges from other European centres, such as Frankfurt and Paris.
So the base of skills in London is deeply embedded. But the City has done something more: it has become a magnet for skills too. Indeed had London financial institutions just managed on the available pool of British workers, the City could never have succeeded in the way it has. It has imported talent at the highest level from all over the world. How? Well, of course, the answer is partly about money:11 an international financial post in London pays, as a rough average, double the rate for the equivalent role in Paris or Frankfurt. At the top skill levels the disparity is even greater. In some specializations, though not all, the London pay package is larger than the New York one.
But it is also culture-the open attitude to foreign talent. This goes back centuries: most of the top merchant banks of the nineteenth and twentieth centuries-the Rothschilds, Schroders, Kleinworts and Warburgs-were founded by people from the Continent. Go to the huge Reebok health club at Canary Wharf and listen to the cacophony of foreign languages and accents.
The City is also open to Britons of modest background and education-there is no ‘credentialism’. Even now, many high-earners in the dealing rooms and insurance markets have not been to university. There is a long tradition of that open attitude. For example, both my grandfathers had modest starts in life: one was the son of a Highland Scottish shepherd, the other came from a poor family in the East End of London.
The first question, then, for any budding financial centre is how to attract the people. Getting financial capital is easy: you give tax breaks to companies. Getting human capital is much more complicated.
People are the key to building a financial centre. They are also the key to its survival down the years. Somehow each new generation has to take on the ethos built up by the previous generation-or at least the positive aspects of it-and modify it to fit new conditions. There are fascinating similarities between people in the City now and those a generation ago. Most obviously money is a powerful motivator, but it is not just that. Money is a way of keeping the score-it says how good you are-and successful people are hugely competitive. But there are also social limits to competition in this business, for people have to play in teams; loners do not do well. Sustained success is achieved partly by competing, but also by co-operating.
A further element for lasting success is effective regulation. Even ahead of the current crisis London has had its regulatory failures: in banking the collapse of Bank of Credit and Commerce International;12 in pensions the stealing from workers by Robert Maxwell;13 and in insurance the near-collapse of Lloyd’s of London.14 We now know that the changes to the system put in by the Labour government of 1997 at best failed to insulate London from inherent weaknesses in the international financial system and at worst contributed to the failure. On the other hand the model adopted by the British authorities for the rescue of the banking system worked comparatively well and became a model for bank rescues in other countries.
But to see the City through the prisms of regulation and rescue seems to me to be a narrow and distorted way of looking at the place. In any case banking is only one part of the financial services industry, albeit an important one, and over the years London’s regulatory advantage over New York has encouraged most major US banks and securities houses to base their international business there. As for Tokyo, its obstructive system is one of the reasons why it has failed to become a truly international centre, as many had expected back in the 1980s.
Regulation is only a means to an end. That end is to have efficient, open and transparent markets. And arguably London is able to get away with lighter regulation because it has managed, compared with other centres, to sustain a reputation for fundamental straight-dealing through many incarnations of regulatory environment.
I do not think anyone fully understands how this spirit endures down the generations. There must be some element of peer pressure to do the right thing. There must also be a continuing climate of openness-of looking to the world rather than just to the UK or to Europe. But I think the strongest glue holding the City together over time is simply the profound embedded appreciation of the power of the market. Do not over-intellectualize. Respond instead to whatever the market signals that people want and then you will make money. And by making money you will have served a social as well as an economic purpose.
This may be a bit idealized-a vision of City aspirations that is, for many workers in the financial services industry, a long way from their own experience. There are plenty of greedy people in London, quite a few crooks who will manipulate markets to their own advantage. There has been quite a lot of insider dealing and, as we are now well aware, quite a lot of excess. To many people this is distasteful, and even enthusiasts for the City would have to acknowledge that these excesses undermine both its reputation and ultimately its performance.
But there is no denying that it has brought home the bacon for the economy of the capital and the south-east of England. Inner London is the richest place in Europe in terms of GDP per head.15