London has long been one of the world’s premier financial centres, but data suggests other cities are catching up fast. The government is rolling out reforms aiming to halt that decline, but critics argue they’re too timid and that Brexit has dealt a fatal blow.
Too little, too late to halt London’s decline as a financial centre?
London’s falling
The bad news just keeps on rolling in for the London Stock Exchange (LSE). Paris overtook London as Europe’s largest stock market in 2022 and has drawn further ahead in 2023.1 Moreover, large firms have started to question the advantages of keeping a primary listing in London. BHP Group Ltd, Ferguson PLC, and CRH, the world’s largest building-materials supplier, have moved their listings to the US. ARM Holdings, the UK’s biggest technology company, has also rejected London in favour of New York. 2
Decline predates Brexit
Some are quick to blame Brexit – that handy catchall scapegoat – for the LSE’s decline, but in truth it’s been going on for some time. In 1990, UK equities accounted for 11% of the MSCI World benchmark, with three UK stocks ranking in the global top 15 by market capitalisation. In 2023, the UK market accounts for just 4% of the world equity benchmark, while Shell, the largest stock, ranks only 38th in global market value, according to an equity analyst writing in the Financial Times (FT). 3
So, what’s gone wrong? According to that same analyst, the biggest culprit is a ‘giant’ shift in institutional asset allocations, with domestic pension funds and insurance companies dramatically cutting their weightings in UK equities. Whereas these institutions owned more than half the market in the 1990s, they now own just 4%.
The decline in allocation reflects the long period of low interest rates and the equity bear market of the early 2000s. As asset valuations collapsed, liabilities rose, bond yields fell and pension-fund deficits soared. Liability-driven investment strategies, which invest in assets that can generate the cash to pay for current and future financial obligations, surged in popularity. Consequently, pension funds sold their equities and moved into gilts and other areas such as real assets, which includes the likes of property and infrastructure.
The largest stock exchanges in Europe by domestic market capitalisation ($ billion), June 2023
FX competition heating up
London remains the largest foreign-exchange (FX) trading centre, but its grip here is slipping too. London’s share of the global market dropped to 38% in 2022, from 43% in 2019. 4 The government has responded to the threat to the UK’s financial services sector – which is vital to the UK’s economy, contributing £216 billion a year – with promises of deregulation. 5
The measures, announced last December and known as the ‘Edinburgh Reforms’, are designed to ‘unlock investment and turbocharge growth’ by repealing ‘burdensome pieces of retained EU law’. They include reforms to equity capital markets and changes to Markets in Financial Instruments Directive 2014 (MiFID II), which has been ‘disastrous for company access, market efficiency and investors alike’, according to one analyst. 6
The measures are designed to boost the UK’s appeal amid growing competition from cities such as New York, Frankfurt and Paris. However, sceptics about the UK’s ability to overcome this competition abound. Writing in the Financial News, long-time financial journalist David Wighton, for example, argued:
‘Most of the Edinburgh Reforms are uncontroversial or very modest, were in the works already or were just vague promises of changes to come. Yet when ministers met stiff resistance from regulators over the proposal to give the government the power to overturn their rules, what happened? The government caved.' 7
Others believe that the Brexit vote spelt the death knell for the financial services industry in the UK. Guy Hands, head of the private equity group Terra Firma, has argued that the Edinburgh Reforms wouldn’t be enough to overturn the overall impact of Brexit on the City. The Financial Times (FT) quoted Hands as saying:
‘The decline of the City of London is inevitable and was completely predictable. While people can disagree about the speed of Britain’s likely financial and social decline, the vote in 2016 [has] set Britain off in a direction that will be very difficult to reverse. The City of London will be one of its first victims.’
However, not all the data supports that view. Ernst & Young Global Limited (EY), for example, says that:
‘The UK continues to be Europe’s most attractive location for foreign direct investment (FDI) into financial services, according to EY’s latest Attractiveness Survey for Financial Services. The UK attracted 76 financial services projects in 2022 – an increase of 13 projects from 2021 – and has extended its lead over second-placed France, which secured 45 projects in 2022 – 15 fewer than in 2021'.7
The truth is that it will be a few years before we know whether the Edinburgh Reforms prove effective in reinvigorating the UK’s financial services sector.
1 https://www.bloomberg.com/news/articles/2023-03-22/london-stock-market-is-now-250-billion-smaller-than-paris
2 https://edition.cnn.com/2023/03/10/investing/london-stock-exchange-future/index.html
3 https://www.ft.com/content/d0ac7dc2-d059-4271-934c-81cfaaa95ff7
4 https://www.bloomberg.com/news/articles/2022-10-27/london-is-still-world-s-biggest-fx-trading-hub-but-grip-slipping
5 https://www.gov.uk/government/news/edinburgh-reforms-hail-next-chapter-for-uk-financial-services
6 https://www.ft.com/content/c446fae9-e36c-44e2-8c43-b3077dc3caa2
7 https://www.reinsurancene.ws/uk-remains-europes-most-attractive-spot-for-financial-services-investment-ey/#:~:text=According%20to%20EY's%20survey%2C%20The,secured%2045%20projects%20in%202022
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