Singapore and Hong Kong are the Asian cities that for decades have been cited as the near perfect examples of modern successful economies – places with a dynamism and work ethic that we tired old people in the West could never hope to emulate.
Similarly the typical reader might not have realised that today the world’s biggest taxi company, Uber, does not own any taxis. The world’s biggest retailer, Ali Baba (not Amazon) does not own any shops. The world’s biggest media company, Facebook, does not generate any content. The world’s biggest hotel company, Airbnb, does not own any hotels. These are technology companies which have seen the business world differently and transformed it. They are the reason management consultants McKinsey suggest that over a quarter of the business models currently used by rms will be obsolete within five years.
Put these two thoughts together, and a third and even more surprising thing becomes apparent: it is not financial services which is driving the London economy. Rather the jobs growth is coming from the digitally driven explosion of activity known colloquially as fin tech – which is a blanket term for the harnessing of technology to traditionally financial activities. Heavily concentrated around Old Street and neighbouring Shoreditch in East London fin tech has in the years since the London Olympics seen the creation of more new jobs in those post codes than in the whole of Birmingham, Manchester and Leeds put together. It has put on what the financial sector has lost.
Meanwhile, a few paces south in the financial sector, insurance and fund management are both moving forward but neither is enjoying a boom. The fund management industry faces massive compliance and regulatory disruption as it adjusts to what is known as MiFID II. This is an initiative designed to make markets safer and more attractive to investors, but which in so doing demands fundamental changes in the asset managers’ business model.
Meanwhile insurance is struggling against years of downward pressure on premiums, a massive increase in regulation, and the huge difficulty of making a worthwhile return on its investible funds. Elsewhere advisory work is flat and even an improvement in stock market volumes has not brought forward many new listings or a resurgence of bids and deals. Finally bankers still struggle to find a business model which works for them in a world of near zero interest rates and a mountain of new regulation.
Yet in spite of all this, if people are asked what they think is the City’s greatest challenge their minds automatically turn to Brexit, and the degree of disruption and dislocation which might follow when a deal is eventually struck between Britain and its EU partners. Will it be business as usual? Will firms have to relocate their headquarters to demonstrate that they remain firmly inside the European Union? Can London continue to be Europe’s financial centre if it stands outside the block? All these questions demand answers. The uncertainty of the wait is eating away at confidence.
But perhaps we are obsessing with the wrong thing here. Even though the issue of EU access is profoundly important perhaps it is not the real challenge because the risks of adjustment will come within Donald Rumsfeld’s classification of known unknowns. What is far more worrying are the uncertainties which come from unknown unknowns. What should give sleepless nights to the executives running City firms is the fear that up in Old Street there is a bright young computer whizz who is about to do to their business what Uber has done to taxi firms.
What will determine the City’s fare are two things. The first is whether it can successfully embrace technology even when that will fundamentally change the nature of the business; many big banks fail to do this because for 90 per cent of the employees fundamental change is a threat which they resist, while for the business as a whole it means sacrificing what they know works for them to gamble on a quite different and inherently uncertain future.
The second challenge is regulation. It is no surprise that one reason financial sector shares soared in America following Donald Trump’s election victory was the hope that he would lighten the burden on banks. But the bigger issue is how regulation generally underpins the status quo and mitigates against innovation.
This is particularly the case with data driven initiatives and it should be a warning sign to the West that the big financial institutions in China are developing customer products which could not be developed, let alone sold here, because they would fall foul of privacy and data protection laws.
So there is at least a danger that the cutting edge of innovation will move to Asia where they worry much less about some things, and once it has fallen behind London would find it hard to catch up.
And that surely is the real challenge to London’s financial services industry. Brexit is a risk but Brexit is just for Christmas. The digital revolution is for life.
Author, broadcaster, journalist and lecturer, Anthony Hilton joined Fleet Street in 1968 as a trainee on The Guardian. He was City Editor of The Times (1981 to 1983), City Editor of The Evening Standard (1984 to 1989) and in 1989 became Managing Director of The Evening Standard. He held that post for six years before returning to the City Office as Editor in 1996.