Financial centres: Cities stand on verge of new era

Today’s global economy will increasingly be dominated by cities – including major financial centres – according to former French prime minister Dominique de Villepin, who recently addressed a private equity symposium in Geneva, organised by family-owned investment firm ACE & Company.

“You have to take into account that a big city today is somewhere where big decisions are being made so businesses have an interest in being there,” says Mr de Villepin.

The ex-politician predicts a return to the 16th Century system of city states, when the likes of Venice and Rotterdam once prospered.

“Cities will have their own legislation, their own rules and the ability to answer the key issues of today, providing social assistance and education, so that this is a good place to be.”

A handful of five or six financial centres will be vying for banks to relocate and for companies to list there, he believes, with each city-based institution spreading its tentacles globally through an efficient network. 

“The strategic vision of where a company is located is very important to its success.”

BATTLE LINES DRAWN

This future of a cut-throat battle between financial centres was described by Amin Rajan, head of the Create asset management consultancy back in 1989, in a research paper for the City of London titled Create or Abdicate. This was written at a time when the European Commission was anticipating Frankfurt and Rome would be the continent’s key banking centres, with Amsterdam overseeing insurance and Paris taking care of bonds in a proposed single market for financial services. 

But the reality, dawning at a crucial time when finance centres could benefit from a combination of shifts in globalisation, securitisation and technological progress, ended up strikingly different.

“We argued that if a city can enhance its talent pool, it will remain number one, but if not, it will lose out to other financial centre,” he says.

Unlike Frankfurt and Paris, London took this quest for financial dominance seriously, with the heads of HR departments from 17 banks coming together to plot a strategy to improve the city’s skill-set, recalls Mr Rajan, who worked closely on the project with Rhiannon Chapman, then head of personnel at the London Stock Exchange and later chief executive of the Industrial Society.

This working party identified the need to attract recruits with skills to engineer innovative financial products, together with selection of a new generation of leaders to change the city’s old-school mindset for the modern, post-Big Bang era. This meant injecting employees in staid institutions with more of a self-employed, entrepreneurial mindset.

“The premise of our research was, do we create the necessary stock of skills, or abdicate our leading position?”

The group concluded financial centres with a more diverse population of recruits were more likely to succeed. “We found that diversity is the root cause of innovation,” says Mr Rajan. “We told bankers to stop cloning themselves when they do their recruiting. If two people are similar, they have nothing to offer each other.”

This agenda was quickly taken aboard by London’s institutions, he says. “Other financial centres were not doing anything. Frankfurt expected the European Central Bank to come there, which added a few local jobs, but did nothing to improve the status of their city.” 

Only those centres which carry on thinking strategically will prosper, believes Mr Rajan. “London turned from a mediocre city to a global financial centre, number one in insurance, number two in asset management and second biggest in investment banking,” he says. These skills must be regularly replenished to maintain this position.

“Up to 40 per cent of the market in asset management will come from big ticket, high alpha strategies by the end of this decade, up from 14 per cent today. This needs the right bench strengths, leadership and business strategy,” says Mr Rajan. 

During the run-up to the UK’s EU referendum, he was extremely concerned London’s decades of hard work would go to waste in the event of Brexit, fearing Europe “will do to London what China is doing to Hong Kong, reduce it to second class status”.

Bankers agree London has succeeded as Europe’s pre-eminent financial centre due to its superior skill-set. “We need to focus on the importation of human capital, those people who show up almost by chance and become great entrepreneurs and captains of industry,” says the Canary Wharf-based boss of a major private banking operation.

“There are plenty of people in London who have arrived in this way and become incredibly successful, with a good effect on the economy. This must not go away.” 

NEXT BIG THING?

Paris has potential for growth in asset management, with expertise in similar areas to London, but lacking the necessary depth, believes Mr Rajan. 

While central European capitals such as Warsaw and Prague offer “plenty of scope for the back office”, he singles out Dublin and Luxembourg for their forward thinking. The Irish capital has created “its own equivalent of Canary Wharf”, boosted by the arrival of American long-only and hedge fund managers keen to passport their funds into the EU.

“Dublin has the depth of skills, having invested a lot in education and training,” says Mr Rajan.

“Luxembourg will continue to expand. There is a real trust out there for Ucits products,” which must continue to penetrate Asia and Latin America in order for the Grand Duchy to succeed. “Many of the buildings I see in Luxembourg on each visit were not there last time.” 

All European financial centres are looking at how to become more efficient, says Luigi Pigorini, CEO of Citi Private Bank for the Emea region. This is particularly true for Geneva and Zurich, which are burdened with huge Swiss franc operating costs, he says, with back office and technology roles increasingly transferred to Dublin, Belfast, Warsaw and Israel.

“If banks can reduce their cost-base by transferring lower skilled jobs to lower cost-based countries, they will do it.”