KEY POINTS:
Whenever the media pick up on a trend in financial markets, it is usually much too late.
This month, the New York Times ran a long article explaining how New York had surrendered its status as the world's financial centre to London.
Right on schedule, the very opposite
appears to be true.
After at least five years during which London pulled ahead as a finance hub, several catastrophic mistakes by the British capital are about to put that into reverse.
London has blown its lead. The way is now clear for New York to stage a recovery.
There is little question that London enjoyed higher status, and New York was starting to notice. MasterCard in June named London the top city for business, beating New York on four of six key benchmarks. A report in January commissioned by New York Mayor Michael Bloomberg and Senator Charles Schumer warned that the US city risked losing financial leadership to London. The trouble is, those reports are now history.
With a willfulness they might live to regret, the British have been busily squandering those advantages.
Here are four reasons why London has blown it:
First, tax.
Right now, it is open season on the rich. The Conservative Party recently proposed an annual £25,000 ($67,940) levy on non-domiciled foreigners who were previously exempted from paying British taxes on their worldwide earnings. That was such a hit in the polls, particularly as the money would be used to pay for tax cuts for the British middle classes, that it scared the ruling Labour Party into copying the move. It plans a £30,000 annual levy on foreigners who opt for non-domiciled tax status.
Even worse, changes to the rules on capital-gains tax will hit private-equity funds hard, replacing what was effectively a 10 per cent rate of tax on their profits with an 18 per cent one.
That sends out all the wrong messages. Although the UK now has relatively high taxes - the top rate on individual incomes is 40 per cent - it has been careful to protect its financial-services industry. No more.
The politicians have discovered they can squeeze the City, as the financial district is known, and win votes at the same time. They won't stop until they see real damage being done, by which time it will be too late.
Light-touch regulation was another key to London's success. That is also at risk. "The UK appears to be catching up with the US in terms of exposure to regulatory matters," said Chris Warren-Smith, head of international financial-services disputes at the law firm Fulbright & Jaworski in London.
And how about the city's reputation? There is still an argument about who was responsible for the collapse of mortgage lender Northern Rock. You could make a case for blaming the bank itself, the Bank of England, or the Government. You could even blame the media. During the US sub-prime crisis, the Federal Reserve managed to minimise the damage, while the UK witnessed the first run on a bank seen in a developed country in living memory. That hardly did London's reputation for financial stability any good.
Lastly, take a look at the quality of life. London has never been an easy place to live. Still, there are limits.
According to a study by keepmoving.co.uk, London is the slowest city in Europe. Traffic in the British capital moves at a sluggish 19km/h per hour. In Frankfurt, it whizzes along at more than 64km/h.
At the same time, Heathrow Airport is a disgrace: It has an estimated 20 million more passengers each year than it can handle. And the Underground? Don't get me started.
A city can survive one, two, perhaps even three negatives. But right now, the points against London are stacking up faster than the planes trying to find a landing slot at the airport.
New York has recognised it lost a lot of business and is fighting back. Maybe it doesn't even need to. London is intent on knocking itself out, and it may not be long before the investment bankers, derivatives traders and hedge-fund managers decide that maybe New York isn't so bad after all. It is safe and efficient, and taxes are at least predictable. And with the pound trading at more than $2, it is cheap.
Very little global financial business is in London because it has to be. It isn't serving the modestly performing British economy, which feeds off the financial markets, not the other way around. If the City suffers, so will the country. Right now, nobody is in the mood to recognise that.
