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How will London stay ahead of the game?

3rd March 2008

Jonathan Djanogly MP speaks to the US Monday Luncheon Club.


London is undeniably now a major if not the location of choice for global financial services - this is the City where it is all happening. At least, where it was all happening until the Chancellor got over excited in proposing taxes for non domiciled UK residents - but more on that later. The London Stock Exchange has become the World's primary centre for equity capital, raising £26.5 billion through IPOs alone in the last year, £11.5 billion of which was raised through international IPOs. The number of international companies joining the main market almost doubled in 2006 with some 139 international companies from 25 countries joining the main exchange and expanded again last year albeit more slowly.

The secondary AIM market has also attracted a huge amount of new business from all over the world. From humble beginnings in 1995, with just ten listed companies, AIM has grown to become one of the largest markets in the world in its own right. Last year AIM companies raised around the same amount as Nasdaq and substantially more than major exchanges in Frankfurt, Tokyo, Toronto and Sydney. The total value of shares traded on AIM in 2007 was £75 billion; up more than 29.3 per cent on the comparable figure for 2006.

In addition, a large number of support services such as lawyers and accountants thrive in the City. London has become a magnet for many of the brightest people from all over the world... just look around this room.

Of course, as with the global economy things have tightened in the UK over recent months - but the same is true in most other countries.

However, now is certainly not a time for the UK to be complacent about our success. A number of economic trends are altering the global business environment and the growth of emerging economies (not least China and India) present a challenge as well as an opportunity for London. There are also internal forces and developments within the UK and the City itself that we must be aware of and respond to, if London is to continue to prosper. And in all these areas - events in recent months give me much cause for concern.

Corporate Governance

It is important for London to recognise its strengths and work at maintaining them. For example the UK's "light-touch" regulatory approach is recognised as key to attracting international businesses to London. Britain is now generally seen by international investors as a more welcoming regulatory environment than the United States, especially since America passed the Sarbanes-Oxley and USA Patriot Acts. But business sentiment can change quickly. When I joined the City in the 1980s - the talk then was of Frankfurt overtaking London. The UK is consistently the clear leader in global corporate governance rankings and our regulatory standards are ones to which many foreign companies apply - but this position needs to be worked at.

Recently, critics in the US have attacked the UK AIM market for operating like a "casino". Of course, this hugely underestimates the subtlety of the AIM market which does not provide for no regulation, but rather allows companies to put in place a corporate governance regime which is adaptable and which can be moulded to the requirements of the business concerned. In the UK, corporate governance would normally provide the means whereby dispersed shareholders can keep an eye on the Board - but in other European countries it might provide the counterbalance for a handful of very powerful shareholders not to subvert the board. So to assume that all corporate cultures require the same governance requirements is simply not realistic.

To date the impetus for corporate governance development has been led by UK and the US institutions, resulting in a ratchet effect between the UK and the US. However, we now seem to be entering a period of reflection (particularly in the US) as to whether we are heading in the right direction. Countries which are members of the Organisation for Economic Co-operation and Development (OECD), and who are implementing corporate governance standards, are considering the extent to which they wish to follow UK and US models or develop their own frameworks, which may not be considered adequate for UK and US investors. This, I think is, one of the most significant areas for corporate governance policy development and I cannot yet say for sure how it will work out. But what I can say is that generally speaking, the UK "comply or explain" model is working pretty well, since its inception a few years ago, at providing a balanced and adaptable approach which is proving attractive to non UK/US companies looking to raise funds from UK/US institutions.

But as between the UK and the US, the recent NASDAQ bid for the LSE fuelled speculation, and no little concern with me, that US SEC rules could be applied in the UK markets. However, the UK government to its credit responded quickly by producing urgent legislation to create a legal ringfence around the City, designed to protect the competitive advantage that London derives from its light-touch regulatory regime. The principle was clear and, by the way, agreed by my Party with the Government, that politically we have no problem with foreign ownership of the Stock Exchange. Indeed we wish to have none of the barriers to ownership that non-US companies would have in purchasing the US exchanges. Where we do have a problem politically is in terms of any threats to our regulatory environment - because that goes to the heart of our competitive positioning.

But the decision that the Government showed a year ago has now disappeared since the change of Prime Minister and the best phrase I can use now to describe them are ditherers.

So what are the main threats to the UK?

1. Level of tax and regulation
To whatever extent New Labour forged relationships with business - the romance is now over, such policies as, ill thought through changes to corporation tax last year, the proposal to end taper relief on capital taxes and almost doubling the capital tax rate for business sales are all destroying Labour's credibility with business.

Remaining flexible and retaining an ability to respond to the changing requirements of rapidly evolving markets will be vital. This will require ongoing vigilance, not only from the SEC, but also from Brussels which continuously eyes up and tries to regulate British business - not least - the less onerous corporate governance regime of the Alternative Investment Market. Also, I fear regulatory pressure from this Government which frequently gets carried away on the regulatory front.

2. Trade Unions
One influence consistently calling for more red tape on companies is the trade unions, a powerful and vocal force within the Labour party. By way of background, let me explain that by 2006, Labour received over 70% of its donations from the Unions as its business backers dropped out.

The Trade Unions do not donate such significant amounts of money to the Labour Party, without expecting anything in return. The 'Warwick Agreement', agreed between the Labour Party and the Unions in July 2004, saw the Labour Government make over 60 concessions to the Trade Unions, including the watering down of anti-strike legislation and Government funding for some Union operations and a host of employment legislation. In return, the Unions agreed to provide funding for Labour's 2005 General Election campaign. The same negotiations are now going on for the next election; under the heading 'Warwick II'. Only a week ago, a huge union led Labour backbench rebellion has forced the Government to review its previous opposition to increasing employment rights for temporary and agency workers. If the Government caves in on this - the UK's flexible labour market will be made significantly less competitive.

The nature of the Labour Party's funding has completely changed in the last few years. Its collapsing membership, and rapidly disappearing base of new Labour entrepreneurs has resulted in the Labour Party becoming ever more dependent on trade union funding. My opinion is that, there should now be more transparency, better accountability, increased openness and annual union votes in relation to such donations. If this trend is to continue, with trade unions demanding that the Government legislate according to the unions' agenda, then this could have a serious detrimental effect on investment in this country.Next week for instance, I shall be opposing another union led private members bill - this time calling for the employee Transfer of Undertaking Regulations to be extended to share acquisitions - and so it goes on.

3. Infrastructure
London's infrastructure needs improvement if we are to stay competitive. Much of London is old - the public transport underground system for instance - prices (including housing) compared to most other cities are high and crime is a problem. These are practical issues, which are important to why you and your families actually wish to live here as much as work here- it is important we improve these. Here the impetus of the Olympics should be of help if handled well - and I am sure that our Boris Johnson can only do better then the current mayoral incumbent.

4. Private equity and hedge funds
We must also be mindful of developments within politics, and my example here would be private equity funds. In recent months this industry has faced the full glare of the media spotlight, and much of this has been unsympathetic. The press has often compounded the negative image originally propagated by trade unions and now generally picked up by the left by repeating normally inaccurate assertions about the special beneficial tax treatment that private equity receives, the lack of transparency and concerns about regulation.

It is surely right that private equity firms should look to adapt their business models in ways that emphasise their positive potential as a good force in society and with greater transparency. But the negativity and thoughtless nature of the attacks in the US as much as the UK have been staggering. In the UK, 1,500 companies were financed by private equity in 2005 with 20 deals of more than £250 million. In 2006, some $45 billion of deals were announced in the US.

So from a UK viewpoint, changes should be made with great care so as not to send this industry overseas - particularly if the US Congress is to pass its Bill increasing tax on private equity and hedge fund managers' earnings. The recent spate of very large buyouts is a relatively new phenomenon in the UK - and this has significantly increased the profile of private equity in terms of its association with popular brands - but also with large unionised work forces and much higher levels of debt (at least until the "credit crunch"). I have no doubt that solving the carried interest tax issue will not in itself lessen the political attacks on the private equity industry and that a more public focused, transparent, corporate governance type structure will be required. To those who simply say that because a company does not offer shares to the public it should not have to publicly report - I say - you simply don't get it. Responsible Business or Corporate responsibility is a key issue and the question is whether business is going to take this into its own hands or just wait for government to legislate.

The low profile closed door culture of many private equity firms and hedge funds nowadays, like it or not, frequently results in an assumption that the firms are secretive and cannot be trusted. This problem will I believe only be overcome through greater transparency and disclosure, positive engagement in society as a force for good and better communications. Private equity firms need to state their business values and raise their profiles in what they stand for and what they do. They also need to state clearly their approach to management and restructuring of company assets in ways that do not suggest that they will not care about employees and communities affected by change.

Global economy

Looking at the wider issues; clearly the global economy is going to go through a rough patch over the next year or two. The news coming out of the US last week was not good - with continuing sub prime fallout, huge increases in home repossessions and inflationary pressures - rising oil prices and a weakening dollar against the Euro - leading some to question the possibility of stagflation in the US.

UK economy

The knock on implications for the UK are almost inevitable. We start from what is an exposed position; with poor public finances, overextended state borrowing, banks cutting back on mortgages and business lending, relatively high interest rates and high taxes - giving the Government less room for macro economic remedies than exist in the US. The inflationary pressures are growing and the one lever remaining will be higher taxes - or possibly more redistributive taxes. Frankly, I can't see why a government that can nationalise a bank should worry too much about tax soaking the rich.

Clearly the non-dom tax issue has been a disaster in its handling, presentation and consultation. I appreciate that there are particular problems for US non doms - if a US tax offset deal cannot be reached. Given the lack of thought that has gone into this, I do think this proposal should be delayed until its implications can be worked through. The Government took the Conservative Party's £25,000 no questions asked proposal - and turned it into a Pandora's box of disclosure, retrospective effect and complexity. Having spoken to scores of non-doms in recent weeks however, I do think that this is actually a trigger issue rather that a causation issue for non doms leaving the UK. In effect, the underlying worrying issue is the growing numbers of the international business community who have a lack of confidence in Britain as a place to do business and/or invest over the next few years. This is an indictment of this Government's economic policies.

Good government

I think it important here to make the point that good economic, or political, government is much more than just about having the right policies - as important as that is. It is also about perception and stability. Being able to show government for the longer term - giving business the confidence to invest in this country. This is what is now lacking in the current government. Proposals are now being rushed out for political reaction or effect rather than for economic stability reasons and implementation is becoming increasingly muddled and inconclusive.

Just look at the Government's handling of the Northern Rock bank saga. They dithered and turned down an offer last autumn for Lloyds TSB which involved a rescue in return for £ 30 bn of taxpayer guarantees. They then failed to get the top banks to mount an old fashioned rescue operation on the quiet or the bank to lead a reconstruction exercise, they then messed up a private sale process and then they endlessly dithered over nationalisation. Queues of panicking depositors made the UK look more like a banana republic than the biggest financial centre in the world and the damage to the reputations of the Treasury, the Bank of England and the FSA are yet to be assessed.

To add insult to injury, a couple of weeks ago, having given private companies months to undertake due diligence, I and other legislators were given just 2 days notice by the Government of the proposed purchase by us (on behalf of the tax payer) of a bank with £115 bn of liabilities - with no due diligence offered. Indeed it only came out at the end of the nationalisation process that the best part of the loan book had been hived off to another company. We were offered no advice from bankers and were simply asked to rely on ministers' assurances - the same ministers who had got it wrong so often before. This, ladies and gentlemen, is no way to run an economy.


London's reputation as a leading financial centre means a great pool of talent has gathered here from around the world. Indeed London was ranked in the 2007 Global Financial Centres index as the No. 1 financial centre in the world. However, London's future competitiveness as a financial centre will rely on its continuing to attract highly skilled workers, from the UK and internationally and also foreign companies wishing to use their services. For that to happen - we will need to tread very cautiously in terms of adapting and enhancing - but not suffocating the competitive environment which we have to offer. Moreover - given recent events and uncertainties we need urgently to re-establish our reputation for steady government and economic stability.

Jonathan Djanogly MP

Shadow Minister - Corporate Governance

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