In a year dominated by Brexit, trade wars and global financial volatility, Duff & Phelps’ latest Global Regulatory Outlook (GRO) report found that London is no longer perceived as the world’s preeminent financial centre. New York has taken back the title according to our report, which surveyed over 180 senior professionals in financial institutions around the world.
Our analysis focused on the factors driving this change in perception amongst senior industry leaders, and how this dynamic could evolve in the coming years.
Brexit and London’s position
Each year, our survey asks respondents to choose the city they believe represents the world’s financial centre today and the one they believe will play that role in five years. The survey’s respondents were mostly from the asset and wealth management, private equity, hedge fund and banking sectors.
Comparing this year’s responses to last, we see the effects of both short-term and long-term global trends. In 2018, while Brexit cast a shadow of uncertainty over the UK’s economy, London was still perceived as the world’s No. 1 financial capital. This year, New York and London have switched places, as the share of those choosing London dropped from 53% in 2018 to 36% in 2019. New York is now seen as the world’s top financial centre by 52% of respondents; a 10% increase from 2018.
Since the EU referendum, the UK has at times been portrayed as an inward-looking nation. With Brexit undoubtedly influencing the future of UK’s financial services sector, London has remained distracted by domestic political affairs and has not yet managed to successfully communicate to the world that it’s still open for business.
Looking ahead five years, respondents’ confidence in London returning to the top spot does not improve either. Only 21% of respondents said that London would be the world’s financial centre in 2024. Confidence in New York’s ability to maintain its place falls slightly to 44%, with Hong Kong picked as the number one city by 12%, signalling the beginning of the “Age of Asia” combined with uncertainty in the outlook for the UK’s capital post-Brexit.
It’s also worth noting that a handful of other cities were named as the global financial capital of the future, including Shanghai (9%), Dublin (4%), Frankfurt (4%) and Luxembourg (3%).
These numbers are further proof of the combined effects of globalisation and Brexit, as the finance industry considers which financial centres to focus its time and resources on. The current Brexit uncertainty has cast a shadow over the UK’s world-class financial sector and its ability to dominate other major financial hubs in the coming years.
The cities that are increasing in global prominence all have three key characteristics in common: sophisticated financial infrastructure, stable markets and a skilled and dynamic workforce. Although, the survey shows that industry professionals expect to see Asian centres such as Hong Kong and Shanghai rise in popularity, it’s worth noting that respondents considered Australia and Malaysia to be strong contenders as well. This growth in Asian prominence has its roots in the 2008 financial crisis, which affected Asian centres far less than their western counterparts. These cities are telling the world that they are running – and open for business.
In the years since the 2008 financial crisis, regulatory compliance has come to play a larger role for financial institutions. UK regulatory standards have become much more complex – particularly for firms operating in multiple jurisdictions – and the frequency of enforcement action has increased.
Some of the most pressing issues facing the global financial community this year continue to involve anti-money laundering (AML) and industry conduct. These issues are a telling indicator of the pressures shaping the global financial landscape and are influencing activity in both current and future global financial hubs.
After a decade of changes in regulation and compliance, firms have become more sophisticated and diligent in their compliance and risk management efforts. The resulting changes we have seen have created a more transparent global financial system, but there is still much work to be done to combat AML, and more broadly, recover from recent and ongoing scandals.
There is a growing sense of regulatory fatigue that could be a contributor in London’s declining status. The reality is that many companies do not always perceive the changes arising from substantial swathes of new regulation as having a positive impact. Companies are still coming to terms with the cost and difficulty of widescale regulatory changes. The question, “What effect are the regulations having on our business and our ability to compete in the global market?” is still plaguing many professionals based in the Square Mile.
London’s financial centre outlook
London’s position has indeed slipped in 2019, but we at Duff & Phelps don’t expect to see London as a financial hub disappear. London’s highly developed, sophisticated infrastructure means that the city has everything you need to work in finance and offers so much in terms what most people want in their day-to-day lives.
The challenge of political and economic uncertainty remains, and it’s crucial that London showcases stability and predictability to firms. Political and market dynamics are exerting immense pressure on the global financial landscape.
Although London’s global financial centre status may currently be under intense scrutiny, the one thing that remains certain is that the global system is going through a geographic re-alignment that has only just begun. However, with change comes opportunity, and London can still demonstrate to the world that it remains a good place to do business, whatever the Brexit outcome.
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