UK banking competitiveness being 'eroded', says BBA-commissioned report

The report, produced by a team led by former Financial Services Authority (FSA) chief executive Sir Hector Sants on behalf of the British Banking Association (BBA), said that "UK-specific policy and regulatory decisions" had begun to hinder the ability of UK banks to compete internationally. At the same time, new technology and the growth of Singapore and Hong Kong as international banking destinations was making wholesale banking activity more "portable", Sants said.

The report sets out 23 recommendations for the UK government, industry and regulators (56-page / 2MB PDF), intended to address what it identifies as eight "threats" to international banking in the UK. These range from a new high-level "vision" for international banking as part of the UK economy to regulatory reform, a phasing out of additional taxes on bank profits and reducing visa restrictions to attract skilled banking professionals to the UK.

"We have now reached a watershed moment in Britain's competitiveness as an international banking centre," said Anthony Browne, BBA chief executive. "The balance of push and pull factors, including tax and capital treatment, unilateral and extraterritorial regulation and overall uncertainty are weighing heavily in boardrooms across the industry. Many international banks have been moving jobs overseas or deciding not to invest in the UK."

"Our report shows we cannot be complacent. Wholesale banking is an internationally mobile industry and there is a real risk this decline could accelerate. We have to act now, together with regulators and government, to maintain the UK's leading position in the global competitiveness race and deliver the 'new settlement' outlined by the chancellor in his Mansion House speech," he said.

The report, produced by the Oliver Wyman consultancy in conjunction with the BBA, listed a number of "worrying trends" for investment banking, going beyond the worldwide decline in trade volumes as a result of changes to international regulation. It found an 8% in employment and 12% reduction in assets in the UK banking sector since 2011, at the same time as assets grew by 12% in the US, 34% in Hong Kong and 24% in Singapore.

One of the biggest threats to the UK's reputation was what the authors of the report described as the 'Wimbledonisation' of the banking industry, referring to a scenario where the biggest banks continue to trade in London but move their headquarters elsewhere. The report said that this would undermine the UK's ability to influence global policy on banking, at the same time as increasing the risks that credit or liquidity could be moved out of the UK if there was a repeat of the international banking crisis.

To address this, the report said that the UK needed a "sound global regulatory framework backed by consistent principles, rules and standards", with regulatory principles applied in a "predictable and proportionate way". This would require a "horizontal review" of the post-crisis UK regulatory regime, ensuring regulation was in line with and went no further than global standards and potentially the creation of a new independent body to take over the penalty and redress regimes from the Financial Conduct Authority (FCA).

The report also recommended that the government review its timetable for ending the bank levy, and reposition the new 8% tax on bank profits as a "temporary counterbalance to historically low corporation tax receipts". The new surcharge will be introduced from 1 January 2016 while the existing annual levy charged on the total value of banks' balance sheets will be gradually reduced. The current tax treatment of banks in the UK has encouraged them to "move activities to other financial centres, often back to their home markets", according to the report.

Government, regulators and the banking industry should also work together to promote the UK as "a centre for highly skilled banking employees and a driver of employment across the nation", according to the report. This could be done through both changes to the visa system for skilled workers, and to the tax treatment of those temporarily resident in the UK for the purposes of training programmes. More should also be done to support growth and innovation, particularly the role of fintech as "an increasingly critical part of the banking ecosystem", according to the report.