Muddy attempts to predict Britain's financial future

Anthony Hilton
19 Jan 2010

There is a party in Drapers' Hall tonight to mark 20 years of the Financial Services Survey, the title of a regular look at the industry produced by the Confederation of British Industry and PricewaterhouseCoopers.

Unlike many so-called surveys which bend their interviewees' views to support the latest product the sponsor wishes to sell, this one actually reports and discusses what the respondents think. As a result, it has been right and first on some of the biggest issues and trends, and has a reputation for quality in what is admittedly a patchy field.

The anniversary is also a peg for a bold attempt at a 20-year forecast to try to look beyond the day-to-day issues to think instead where the industry will be in two decades' time.

Or at least that is what it claims to do. But there is a tell-tale familiarity with many of the points in the executive summary — for example that tax rises which appear to be politically motivated could damage London, ditto for excessive or inappropriate regulatory measures and the proposed EU Alternative Fund Managers directive which has so upset UK-based hedge funds and private equity.

Add the predictions that government intervention will continue, that financial innovation will be treated more sceptically, and that insurance will suffer as a consequence of significantly more onerous capital requirements, and what one has are the contents of the current lobbyists' handbook, not the crystal ball.

The other messages are slightly less naff, but only slightly. It says, for example, that global banking will continue to be dominated by a few large institutions with more international consolidation and with Chinese banks starting to make an impact internationally. Though it does not say so, there are five Chinese banks in London already and probably four more on the way.

Measured by market capitalisation, they are among the biggest in the world. But that does not mean they will be successful. Twenty years ago when this survey started, the Japanese banks were coming to London as the biggest in the world and they were widely expected to sweep all before them. It did not happen. They blew themselves up instead. The survey is, of course, too polite to say the same might happen to Chinese banks — though that is probably the way to bet. They were for years the worst banks in the world, with horrendous levels of non-performing loans until the frenzied clean-up of 10 years ago.

But last year they were the conduit for the biggest stimulus the world has ever seen when the Chinese government opened the lending floodgates to revive its economy. Once that stimulus has worked through the system and much of it has been shown to have been wasted, the enthusiasm for Chinese banks may have to be rethought.

The survey also says that UK banking could see the emergence of new competitors. But we do not need a survey to tell us that Tesco is coming in, that Virgin has taken some initial steps and that someone else will have an opportunity to get a foothold when Lloyds and RBS are forced to sell off branches on competition grounds.

Far more interesting but not mentioned is whether Zopa will continue to grow — it being an internet site that puts would-be borrowers in direct touch with would-be lenders so we don't need banks at all. It does not mention that it ought to be possible for all new issues to be sold online, so we don't need investment banks and brokers as distributors.

Nor does it even nod to the suggestion that stock markets, bond markets and a lot of over-the-counter stuff could easily be bought and sold on something like eBay, so half the City's infrastructure including the Stock Exchange would become redundant. Over a 20-year time horizon, this seems entirely possible to me. Indeed, the seeds are already there in dark pools and crossing networks.

These are not the only fundamental questions that need to be thought about. In his latest book, The Trouble With Markets, City economist Roger Bootle raises a host more. At a lunch yesterday hosted by the Centre for Financial Services Innovation think tank and lawyers Taylor Wessing, he made a distinction between economic activity which creates new wealth, and economic activity which redistributes existing wealth, and said that much of what the financial services industry does consists of the latter. This leads him to suggest that the financial services industry has got too large, and the country might well be better off if it were smaller so that some of the resources and brainpower it employs could be used elsewhere.

The survey had no views on something as heretical as that. Nor did it comment on another of his themes, which is that financial markets in their modern hyperactive state have a huge potential for instability. The cost of this instability falls on society at large, as we have just seen, and society might easily conclude that this cost outweighs much of the benefit it gets from financial markets.

How this plays out will have a huge impact on the shape of the financial services industry in 20 years' time, and would perhaps be a more fruitful avenue for discussion than railing yet again about Alistair Darling's tax on bonuses.