The City in Crisis, day five: London vs rest of the world

James Moore discovers that reports of the capital's demise as a global financial centre have been greatly exaggerated – it's still No 1

To listen to the prophets of doom you'd think London's financial centre has had it as a force to be reckoned with. Beset with scandals and faced with a tough, new regulatory regime as a result, not to mention being roundly despised by a banker-bashing general public, the outlook isn't exactly cheery.

Then there is the country's still high 45 per cent top rate of tax about which many finance professionals, who can easily afford it, still complain bitterly.

This has fostered a narrative of decline with New York, Singapore, Hong Kong, and others poised to clean up on London's losses. There are figures to back up the case too. In a gloomy recent article, The Economist cited research from the CEBR, an economics consultancy, showing London's financial industry will have lost about 100,000 jobs by the end of this year from a peak of 354,000 in 2007. By comparison, New York's financial comptroller thought Wall Street employed only 20,000 fewer people than before the crisis.

And it's true that a number of big investment banks with sizeable operations in London are in full-scale retreat, notably Royal Bank of Scotland and Nomura, while others such as Deutsche Bank and Barclays are cutting back, having spent years expanding.

But that's not the whole story: the most up-to-date edition of the Global Financial Centres Index, a barometer which tracks movements in the competitiveness of 77 global financial centres, ranks London in exactly the same position which it held before the financial crisis, the Libor scandal and the perception of Britain as a nest of banker bashers: first.

In fact, in the most recent quarter, its lead over New York, the long-time No 2, increased slightly.

The index is not just a cheap survey. It is calculated by questioning 1,890 financial services professionals who provided 26,180 assessments of financial centres.

Interestingly, the past trend of huge leaps in the power of Asian tiger centres such as Hong Kong, Singapore, Shanghai, Taipei, Shenzhen, even Tokyo, stalled. All saw their scores dropping, although the report notes that respondents believe this may be temporary and the Asian financial hubs will roar back in the medium to long term.

Which necessarily doesn't hurt London at all, sitting as it does in a convenient time zone which overlaps with both New York and the emerging Asian powers.

London is also where New York banks still hold most of their non-US assets. Some 85 per cent of them, according to Paul Volcker, the former US Federal Reserve chief who drafted a key part of America's reforms to financial regulation.

The issue of regulation, and whether the new, get-tough regime in place since the crisis (with more to come promised by the Financial Conduct Authority) will hit London was recently addressed by the Parliamentary Commission on Banking Standards.

Justin Welby, the former oil executive turned theologian who is the current Bishop of Durham, was worried: "Historically, London was restored to its position as a major international financial centre essentially through regulatory and tax arbitrage in the early 1960s, with the opening of the euro-dollar market to evade certain issues in the United States.

"How much danger do you see of a seismic change similar to the reopening of the euro market if London had strict regulation through regulatory arbitrage of people just upping and moving?"

To which Mr Volcker replied: "The argument that you hear all the time is, 'Oh, we are all going to move to New York.' If you are in New York, you hear, 'Oh no, we are all going to move to London.' Those are the only two centres now that really have the capability, the size and the knowledge really to do this in a big way."

London's other advantages are also often undersold. Not just the time zone, but the "network" or "cluster" effect of having large groups of senior people all working in the same field available.

Said one banker: "That's key for us. In London you simply have the ability to access a huge range of senior, experienced people that aren't available elsewhere. Business services is a huge strength."

The cluster effect is also cited by City UK, which promotes the City's financial competitiveness, as a key selling point which isn't going away anytime soon.

The legal system, too, may be much derided. But unlike parts of Asia, the rule of law functions here and in a far less onerous manner than it does in London's other big rival, the US.

"Businesses in London's financial centre operate in a less litigious environment than in the US," says Maxine Cupitt, a partner at the City law firm CM Cameron McKenna. "Among other things this is because English law makes unsuccessful litigants pay their opponent's costs, there are limited circumstances in which shareholders can bring an action and keep the proceeds and, in the case of class actions, English law essentially requires that claimants opt-in (rather than opt out) of a class of claimants bringing proceedings and keeps an extremely tight rein on what is permitted by way of class action and how this is managed. English litigation procedure is also designed to require parties to seek to resolve disputes without recourse to litigation wherever feasible."

The way the justice system works for individuals is open to criticism: people who may have lost out over the Libor scandal are going to the US to seek redress because they fear that the UK system won't offer much. But it's good news for businesses.

So while rivals would dearly like to usurp London's position they aren't going to find it easy. It seems as though reports of London's demise as a financial centre have been greatly exaggerated.

And overall figures from Reuters, contradict the CEBR's bleak view. They show that the total UK employment of people engaged in financial activities, including insurance, was 1.28 million at the start of 2008. It was only down slightly to 1.23 million at the end of this year.

As HSBC's chairman Douglas Flint, pictured, says: "London has proven time and again its ability to adapt to changing global circumstances. This has been built on maintaining an environment that's conducive to international business, supported by robust regulatory architecture and underpinned by a legal system respected for its independence and fairness. For example, London's development of the global RMB market outside of greater China shows that it is still reinventing itself. This is crucial to its future success."