Outlook Over the past few years, I have written repeatedly about my fears for the future of the City. These concerns have been further enhanced by the banking crisis, during which the City's halo as a place for international finance has not so much slipped as fallen to the ground and been trodden into the mud. The Government has won political plaudits around the world for the eventual boldness of its plans for dealing with the meltdown in credit markets, but the same is not true of the financial markets themselves, where there is growing alarm that a previously non-intrusive approach to banking and finance is being replaced with an exceptionally heavy handed one. Even before the banking crisis hit home, London's position as the world's pre-eminent financial centre was already beginning to slip. At the edges, there was a growing loss of competitiveness which was starting to drive financiers and international capital into upstart centres in Asia and the Middle East.
From Northern Rock onwards, this process has accelerated. For a long time, it seemed to be government policy to encourage the City, a rich source of wealth and tax revenues. Now the Government seems to have joined the mob in wanting to kill the goose now thought responsible for the current bust. A couple of recent instances serve to illustrate the seepage of international business now taking place. One concerns what is only an idiosyncrasy of UK insolvency law, yet it is having a pronounced effect all the same.
Clients of the US side of Lehman Brothers, which has been put into Chapter 11 bankruptcy, have found it easy to access and reclaim their assets. This has not been the case in the UK, where administration has frozen all assets in the system. This includes the Chinalco stake in Rio Tinto, which was held through a custodial account. This has infuriated the Chinese, who are unlikely to use London for custody again. Equally disturbing is the fate of the Olivant stake in UBS, which was again held through Lehman's, but on a "rehypothicated" basis that allowed Lehman's to use the holding for stock lending and other purposes. This may make Olivant no more than an ordinary creditor in the administration and therefore highly unlikely to get its money back.
Use of anti-terrorist laws to freeze Icelandic assets in London, though possibly justified on grounds of the losses suffered by British depositors, has set alarm bells ringing among international investors. If Russia had done the same thing, it would be criticised by Britain for arbitrary use of power and the betrayal of inter-national capital. Yet here is the UK doing what it would condemn in others. Light-touch regulation is widely considered to have failed, yet if the heavy-handed approach which now looks destined to replace it drives away the international capital which has been the lifeblood of the City and the British economy, it won't be counted as much of a success.