Jeremy Warner's Outlook: The City is consolidating its global lead, despite everything the Chancellor throws at it

Showing the way on corporate broking; BAE must not be allowed to relocate
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The Independent Online

As the City approaches the 20th anniversary of Big Bang, there has been a growing chorus of warnings about the damage the Government's addiction to taxation and red tape might be doing to this spectacular British success story. Quite right too. There is only so much the City can take.

Yet perhaps curiously, most of the available evidence points in the other direction; despite everything that the Chancellor throws at it, the City seems to be extending its lead in key product areas. A self-fulfiling critical mass seems to have been reached, which is immune to the usual business deterrents of oppressive regulation and taxation.

The latest example of this phenomenon comes from annual figures compiled by International Financial Services London on foreign exchange. These show that the daily turnover of the UK's foreign exchange markets in April was an astonishing 41 per cent higher than a year earlier, raising Britain's global share of traditional foreign exchange from 31.5 per cent to 32.4 per cent. Rather satisfyingly, the US's share shrunk to 18.2 per cent and Japan's hit a four-year low of 7.6 per cent.

More dollar-based foreign-exchange trading now occurs in Britain than in the US. The City also trades more euros than all the euro area countries put together. For those who can remember the Chancellor's five euro tests, one of them attempted to assess whether the City would be harmed by failing to join the euro. None of them seems to have much relevance today, but that one can well and truly be assigned to the dustbin of history.

The reasons for this success are well rehearsed, many and varied, but one of the most interesting things about it is how little it has been hindered by tax and regulation, thus far at least. Indeed, the Financial Services Authority is generally thought to have been a boon for the City. Today, its light-touch approach to regulation is seen as a key part of the City's success. However, the operative phrase here is "thus far". Some aspects of employment and social regulation are very definitely beginning to make some companies think twice about being in the City. Certain parts of the tax regime have also become uncompetitive, even if others - notably the tax treatment of non-domiciled UK residents - remains the most favourable in Europe.

Unfortunately for the City, there is a downside to being so successful. It means the Chancellor can afford to take this dynamo at the heart of the British economy for granted. Perhaps if it failed a little more, the Government might actually act on the City's complaints, rather than nodding in understanding, setting up another review or taskforce, and then doing absolutely nothing about them. Unfortunately, by the time something starts failing, it is generally too late to do anything about it.

Showing the way on corporate broking

Confirmation that Peter Meinertzhagen is quitting the City early next year when he hangs up his boots as chairman of ABN Amro Hoare Govett is being seen as symbolic, as the anniversary of Big Bang approaches, both of the passing of the City old guard and the demise of the sort of old-fashioned, independent corporate broking, where the client's interests always come first, that Mr Meinertzhagen personified.

Nothing could be further from the truth, on either count. There are still lots of people in the City who pre-date Big Bang and have not tired of the wonders of financial markets quite yet - yours truly being one of them. If anything, corporate broking is enjoying something of a renaissance. One of its longest-serving practitioners, David Mayhew, chairman of Cazenove Group, shows no signs of slowing. He once told me he intended to carry on as long as they'd let him and would die in the saddle if he could. Thankfully, that doesn't look like being any time soon.

Nor is corporate broking - a quintessentially British invention - showing any sign of dying on its feet either. The Americans never quite understood it when they arrived here in London, but they have been desperately trying to replicate this "other voice" in corporate advice and investor relations ever since - notably when Citigroup poached Nigel Mills and several of his team from under Mr Meinertzhagen's nose at Hoare Govett a year and a bit ago.

As the City consolidates its position as the listings centre of choice for international capital, demand for corporate broking has never been higher. Even the Chancellor might struggle in trying to take the credit for that. Mr Meinertzhagen's role in it, on the other hand, is not in doubt.

BAE must not be allowed to relocate

Defence ministers tend not to be noted for a surplus of grey matter, and as if to prove the point along comes Lord Drayson, who, though you may not know it, is apparently in charge of our nation's defence procurement, to say he wouldn't mind if BAE Systems, the largest British defence contractor, upped sticks and redomiciled to the US. Provided the company maintained a critical presence in the UK, and it didn't interfere with the company's ability to supply the MoD, then he wouldn't interfere.

It's a funny thing about New Labour, but though it likes to tax and regulate British business as heavily as it can, when it comes to globalisation, it is positively evangelical in its adherence to free market principles. Let capital do what it wants, is the message repeatedly hammered out with all the passion of the zealot.

There is no national government on the planet, and that includes the US, which is quite so religious on these matters as our own. In many respects, this is to be commended, for one of the great strengths of the UK economy is is openness. Ministers are right to defend something which has helped usher in a golden era of prosperity for this country. Yet slavishly following the mantra will always eventually eclipse plain old common sense, and this seems to be a case in point. It is hard to imagine any circumstances in which the Government should allow BAE to relocate abroad.

BAE has made little secret of its desire to merge with a big US defence contractor. Re-domiciling to the US could be part of the price that has to be paid for such a move. But while this might or might not make commercial sense for BAE - the US is after all, still far and away the biggest consumer of arms in the world - it is impossible to see how making British defence procurement solely dependent on overseas arms contractors would in any way be in the national interest.

Nor would many BAE shareholders - some still bound by heavy UK weightings in their portfolio strategies - be easily persuaded of the merits of such an approach. Many UK index tracking funds would be forced to sell the stock whether the deal made sense or not. It matters not a fig in some industries if all the players are foreign. In the City it seems to have been a positive boon.

But few industries are as strategically important as defence, nor is there any industry that relies as heavily on a single buyer - in this case the MoD. Is it entirely wise to allow such a big consumer of taxpayers' money to become beholden to US or any other overseas interest? I think not. In any case, whatever BAE might gain in terms of access to US markets, it will lose ten times over in many other overseas markets, particularly the Middle East.

Whatever ministers say, the business of safeguarding British interests, jobs and technical know how becomes that much more difficult. The national interest would quickly become subservient to whatever the corporate imperative of the moment might be. It is only a few weeks since BAE sold its 20 per cent interest in Airbus, yet already Britain's role in the project is under threat. There is every prospect of the UK being frozen out of production of future models in the absence of massive state grants and subsidies to keep the work here.

Does Lord Drayson want to see the MoD similarly over a barrel on its defence budget? It seems he doesn't care.

j.warner@independent.co.uk

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