The collapse of Barings inevitably gave rise to a variety of reactions, including concern that this country might not have as much of a comparative advantage in investment banking as City boosters had claimed, and incredulity, even outrage, that the staff of Barings should still get their £100m in bonuses.
The fact that the battle for control of Barings should be fought by two Dutch financial services groups further stoked a sense of unease: is the price of keeping the City as the prime international financial centre the loss of national control over more and more of its formerly British- owned institutions?
But it is not just Barings, of course. The weakness of the Tories has sparked City circulars on the likely impact of a future Labour government. Since the Labour Party has long manifested a dislike of the financial services industry (a pretty mutual feeling) there have been suggestions that a Labour government would damage the industry. Indeed a new paper by ABN-Amro Hoare Govett has suggested not only that banks (amongst others) will be a clear loser under a future Labour government but that this effect will become evident in bank share prices within about a year, as we begin the run-up to the next general election.
The whole debate will be given a further impetus tomorrow with the publication of the final report from the London Business School on "the competitive position of London's financial services". This will pull together the various strands of the work the LBS has been doing on behalf of the City Corporation over the last four years on such matters as how London's telecommunications network ranks against those in New York, Tokyo and the various continental centres, and how its market share in the main areas of business has been developing.
From this work, the broad strategic position of the City seems, if anything, to have improved in the last 10 years. Though it has lost some market share in mature sectors such as international banking and insurance, it has been gaining ground in the new or rapidly growing sectors such as international equities, derivatives and portfolio management.
This is all very useful stuff, for the LBS has already vastly increased the stock of information about this industry. If individual financial services companies have long been pretty bad at strategic planning, the City as a whole has been hopeless at it. Maybe it should not try and plan too much, but rather, as it has done in the past, continue to react very quickly to market signals. While the "don't plan, but be nimble" policy has worked well enough, the sheer lack of knowledge about the performance of London vis--vis other centres is astonishing when you consider the size and importance of the industry.
But there is another dimension to this finance/manufacturing tussle that has attracted less attention. This is the extent to which the financial sector as a whole has been gaining ground on manufacturing; gaining ground to the extent that it will soon overtake it, if it has not already done so.
The graphs, drawn from figures published in a new quarterly CSO publication, The UK Service Sector, show what has been happening. Over the last five years the value added by the financial services sector has been rapidly catching up with manufacturing, while the sector has been increasing its long-standing lead in profitability. These are 1993 figures - we don't yet have last year's ones - and while there was a considerable recovery in manufacturing in 1994 it would be surprising if the gap had not narrowed further. This year may well be the time when the two lines on the graph cross.
Now it needs to be acknowledged that "financial services" as defined here goes much wider than the City. Not only does it include all the banks, building societies and insurance offices all over the country, it also lumps in a whole range of business services - everything from computer consultancies to estate agents - and it adds in the property companies, too. However, net interest paid to this sector is deducted in the figures on the graph; without that adjustment the financial sector would already be larger than manufacturing.
The really important point, though, is that this big financial and business services sector has been strikingly unsuccessful at getting its message across to politicians. The size of its profits means that it is the main contributor to corporation profits tax. You might imagine that this gave it some clout with both the Government and the Opposition. You might imagine that the Chancellor, instead of always stressing manufacturing, would also acknowledge that non-manufacturing was the chunk of industry that was doing most to help him cut the borrowing requirement. As for the Opposition, the fact that by the next election this financial sector was likely to be larger than manufacturing would colour its policies.
To say this is not to make a judgement about the relative merits of the manufacturing and non-manufacturing parts of industry, for the two are complementary. Neither could do without the other and both should reinforce each other. In any case a qualitative judgement about our manufacturing sector would surely conclude that it has been improving rapidly. It may be contributing proportionately less to the economy, but what it is doing it is doing better and better.
But it is odd that politicians on both sides of the House are not sufficiently numerate both to know which bits of the economy have been growing and which bits have not. And it is odd that they find it difficult to be sensitive to the needs of the growing sectors.
What is to be done? There seem to be two main ways in which the financial service industries should seek to make their voices better heard. The first concerns the City. Up to now the City has been largely represented to government by the Bank of England. But the Bank is an arm of government, and so feels pulled in two directions. The City seems to have scrambled out of the Barings dbcle with relatively little damage, but had there been more damage and consequently the need for direct government support, the Bank would have been ill-equipped to lobby for it.
The City Corporation has done solid work in promoting the financial services industry, but it, too, is torn, for much of London's financial services companies are located outside the Square Mile, in the West End or in Docklands.
British Invisibles, the body founded by the Bank to promote knowledge about invisible earnings, has also done good work, but it has to represent all such companies, not just those in finance. Put at its lowest, there is a case for co-ordinating these different voices into a single organisation devoted to promoting the interests of the international side of Britain's financial industry.
There is a second and rather different job to be done: improving the relationship with the customers of the domestic side of the business. Any other big industry - the motor trade, the oil companies, the supermarket groups - puts an enormous amount of work into this: making sure that customers are satisfied with the product or service they are receiving. It is not at all clear that big banks or insurance companies do enough to cement these relationships. They are not greatly loved.
As a result, they are more vulnerable to calls, for example from Labour, for a new banking regulator that would ensure "fair and reasonable" dealings between them and their personal customers. If banks had happier customers, there would be fewer points to be scored by their opponents in the great manufacturing-or-services debate. Better still, that whole rather pointless argument would wither away.Reuse content