Being under lockdown for almost two years has had diverse effects on people, processes, and companies all over the globe. The financial services sector is no exception to this fact. The coronavirus has spurred a trend of considering climate change and social justice as measures of corporate performance. These elements are just as relevant to a customer’s perception of a company as the bottom-line and other traditional performance measures. Consequently, businesses in the financial services industry have witnessed a steady rise in investor demand for ESG Investing. ESG is an investment approach that encompasses aspects of the environment, society, and governance.
The trend of more conscientious investing has also influenced the city of London, which has a well-deserved reputation for being a center of financial innovation and ingenuity. As the UK gets ready to boost its economy in the wake of the pandemic, it will find that fiscal activities are critical factors in determining the quality and pace of recovery. Reducing the tax burden on its banking institutions, providing the fintech sector with more support, and embracing socially responsible investing are reasonable strategies the UK can employ on its path to economic recovery.
The UK is very influential on the world finance stage. For example, in the context of the global foreign exchange market, which deals daily with transactions valued at $6.6 trillion, the UK takes the lead. British fintech accounts for a whopping 10% of global fintech markets. An unsurprising fact, given that the fintech sector in the UK alone is thriving and valued at over £11 billion.
In addition to being highly profitable, the UK contributes over 50% of the total fintech venture capital investment in companies all over Europe. It is also worth mentioning that the city center is a magnet for international real estate investments.
To keep its lucrative position as a financial leader, the UK will have to do something about bank taxes. According to Financial Services Minister John Glen, the UK’s banking tax rates are not as competitive as they could be. Currently, banks in the UK are saddled with incredibly high tax rates. Compared to tax rates of similar institutions in New York, British banks are not competitive at all. So, bank taxes will need to come down for the UK to maintain its position as a center for fiscal excellence.
In its bid to uphold its position as an industry leader in the financial arena, the British Government would do well to consider promoting socially responsible investments. These kinds of investments are increasingly gaining traction all around the world. They tend to focus on the diversification of portfolios. The key strategy to achieve this end is to populate portfolios with financial products that reflect an investor’s philosophical or moral beliefs.
For example, an investor could be concerned about the effects of greenhouse gases on the environment. A financial advisor could steer the investor towards a fund that specifically addresses the reduction of carbon emissions on a corporate level. Stakeholders can realize healthy returns on their investment with such conscientious funds. Doing good for the environment and turning a profit are no longer mutually exclusive activities.
Previously, there were not that many environmental-social-governance stock options available for investment purposes. Nowadays, demand for socially and environmentally responsible investment products has led to the increased availability of green investments. Allowing investment decisions to be determined by ‘soft’ factors such as morals and philosophy can also be a boon to risk management in an investment portfolio. Being socially and environmentally aware and responsible can yield profits in many forms.
The financial performance of the British financial services sector has surpassed New York as the world’s preferred destination for fintech-themed investments. But the UK could stand to do better. The reason for a perceived slack in its fiscal performance is Brexit – the UK’s separation from the European Union.
Five years ago, many influential pundits in the financial sector thought the referendum effects would be negligible. They were in for a nasty surprise when the pound value catastrophically decreased in response to Brexit. The UK had not seen such a hectic devaluation in over three decades. The advisory firm Duff & Phelps surveyed senior decision-makers in the financial services industry and found that just over half of them considered Brexit a hindrance to London’s operations as a fiscal hub.
Nevertheless, London still has a reputation for being a powerful finance center. Brexit has not done as much damage as at first anticipated. In some ways, the UK is in a far more advantageous position following the referendum. Industry officials think that the British financial services sector is now at great liberty to make its own rules and regulations.
Before the UK gained a reputation for financial prowess, America held the fiscal prudence crown. In 2018, New York was the darling of the financial world because it took the lead in the stock market. Historically, New York has always fared well in commercial trade. Its success is attributable to geographic factors and some key events in American banking history, such as the Second Bank of the United States allowing its charter to deteriorate in 1836.
According to the same Duff & Phelps survey cited above, almost two-thirds of industry officials surveyed considered New York, and not London, to be the true center of fiscal expertise.
No matter what the opinion of experts is, London’s position as a vibrant financial locale is unlikely to change any time soon. Economic History Professor, Youssef Cassis, observes that changes in financial capital tend to take place over extended periods of time. The changes that do occur often do so at a very low rate.
The UK can focus on lowering the tax rates for its banking institutions, encouraging investment in ESG initiatives, and bolstering its fintech sector. These activities will help London secure its fiscal innovation crown.