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Western EuropeJuly 5 2010

Looking beyond London

The UK's regional financial centres are undergoing a financial and cultural renaissance. They are shrugging off the effects of the downturn, establishing themselves as viable alternatives to London and growing in both confidence and maturity. Writer Charlie Corbett

by Charlie Corbett

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The UK's regions suffered a collective crisis of confidence in the decades following the Second World War. The slow death of the nation's industrial and manufacturing heart left cities across the country with high unemployment, social unrest and a lack of purpose. It was only in the 1980s and 1990s that the process of reinvention and revitalisation began to take shape. Today, despite London remaining by far and away the leading destination for inward investment, the UK's regions are thriving.

The economic downturn checked that growth, but it is a case of progress being slowed down rather than snuffed out. There remains, however, a perception from many international investors that the UK equals London. A tour of the regions proves otherwise. It reveals towns and cities which have world-class infrastructure, a deep skills base across the finance, professional and manufacturing sectors, a highly productive cohesion between civic government and business leaders, and a new-found confidence in the ability to attract and retain global enterprises.

There is no escaping the fact that London will continue to be the UK's number one centre for inward investment. Its international transport links, skills pool and reputation as the centre of the world's financial and professional services industries means that this is very unlikely to change. However, the UK's regions have decided that rather than compete directly with London, they will instead redirect some of the sunlight towards themselves. It is worth remembering that 50% of those employed in financial and professional services in the UK are employed outside London.

The UK's regional financial centres have adopted strategies that include creating niche specialities, such as the high-tech industry and financial and professional support services, as well as trading on the very fact that they are not London. They are able to boast a higher quality of life, a lower cost of doing business, and transport links to and from both London and the rest of the world that are speedier and more efficient than they ever have been. The next step for the regions is to get this message across to investors from around the world.

United in Leeds

The city of Leeds in West Yorkshire is a case in point. Andrew Wilson, a partner at DWF Solicitors, one of 150 law firms now located in Leeds, says that the region has "finally convinced" UK plcs to locate in Leeds, but adds that this is not necessarily the case with international firms. "We need to keep banging the message home," he says. "We've conquered the UK but the next challenge is the international market."

Leeds' approach is to see itself not as a city, but as a region. It markets itself as the Leeds City Region (LCR), which encompasses large outlying cities such as York and Bradford and has a total population of 2.9 million people. This compares to a Leeds metropolitan population of just over 750,000. "When you're talking about a region of nearly 3 million people and a GVA [gross value added] of £50m [$74m] a year, then you're punching in a different weight," says Howard Kew, chief executive of the LCR inward investment agency, Financial Leeds.

Edinburgh pushes on

Tom Buchanan is the city economic development leader in the Scottish National Party administration in Edinburgh City Council. He agrees that marketing is the key to attracting foreign investment. "Cities have got to get out there and promote themselves," he says. In the case of Edinburgh, good public relations have been critical since the financial crisis, which resulted in two of Scotland's biggest banks, Royal Bank of Scotland (RBS) and HBOS being taken into state ownership, in the case of RBS, and into a forced merger with Lloyds TSB, in the case of HBOS. However, Mr Buchanan stresses the diversified nature of Edinburgh's economy and that it employs as many people in tourism as it does in financial services, 40,000, and a further 30,000 people in the creative industries.

In terms of international promotion, most UK cities now regularly attend events such as the property trade show MIPIM, which takes place annually in Cannes, France. Mr Buchanan, a regular visitor to MIPIM, has grand plans for the future of Edinburgh.

"A city complete is a city dead," he says. His masterplan is the development of the city's waterfront area, which will encompass a cruise liner facility, a London Eye-style big wheel and potentially the building of "a town the size of Falkirk".

Property giant Henderson Global also recently received approval from Edinburgh City Council to spend £1bn developing the city's 1970s St James Shopping Centre and to build a further 250 homes.

Howard Kew, chief executive of the LCR inward investment agency, Financial Leeds

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UK financial Centres

Dealing with the downturn

The economic downturn hit the UK's regions hard. Unemployment, particularly in the north of England, soared and productivity slumped. Whereas in the past this could have condemned many towns and cities to the prospect of years of economic malaise, attempts at diversifying local economies have proved invaluable in staving off the worst effects of the recession.

The financial crisis of late 2008 was a baptism of fire for Financial Leeds' Mr Kew. He started in the job as chief executive just days after the collapse of Lehman Brothers. He is not afraid to admit his "huge concern" at the time for the future of the city. Leeds, like other financial centres across the nation, is heavily reliant on the financial services sector and could arguably be a contender for the title of mortgage capital of the UK. The forced merger between Lloyds and HBOS and the deconstruction of mortgage provider Bradford & Bingley sent shockwaves through the region. "We're talking about the potential death of the town of Halifax," he says. "It was every bit as dramatic as the [coal] pit closures in South Yorkshire of the 1980s."

However, like many northern cities, Leeds has become used to turning adversity into opportunity. The death of heavy industry and manufacturing forced areas such as Leeds to reinvent themselves and a survival instinct has been bred into its city leaders. Despite the postponement of several flagship property developments, including a large shopping centre and the cancellation of the so-called 'Kissing Towers' residential project in the heart of the city, Leeds has weathered the storm.

"We formed a regional taskforce that combined the public and private sectors," says Mr Kew. As a result of the council's efforts, joblessness in the financial services sector was capped to between 8000 and 15,000 people, considerably fewer than the potential 28,000 job losses in the sector out of 110,000 employees, forecast by a 2008 Deloitte report. "Losses were significant, but it was by no means an implosion," says Mr Kew.

He adds that West Yorkshire's reputation as the heartland of the mortgage industry remains intact because, unlike many of its peers, the region's building societies resisted the temptation to demutualise during the liberalisation of the sector in the 1980s and 1990s. "They stuck to their knitting and survived and they're now seen as a safe haven by the FSA [Financial Services Authority]," says Mr Kew.

A diverse Manchester

Manchester has also suffered heavily as a result of the recession. Sir Howard Bernstein, chief executive of Manchester City Council, a post he has held for 12 years, admits that the downturn has hit the region hard, but also stresses that his long-term ambition is undimmed. "We never scale back the vision of our ambitions, just their pace," he says.

He wants to rebalance Manchester's economy so that it is not just sustainable in the good times, and move away from a dependency-related culture. His strategy for the future is to continue to grow the city's commercial services sector, as well as the cultural, media, knowledge and science sectors. "We have to make sure the products are available and we have to provide a toolkit to enable us to support business," he says.

Working with the city's inward investment agency, Midas, has been a critical plank in Sir Howard's strategy. He emphasises the importance of stable government and an ability to work with the private sector. He is proud of the council's achievement in transforming the city from its "one-dimensional" manufacturing past into an economically and socially diverse, thoroughly modern city. In terms of surviving the downturn, Sir Howard is clear: "Public expenditure has to be prioritised. Everything has to be related to economic outcomes," he says. "We have a clear and integrated approach now... people know that we are different, that we know how to work with the private sector and we have no shortage of ideas or ambition."

One strategy Manchester has adopted to rebalance its economy has been to establish itself as the second city of finance in the UK. The ambitious Spinningfields development in the centre of the city is testament to this aim. Despite some difficulties resulting from the downturn, the dream of creating a 'Canary Wharf for the north' is beginning to come true. High-profile recent additions to the area include Bank of New York Mellon, SG Hambros, Barclays Bank, Royal Bank of Scotland and the Bank of India.

John Ashcroft is chief executive of Pro Manchester, a corporate membership organisation that represents the financial and professional service community in and around Greater Manchester. He says that there are now 20 private equity and corporate finance boutiques in Manchester, the biggest concentration outside of London. Pro Manchester also aims to attract a further 50,000 financial and professional jobs by 2020.

Mark Blakemore, office managing partner of accountancy firm Baker Tilley, which has an office in Spinningfields, says the development has made it easier to attract talent from outside of Manchester. "It has created momentum. This isn't just about the quality of the buildings but about Manchester. It's an ambitious city and Spinningfields is a shining example of what we've done."

Lease of life: the Spinningfields development in Manchester has attracted a number of high-profile banks

Birmingham's strengths

The leader of Birmingham's City Council, Mike Whitby, has employed a similar strategy and stresses the importance of developing niche skills and new, environmentally sound industries. "Nationally we are engaged in a very conscious and deliberate rebalancing of our economy," he says. "The manufacturing sector has been transformed within Birmingham in recent years and we need to ensure that unique skills in design and development are applied to the greening of the economy generally."

Birmingham has also worked hard to attract the world's biggest global financial services operators to the city. In 2008, Mr Whitby launched his Big City Plan in order to attract investment interest from Asia, the Middle East and North America. "Notably in the high-level meetings I have had with government officials in the United Arab Emirates, India and China, the reputation and diversity of Birmingham's financial sectors have always proven to be one of the most effective tools with which to help sell opportunities in the city," he says.

"Birmingham is a global city with a local heart. This means it possesses all the benefits of scale such as influence, access to top research, economies of scale, and world-class links, while at the same time being able to enjoy locally unique advantages such as a diverse and skilled workforce, competitive cost base and direct access to a local authority ready and willing to engage."

What is common to all of the UK's regions' strategies is the 'split project' approach to luring financial institutions out of London. Rather than attempt to convince global operators to move their client-facing 'shop-front' functions from London, UK regional centres argue that back-office operations can easily be moved out and that this will save millions of pounds on costly London office rates. By locating to a regional centre in the UK, instead of staying in London, companies can save up to 30% of their costs, according to Mr Kew.

Carving out a niche

Developing a niche is also critical to building local economies and encouraging foreign investment. Edinburgh developed a thriving funds management industry in the 1990s, which led to a swathe of professionals from across the UK and the world relocating there. Similarly, Birmingham has worked hard to carve itself a niche in the growing Islamic finance industry.

Farrukh Raza is the founder and managing director of Islamic Finance Advisory and Assurance Services (IFAAS). He located his business in Birmingham, as opposed to London, due to the lower costs and good transport connections. "I can be in London in just over one hour," he says. "It is a very good solution for us. We did consider London, but Birmingham was the better option because we can utilise the savings we make."

Birmingham's strong connections with Asia and its large Muslim population also made it the ideal location in 2004 to set up the Islamic Bank of Britain (IBB). It is the first standalone, sharia-compliant retail bank in the UK. The city's Aston University also recently opened a Centre of Islamic Finance and Economic Research on the back of a £1.5bn donation from an unknown Dubai benefactor.

Mr Farrukh's business is flourishing. He speaks to The Banker from an office full of boxes. "We're moving to a bigger location in the centre of the city," he says. IFAAS has clients across the Middle East and was recently hired to structure the first-ever French corporate Islamic bond. The company has ambitions to structure Islamic bonds in Africa too. Mr Farrukh believes Birmingham has everything his company needs, both in terms of transport connections to London and the rest of the world and in terms of entertaining clients and potential clients that visit the city. "We can provide them with everything as a package," he says.

Mike Whitby, leader of Birmingham City Council

Professor Michael Luger, dean of Manchester Business School

Image problem

One problem from which UK financial centres suffer is in their often negative perception from other parts of the UK and overseas. Many have done a bad job of marketing themselves in the past, and despite offering world-class facilities and a high standard of living, it remains hard to convince senior level professionals to relocate.

Professor Michael Luger is the dean of Manchester Business School and is himself a migrant to the region. An American by birth, he moved to Manchester from North Carolina in 2007. He finds the UK's north-west "dynamic and impressive" but accepts that many of the UK's regions suffer from an inability to attract senior level managers, particularly from overseas.

He highlights the BBC's decision to move much of its operations to a purpose-built media centre in the Salford area of Greater Manchester. It was a highly controversial move at the time and led to stiff opposition from many of the corporation's more senior staff. "The government is having to bribe them to come up here," says Mr Luger. He lists better marketing and PR, international connectivity, high-speed rail links and cultural activities, such as Manchester's International Festival, as ways in which top talent could be encouraged to locate to the region.

In the case of Manchester, sport is another key tool the city is using to brand itself internationally. Two premier league football clubs, Manchester City and Manchester United, the hosting of the Commonwealth Games in 2002, and an audacious bid for the 2000 Olympic Games have all helped to stamp Manchester into the consciousness of populations across the world.

Wealth of talent: Cardiff University is one of three universities in the area. Together they have a total of 60,000 undergraduates

Confidence in Cardiff

Cardiff in south Wales has also struggled in the past to get its message across to the outside world. For some, this boils down to a lack of confidence. "It's about belief," says Peter Evans, head of financial and professional services and economic development at the Welsh Assembly. "In the past, regions such as Wales have lacked self-confidence and belief." However, confidence is one thing that is on the up in the UK's regions today, particularly in Wales.

Cardiff's investment agency, Cardiff & Co launched the Cardiff Ambassador's Programme in March 2009. Its aim is to employ notable local business leaders, academics, sports people and celebrities to promote the city worldwide. More than 300 ambassadors have already been appointed, including the chief executive of Cardiff-based insurance giant Admiral Group, Henry Engelhardt.

One of the UK's biggest car insurance providers, The Admiral Group, established itself in Cardiff in 1993 and has been a flagship for the city ever since. Its success has also encouraged more and more financial services companies to establish offices in the area, including Zurich, Legal & General and ING. Mr Evans says the key to attracting such businesses to the region has been in creating an enabling environment. Legal & General moved its back-office operations to Cardiff in 1999 and now employs 1700 people (down from 2200 at the start of the recession). Adrian Clark, a director of Legal & General, says the move was "better than a good thing". "We've had no problem in recruiting the right standard of people for the right roles," he says.

Providing businesses with local employees with the requisite skills is critical to attracting business to a region, and this is something that the UK's financial centres have taken to heart. Many of the UK's regions can boast world-class universities and excellent research and development skills. Mr Buchanan reminds The Banker that Edinburgh was where the first ever cloned animal was produced, Dolly the Sheep, in the University of Edinburgh's science faculty. LCR boasts seven universities that produce 40,000 graduates a year, Greater Manchester contains almost half a million students and Cardiff has 60,000 undergraduates at its three universities.

People power

The Target Group, an IT outsourcing company based in Cardiff, is a good example of a small business that in the past might have needed to locate in London to find the requisite skill base. It provides software to banks and building societies both across the UK and Europe. Its managing director, James Rudolph, says operating from Cardiff provides advantages that would not be found in London. These include not only easy access to decision-makers, but also the large skills base in the wider region and the close relationship small businesses have with the universities. "We have little trouble in attracting the right kind of people," he says. "There is also an ability and willingness of people to work together and take a collaborative approach." The firm's portfolio of clients reads like a Who's Who of banking and finance. Target Group has added eight new clients this year alone, including Credit Suisse, Deutsche Bank and Morgan Stanley.

Mr Rudolph's experience is mirrored by other companies in the area. Michael Foley is managing director of Peter Evans, a company that provides specialist technology for post-trade asset servicing for stockbrokers and global custodians. He says he arrived in Cardiff "by accident" 25 years ago and has never left. He established his headquarters in the city, but operates a front office or "lightweight client function" in London. He has never had a problem with finding skilled people in Wales.

"Recruiting in south Wales is great. We have two new graduates starting from Cardiff Business School in August that are the pick of the crop," he says. "In 25 years here we have never felt the need to leave."

It is a similar story in other parts of the UK. Helen Scott, managing director of foreign exchange platform 4X Currency, established her company in Leeds rather than London because of lower rents and a better quality of life. "Leeds has a mature financial and commercial centre. It's got great [transport] links, a great quality of life, great housing and a great retail offering," she says.

Devolution is evolution

Looking ahead, the biggest challenge facing the UK's financial centres will lie in their relationship with central government. Scotland, Northern Ireland and Wales are at a distinct advantage over their peers in the rest of the UK because of their devolved government status. Control over tax and tax raising powers are critical elements to the establishment of a region as a global financial centre.

With the prospect of savage cuts from the UK's new Conservative-Liberal coalition government, the future could look bleak for the development and upgrading of much critical infrastructure in the regions. It is an issue not lost on Jerry Blackett, chief executive of Birmingham Chamber of Commerce. "We all need to accelerate growth to get us out of the recession's hole... the government should encourage the devolution of more powers to allow us to decide our own destiny," he says.

One way of doing this, according to Mr Blackett, is through tax increment financing. It is a financing technique developed in the US that allows local authorities to borrow against anticipated future increases in business rates, to fund the improvements that are expected to generate those gains. The strategy would be to encourage central government to allow regional centres to keep money earned through business rates, which currently go to the Treasury in London, in order to pay off loans used to redevelop towns and cities. "By doing that we're not putting our hand out, which is an intellectually unsound approach." Mr Blackett says.

Another way in which central government can help the regions is by the continued movement of public services out of Whitehall and into the regions. Given the cost of operating in London, this would seem an ideal way to cut spending in the public sector by taking advantage of the cheaper rates and cheaper employment costs offered outside the capital.

"The biggest thing this government could do to encourage regional development is to get Whitehall out of London," says Mr Kew. Currently the biggest prize for the regions is the potential outsourcing of the UK's Ministry of Justice department. It is a source of great competition between the country's financial centres, which is not always a healthy thing, according to Manchester Business School's Mr Luger. He says that collaboration is a far more effective way to attract business than "destructive competition". "There is a danger of it turning into a race to the bottom," he says.

However, competition is not all bad and has been a driving force in transforming many formerly struggling and dilapidated UK cities into global forces in finance and manufacturing. London is no longer the automatic choice for many businesses looking to establish themselves in the UK. In fact, it would be foolish for any business to dismiss regional financial centres as potential centres of operations. Baker Tilly's Mr Blakemore not only speaks for Manchester but many of the UK's other financial centres when he says: "Manchester is a good place to do business. It has receptive people that are easy to get hold of and with a can-do attitude. [The region] has great infrastructure, the airport is a massive plus, and the university has more graduates than anywhere else in Europe."

The key to success for the UK's regions in the future, according to Mr Blakemore, is to work in co-operation with London and not in competition. "We're not frightened to work with our big brother in London," he says.