I recently had the honour of co-chairing a group assembled at the behest of the UK chancellor of the exchequer to examine the global financial services industry and make recommendations to keep the industry in the UK competitive over the next 10 to 15 years.
Any economy the size of the UK's will have a substantial domestic financial services component, but the UK also has a sizeable international component built on a foundation of trust, tradition and competence. The group first had to answer the fundamental question, posed by many amid the ongoing crisis, of whether it is in the best interest of the UK to remain involved in international financial services to the extent that it is. To little surprise, the answer was a resounding "yes".
The group concluded that globally competitive industries are rare and represent highly valuable, long-term assets for any economy. The UK's financial services industry has a durable comparative advantage and policy-makers should be encouraged to see through the current crisis and recognise the industry's long-term value.
Of course, it is recognised that this financial crisis has been highly damaging to the economy and extremely costly to taxpayers, and as a result the industry is undergoing sweeping changes to its regulatory framework and governance.
But in a different form, the financial industry will play a vital role in helping to solve some of the most daunting problems facing the next generation, not only in the UK, but around the world, in developed as well as developing nations. They include:
Financing retirement - ensuring that developed societies can afford to support the rising number of elderly and retired people in relation to the numbers actively at work. Dependency ratios in mature economies are estimated by the European Commission to rise to more than 25% in the next 15 years.
Financing infrastructure projects, where unmet needs in Africa alone total $22bn a year, according to the World Bank.
Financing for an increasingly expensive and complex healthcare system as diagnostics and therapies improve. The UK's Department of Health estimates that costs could double to £200bn ($330bn) over the next 10 years.
Financing investment in clean energy, which could cost more than $1000bn a year globally over the next 20 years, according to the International Energy Association.
Creating new forms of investment to connect savers and investors across the world whose religious beliefs prohibit them from purchasing traditional investment products. The market for Islamic finance products could be $1000bn a year by 2020, according to the Dubai International Financial Centre, and the UK is currently the leading producer of such products.
Position for partnership
The UK is in a unique position to help economies all over the world tackle these issues, which are going to become even more pressing in the years ahead. In examining the UK's future role, the group kept returning to the theme of 'partnership' - partnership between the UK financial services sector and the global industry, but also the partnership between London and other UK cities and regions.
The UK financial services industry is much more than the City or London. It is also much more than banking, consisting also of asset management and insurance, alongside support industries such as accountancy firms, law firms and consultancies.
London is home to just under one-third of the UK's financial services jobs, with the south-east representing a further 11% and the north-west nearly 10%. Different regions of the UK tend to specialise in different disciplines, such as Edinburgh's expertise in asset management or Leeds' prominence in professional services.
Contrary to popular opinion, the group found that the financial services sector is not outsized relative to the UK's economy. Financial services play a vital role in the UK, employing more than 1 million people, accounting for 8% of total output and contributing nearly 14% of the tax collected. Still, the sector represents only 5% to 8% of output over the past decade, similar to that in the US or comparable EU economies, and far less than in places such as Hong Kong or Singapore. Manufacturing, by contrast, represents 14% of UK gross domestic product.
Key financial centres - today and tomorrow? The financial centre landscape has become even more competitive
International co-operation
Co-operation among the different regions of the UK must coincide with increasing co-operation among financial centres abroad, whether established, evolved or aspirant.
The UK has long served as a model for overseas financial centres. It was the blueprint for Hong Kong and Singapore, for example.
As the industry moves past the present crisis, the UK will play a pivotal role in assisting the development of new and emerging financial centres. Rather than seeing the growth of new financial centres as a threat, it should be seen as an opportunity to develop partnerships to stimulate international growth and development. The UK is positioned to remain an integral part of the financial services value chain alongside these new and expanding entrants, as partners, rather than adversaries in a 'winner-takes-all' race.
Perhaps the greatest single factor in the UK's success as a trading nation has been its strict adherence, through successive governments, to the philosophy of open and competitive markets, including openness to international ownership of domestic institutions.
As part of the competitiveness group process, representatives of Citi have disseminated this message of co-operation, both within the UK and abroad. In the UK, Citi executives presented the report's findings to officials in Edinburgh, Leeds, Cardiff and Bristol. In barely more than a month since the project was completed, representatives have also appeared before officials in Singapore, Hong Kong and Shanghai.
Decision-makers at these emerging financial centres received this message warmly, appreciating that it goes far beyond simply attempting to steer business back towards the UK.
Earlier this year, for instance, senior representatives of the International Capital Markets Association at Reading University, UK-based banks, international law firms and financial data agencies participated in a series of seminars in Shanghai and Beijing with Chinese experts, covering the creation of a local corporate bond market.
It is not just the local markets that the UK can help to develop. China's State Council recently endorsed a plan to ensure that Shanghai becomes a global financial and shipping centre by 2020 while Hong Kong consolidates its position as a fast-growing regional centre. China is perfectly capable of hosting two co-operating international centres, given their varied locations and the country's rapid growth trends - similar to the way in which New York and Chicago complement one another.
A genuine spirit of co-operation is developing as the UK helps these centres to expand markets at home as well as their roles within the international financial system. As new financial centres develop, certainly more business will be conducted at the local level, although local companies will continue to rely on the UK for advanced services such as sophisticated risk management and access to a vast range of global investors. The UK is consequently positioned to remain one of the most important links in the financial services 'value chain'.
Continuing to innovate
Yet as the UK helps new markets to develop, it can not stand still at home. The value of innovation has been questioned in financial services circles over the past few years, as some of what passed for innovation in recent years has had little social value. The UK needs to re-establish itself as the centre for responsible financial innovation, where new products are appropriately vetted and regulated.
Financial innovation also needs to be co-ordinated among national regulators, making international co-ordination crucial to avoiding regulatory arbitrage-related problems, which contributed to the current crisis. The UK is naturally in a position to play a leading role in helping constituencies to find common ground.
In summary, the UK can justifiably expect to remain at the forefront of the global financial services industry, but only because it does not take such a position for granted. The world will continue to look to the UK for leadership, but only so long as it continues to offer a compelling vision.
Sir Winfried Bischoff is the newly appointed chairman of Lloyds Banking Group and former chairman of Citigroup
