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  1. 1. Competition in the Service Sector UK Experience – How the UK's financial services sector became successful Sir David Wright Vice Chairman, Barclays Capital
  2. 2. Competition in the Service Sector: UK Experience <ul><ul><li>Underlying Principles </li></ul></ul><ul><ul><li>Freedom for innovation </li></ul></ul><ul><ul><li>Flexibility </li></ul></ul><ul><ul><li>Light touch regulation </li></ul></ul><ul><ul><li>Welcome to foreigners </li></ul></ul>
  3. 3. Competition in the Service Sector: UK Experience <ul><li>History: </li></ul><ul><ul><li>London's growth reflects long business history </li></ul></ul><ul><li>Barclays: </li></ul><ul><ul><li>Founded in April 1690 by John Freame Partnership in 1733 with James Barclay </li></ul></ul><ul><ul><li>Family banks run by Puritan – Non conformist Entrepreneurs, interconnected by marriage </li></ul></ul><ul><ul><li>Boosted by financial needs of Industrial Revolution customers originally wealthy individuals </li></ul></ul><ul><ul><li>By 1840: taking deposits and lending to shopkeepers and businesses </li></ul></ul><ul><ul><li>Barclay and Co set up as Joint Stock Bank in 1896, controlling 1 / 4 of deposits in English market </li></ul></ul><ul><ul><li>By 1939, 1 / 5 (2500) of all bank branches in England </li></ul></ul>
  4. 4. Competition in the Service Sector: UK Experience: London Emerges <ul><li>London Market </li></ul><ul><ul><li>1815 – 1914 London as top-dog, attracting talented foreign financials eg Rothschilds </li></ul></ul><ul><ul><li>1914 – 1960 Two World Wars and US Dominance </li></ul></ul><ul><ul><li>1960 – 1987 London's rebirth largely because growth of Euromarkets, US$ dominated offshore Dealings </li></ul></ul><ul><ul><li>Driven out of US by restrictive controls in New York </li></ul></ul><ul><ul><ul><li>Short-term Eurodollar money market </li></ul></ul></ul><ul><ul><ul><li>Long-term Eurobond capital market </li></ul></ul></ul><ul><ul><ul><li>Both attracted to London by light regulatory touch of Bank of England </li></ul></ul></ul><ul><ul><li>International Euromarket focused City </li></ul></ul><ul><ul><li>UK-oriented City focused on domestic securities market </li></ul></ul><ul><ul><li>But 1987 changes all that </li></ul></ul>
  5. 5. Competition in the Service Sector: UK Experience: Why a Big Bang? <ul><ul><li>National mood: middle of Thatcherism – privatisation, trade union reform, pressures for change. No hiding places e.g. women allowed on London trading floors </li></ul></ul><ul><ul><li>Pressures for wider share ownership from privatisation: resentment of old, closed world of stock market. Office of Fair Trading challenge to restructure practices in 1984 </li></ul></ul><ul><ul><li>Attraction of electronic trading methods: existed in international eurodollar market </li></ul></ul><ul><ul><li>End of discount house monopoly on issuing government securities </li></ul></ul><ul><ul><li>Law of unforeseen consequences: Big Bang unleashed forces in unexpected areas </li></ul></ul>
  6. 6. Competition in the Service Sector: UK Experience: Big Bang <ul><ul><li>The crucial change, 27 October 1986 </li></ul></ul><ul><ul><li>Reforms included: </li></ul></ul><ul><ul><ul><li>Reform of stock market to combine functions of stockbrokers and stock jobbers </li></ul></ul></ul><ul><ul><ul><li>Introduction of the Stock Exchange Automated Quotation system replacing the trading floor with a screen based quotation system </li></ul></ul></ul><ul><ul><ul><li>Abolition of restrictions on ownership of UK stockbrokers </li></ul></ul></ul><ul><ul><li>Focus on stock market, but effects more wide-ranging </li></ul></ul><ul><ul><li>Rationalisation of ownerships of financial services companies both through merger, integration and absorption by others </li></ul></ul><ul><ul><li>Especially, banks become owners of securities companies </li></ul></ul><ul><ul><li>London's international and domestic markets merged into one </li></ul></ul>
  7. 7. UK Financial History (1945 – 2003)
  8. 8. Competition in the Service Sector: UK Experience <ul><ul><li>Underlying Principles – Visible in History </li></ul></ul><ul><ul><li>Freedom for innovation </li></ul></ul><ul><ul><li>Flexibility </li></ul></ul><ul><ul><li>Light touch regulation </li></ul></ul><ul><ul><li>Welcome to foreigners </li></ul></ul><ul><ul><li>: Big Bang </li></ul></ul><ul><ul><li>: Merger of banks and Securities companies </li></ul></ul><ul><ul><li>: Attracts Eurodollar market </li></ul></ul><ul><ul><li>: Takeover by US and foreign companies </li></ul></ul>
  9. 9. Competition in the Service Sector: UK Experience: Main Advantages <ul><ul><li>Historic </li></ul></ul><ul><ul><li>History of business openness since 17th Century coffee ships </li></ul></ul><ul><ul><li>Strong trading culture since 18th Century </li></ul></ul><ul><ul><li>English language </li></ul></ul><ul><ul><li>Quality of life </li></ul></ul><ul><ul><li>Flexible immigration </li></ul></ul><ul><ul><li>Central position between US and Asian time zones </li></ul></ul><ul><ul><li>Tradition of innovation </li></ul></ul><ul><ul><li>All companies treated as UK companies </li></ul></ul><ul><ul><li>No criticism of foreign capital </li></ul></ul><ul><li>Actual </li></ul><ul><ul><li>Critical mass of firms in one location </li></ul></ul><ul><ul><li>Availability of multi-national labour </li></ul></ul><ul><ul><li>Availability of linguistic skills, 300+ languages spoken </li></ul></ul><ul><ul><li>Flexible residence authorisation for non-citizens </li></ul></ul><ul><ul><li>Support services global leaders: accountancy, legal and actuarial skills, IT, innovative marketing </li></ul></ul><ul><ul><li>Beneficial tax regime, personal and corporate </li></ul></ul><ul><ul><li>Logistic and transport centre </li></ul></ul>Regulation: Principles based not Rules based Current debate over London/New York and SarBOx
  10. 10. Competition in the Service Sector: UK Experience: Timing <ul><ul><li>Post 1987 Big Bang, global economic circumstances ideal for growth </li></ul></ul><ul><ul><li>International bond market boomed </li></ul></ul><ul><ul><li>International banking grew </li></ul></ul><ul><ul><li>Derivatives origination and trading expanded </li></ul></ul><ul><ul><li>Professional services (legal and accountancy) grew though corporate finance and securities issuance </li></ul></ul><ul><ul><li>Equities boomed 1995 – 2000 </li></ul></ul><ul><ul><li>Foreign exchange trading expanded </li></ul></ul><ul><ul><li>Corporate finance activity expanded through global M&A activity </li></ul></ul><ul><ul><li>Euro trading furnished a new market </li></ul></ul><ul><ul><li>All developments on which London was able to capitalise </li></ul></ul>
  11. 11. Competition in the Service Sector: UK Experience <ul><li>Survey 2 – 3 years ago of London Services </li></ul><ul><ul><li>London is world leader with:- </li></ul></ul><ul><ul><ul><li>20% global cross-border bank lending </li></ul></ul></ul><ul><ul><ul><li>32% global market for foreign exchange </li></ul></ul></ul><ul><ul><ul><li>43% global OTC derivatives </li></ul></ul></ul><ul><ul><ul><li>80% European Hedge Fund assets </li></ul></ul></ul><ul><ul><ul><li>33% Global FX trading </li></ul></ul></ul><ul><ul><ul><li>2nd largest centre for exchange traded derivatives </li></ul></ul></ul><ul><ul><ul><li>60% issuance of euro-denominated eurobonds </li></ul></ul></ul><ul><ul><ul><li>70% secondary trading in international bonds </li></ul></ul></ul><ul><ul><ul><li>65% global foreign equity turnover </li></ul></ul></ul><ul><ul><ul><li>90% of euro denominated short-term interest rate controls </li></ul></ul></ul><ul><ul><ul><li>95% global base metals traded by LME </li></ul></ul></ul><ul><ul><li>Euro: in effect London is &quot;in&quot; EMU </li></ul></ul>
  12. 12. Competition in the Service Sector: UK Experience <ul><li>Breadth and Depth: </li></ul><ul><li>8.5% UK GDP in Financial Services Associated professional services as additional 3.6% GDP </li></ul><ul><ul><li>Banking industry: 383 authorised banks (255 foreign) Assets – £6.2 trillion ( 1 / 2 held by foreign banks) </li></ul></ul><ul><ul><li>Investment banking: Fee income $53 billion (2005) 51% from US; 31% from Europe; 18% from Asia 1 / 2 European investment banking conducted through London </li></ul></ul><ul><ul><li>Insurance: UK insurance industry No 3 in world, largest in Europe UK largest source of insurance funds and pensions in Europe </li></ul></ul><ul><ul><li>Employment: 1 million employed in financial services 240,000 in City and 78,000 in Canary Wharf </li></ul></ul><ul><ul><li>Business and Professional Services: London Base for largest law firms in Europe 2,900 Accountancy firms in London Big 4 have major London presence London is home to 5 top advertising agencies Plus Management Consultancy, Market Research, Computer Services, Equipment Renting </li></ul></ul>
  13. 13. Competition in the Service Sector: UK Experience <ul><ul><li>Underlying Principles </li></ul></ul><ul><ul><li>Freedom for innovation </li></ul></ul><ul><ul><li>Flexibility </li></ul></ul><ul><ul><li>Light touch regulation </li></ul></ul><ul><ul><li>Welcome to foreigners </li></ul></ul><ul><ul><li>: Derivatives origination </li></ul></ul><ul><ul><li>: Growth of Hedge Funds </li></ul></ul><ul><ul><li>: Principles not rules based </li></ul></ul><ul><ul><li>: 225 foreign banks </li></ul></ul>
  14. 14. Competition in the Service Sector: UK Experience Citi refocuses on London as core for its global business The bank, which had previously based product heads in the US, is moving senior personnel to London &quot;While previously none of the heads and co-heads of the business were based outside the US, we now have six out of 13 product heads based in London&quot; &quot;This is a reflection of the fact that we think there are major opportunities in Europe and it is easier to run a global business from London with the time zone advantage&quot; &quot;There have been a lot of things written about the emergence of London as a financial centre and I guess this is another good example of the trend&quot; February 2007
  15. 15. Barclays Capital overview Barclays Group profile <ul><ul><li>Barclays is an international financial services group engaged primarily in banking, investment banking and asset management </li></ul></ul><ul><ul><li>One of the most established financial services companies </li></ul></ul><ul><ul><ul><li>Barclays has been involved in banking for over 300 years 1 and operates in over 60 countries with over 123,000 employees </li></ul></ul></ul><ul><ul><li>One of the highest credit rated financial services companies </li></ul></ul><ul><ul><ul><li>Barclays is highly capitalised with a balance sheet of over £996 billion 2 and ratings of AA from Standard & Poor’s, Aa1 from Moody’s and AA+ from Fitch </li></ul></ul></ul><ul><ul><li>Profit (pre tax) – underpins healthy business performance </li></ul></ul><ul><ul><ul><li>Full year 2006 £7.136 billion </li></ul></ul></ul><ul><ul><ul><li>Full year 2005 £5.280 billion </li></ul></ul></ul><ul><ul><ul><li>Full year 2004 £4.603 billion </li></ul></ul></ul><ul><ul><ul><li>Full year 2003 £3.845 billion </li></ul></ul></ul><ul><ul><ul><li>Full year 2002 £3.205 billion </li></ul></ul></ul><ul><ul><ul><li>Full year 2001 £3.425 billion </li></ul></ul></ul><ul><ul><ul><li>Full year 2000 £3.392 billion </li></ul></ul></ul>Global Retail & Commercial Banking Notes : 1 Original banking business established 1690. 2 February 2007. SL003 Investment Banking & Investment Management Barclays Capital Barclays Global Investors Barclays Wealth Barclaycard International Retail & Commercial Banking UK Banking Barclays PLC
  16. 16. Competition in the Service Sector: UK Experience <ul><li>Conclusions: </li></ul><ul><ul><li>Four underlying principles provide basic causes of success </li></ul></ul><ul><ul><li>Additionally </li></ul></ul><ul><ul><ul><li>Timing </li></ul></ul></ul><ul><ul><ul><li>Ownership </li></ul></ul></ul><ul><ul><ul><li>Political non-interference </li></ul></ul></ul><ul><ul><ul><li>Ripple effects: jobs, business creation </li></ul></ul></ul><ul><ul><ul><li>Trading tradition </li></ul></ul></ul><ul><ul><ul><li>Living environment </li></ul></ul></ul><ul><ul><ul><li>Logistics/transport centre </li></ul></ul></ul><ul><ul><li>Non-financial causes as important as financial </li></ul></ul>