Series 8 Episode 1: No time to lose: Reasserting UK leadership in financial and related professional services

Transcript

Tessa Norman: Welcome to this episode of Risk and Regulation Rundown, the podcast where we share insights on the issues shaping financial services, risk, regulation and growth. Today we're exploring why the UK's financial and related professional services industry is at a critical juncture, and what needs to change for the industry to continue to drive growth across the economy over the next decade, during a period of profound change. Joining us to discuss this important topic and to share insights from a new PwC and TheCityUK report are Miles Celic OBE, Chief Executive Officer of TheCityUK, the industry body representing UK-based financial and related professional services, and Darren Ketteringham, who's PwC UK’s Financial Services Leader.

In today's conversation, we're going to be unpacking this recently launched report which looks at the future of the industry. This is a follow-up to our collaboration back in 2017 which set out a vision for the industry to 2025, which regular listeners might remember we discussed on the podcast last year. In this latest piece of work, we set out the actions which are needed to secure the UK's leadership to 2035, at a time when global competition is fiercer than ever, and the pace of change is rapidly accelerating. So, let's kick off. Miles, firstly welcome back to the podcast. And it'd be great if you could start off by telling us a bit of background in terms of what's prompted the report and why is now the right time for it?

Miles Celic: Well, this is very much your fault Tessa. The reason that we've done this report in many ways is the podcast we did roughly this time last year, looking back at the 2017 report. So that was setting out the world up to 2025. We thought this was a useful time to look at it, and we did, three of us gathered about a year ago, and afterwards we all thought, 'Well, that was a really valuable piece of work, at a time when the UK, as a country, and the UK industry was facing all the challenges and all the changes that came with Brexit, and then the situation globally now. It's a terrific piece of work, and I really do recommend that anybody listening looks at that report again, because it got so much right, and it's been the roadmap for TheCityUK's activity ever since.

We all felt afterwards that the situation that we're in globally at the moment, and the industry is in at the moment, is in many ways even more evolutionarily important than 2017 was, and that there is a moment here of change. There's a moment of incredible speed of change that's going on, whether that's technology, whether that's regulation, whether that's the geopolitical environment, but also a moment of alignment. In the UK, we have a government that is desperate for growth, and rightly so, growth across the UK, and that our industry is a driver of that kind of growth, a driver of that kind of innovation, a driver of that kind of job creation. And so it felt like absolutely the right time to look at where the opportunities were, where the risks were. We’re also conscious that the competitive landscape is radically different, even in eight years' time, and you've got a revitalised American market, you've got the growth in places like Abu Dhabi and Dubai, and you've got the emergence of centres, just as we were expecting, in China and in India and elsewhere. So, it's an exciting time to do it, and I think it's a phenomenal piece of work.

Tessa: Brilliant, and I know you've both been putting a huge amount of work into this, and there's so much research that's gone into it. Darren, can you tell us a bit more about the process behind the work?

Darren Ketteringham: Yes, sure, Tessa. Look, for me, it's certainly been one of the most comprehensive pieces of analysis that's ever been undertaken. We've drawn upon insights from over 300 senior industry leaders, including 70 CEOs and chairs of UK financial services companies, as well as regulators, as well as policy makers, as well as technologists, disruptors, academics, and think tanks. Those perspectives were combined with economic modelling from PwC, and also international benchmarking, to build a rigorous, evidence-based view that really looks at the industry today, looks at what's holding it back, and most importantly looks at the scale of the opportunity if we act with real ambition, pace, and urgency.

Tessa: Let's start with that point, in terms of where we are today. Miles, could you set the scene for us in terms of the role that the industry plays, both here in the UK and globally?

Miles: I think the first thing I'd say is, is very often, it's easy to start that answer with, you know, 'We are the largest exporter, net exporter of financial services in the world. We've got a terrifically successful financial and related professional services industry here. It's about 11-12% of economic output, employs a huge number of people, two-thirds of those jobs are outside the M25, and so on,' and that's all enormously important, but it's also important to think about this from the point of view of why it matters to the ordinary man and woman in the street. So, yes, this is an enormous British strategic national asset, but when you buy your home, when you save for and invest for your retirement, when you send your kids off to college or university or whatever it might be, when you insure what's important to you and your loved ones, it's this industry that makes it possible. I think it's important that we think about, and I think the report does this really well, the fact that as a country, we have got the kind of asset that our major competitors would give their right arm for, that this is also something that makes a meaningful difference to people in their day-to-day lives as well.

Tessa: Absolutely, and in terms of the international reach perspective that you touched on Miles, we're seeing quite fundamental development in some of the other global centres. Darren, how is that international competition picture changing?

Darren: Yes, sure. Look, London remains a leading global financial centre, but the ground is really shifting fast here. Firstly, if we look at competition, there's no doubt international competition is really intensifying. If we look at centres like Singapore, Hong Kong, Dubai, New York, the EU, they're all investing heavily in digital infrastructure. They're investing heavily in tokenised markets. They're investing heavily in talent incentives as well to bring the very best people to their locations. London and New York have long vied to be the number one financial centre of the world, and I guess, over the last few years, maybe New York's edged a little bit ahead of London, but what's really striking to me is that the gap between London and the other financial centres is probably the narrowest it's ever been, and secondly, activity is more mobile than ever. If we look at capital, firms, people, and talent, they can go wherever they want to, to the most attractive locations. As the world stands today, where activity used to default to London, it no longer has to, and therefore it's really important the UK remains the most competitive, the most predictable, the most forward-looking of locations to be able to do business in.

Tessa: And Miles, is there anything that you'd add to that, particularly in terms of how the industry's performance is shifting, relative to the wider UK economy, as well as relative to some of those international peers?

Miles: I think Darren's made some really important points there about the fact that we've not got some God-given right to succeed here, and I think one of the things that came through strongly in the interviews and in the consultation that was held was this sense of complacency, the risk of complacency rather. That just because we've been good at this historically, surely, we'll continue to be good at this historically, and I think if you were to speak to the owners of British ship-building companies 150 years ago, they'd have probably told you exactly the same thing.

Darren: Exactly.

Miles: And look at where we are now. Again, this is a really important point in the story and in the history of the industry, in terms of looking at where we go from here. And one of the things that really struck me, personally, and has struck a lot of the ministers and the officials and the others that we've spoken to, is the central economic analysis, within the report. If things keep going the way they're going, by 2035 we're going to be averaging growth in the industry of about 0.5%, and if you look at banking and wealth management, and asset management, those are facing some really tough headwinds, and have been for longer than I think most people realise. Insurance has got a good story to tell, professional services, in terms of accountancy and management consultancy and legal services has got a phenomenal story to tell, but this is a mixed picture. And if we look at the picture out to 2035, as I was saying, the industry grows at 0.5% per year, on average, on the centre base case scenario. That is lower than the expectations of economic growth to the economy overall, by about a third. That's roughly 1.5% a year. So that's a picture of relative decline, and that's a picture we've seen too often, in the UK.

The whole aim here is how do we seize this? How do we drive it? How do we make it grow more ambitiously, more effectively, and more aggressively frankly, and to do that in a way that brings industry, and regulators, and government together, in pursuit of a shared goal to achieve that, because one of the big advantages here, and one of the big benefits here, is potentially up to £50bn worth of additional economic activity. And just to put that into some kind of sense of scale, if you think about tax take, that is the entire defence budget. That is a quarter of the NHS budget. It's equivalent to more than the economic contribution of a city like Edinburgh. That's the potential gain here.

Tessa: Yes, and I think that economic analysis and those figures really underscore that compelling case for why we need to change, and it would be great to talk now in a bit more detail about what it is that needs to change, and the report sets out recommendations across five key imperatives. I thought it would be great to talk through those five areas and perhaps let's start with technology given it's so fundamental to so much of the change that we're seeing across the industry. Darren, the report calls on the UK to be leading at the frontier of financial technology. What's that going to look like in practice?

Darren: As you state, the UK's been for a long time a leader in global innovation, but the pace of technological change really means that AI and digital-enabled markets are really going to be the global competitive ground for the next decade, and I think if the UK wants to really stand at the frontier of this, it really needs to lead in developing and mobilising new technologies, whether that be AI, whether that be distributed ledger technology, or increasingly quantum computing. I thought maybe I'll just pick on three priorities that we draw out in the report.

Firstly, the UK really does need to lead the shift in tokenised markets. That starts with clear leadership from government. It needs to legislate for digital securities and tokenised money, and the regulators need to deliver on a comprehensive end-to-end framework, and look we've made pretty good progress to-date, haven't we, through a number of pilots, but now's the time to move from experimentation to scale, and really provide companies the confidence that the UK is open for tokenised finance going forward. Second, I think we need to build the foundations and digital infrastructure that everything else depends upon. An important example of this is digital ID, and done well, digital ID can dramatically reduce the cost of fraud. It can speed up onboarding,it can unlock innovation, and it can improve inclusion. The UK has really got a great foundation in financial services to take this forward, but progress to date has been a little fragmented. What we really need is a clear, shared roadmap. We need to basically extend digital ID to businesses as well as individuals, and we need a stronger public-private collaboration around this, to make sure that we are focused on really trusted economy-wide enablers to really focus on protection and empowerment for every individual and business.

And thirdly, we need to really be thinking about the next frontier of technology. I think that means government, it means industry and regulators need to work together to future-proof the systems. It needs to test the safeguards and it needs to explore all the commercial opportunities that arise from advanced computing and cryptography, and I really do feel if we can get this right, technology becomes a powerful accelerator for not only productivity, but also for investment and for growth, because if we don't, others will set the standards, and therefore value will then drift towards those other locations.

Tessa: Absolutely and really powerful to hear some of those tangible examples that you've drawn out there. So, turning to our next imperative now, I thought we'd widen the lens a little bit and look internationally. The report sets out an imperative around deepening international trade and investment, and we've touched on the point around intensifying international competition. There's also growing challenges around geopolitical fragmentation. Miles, how can the UK both protect and expand its reach given that quite complex backdrop?

Miles: It's by building on a lot of the stuff that Darren's just fantastically articulated, so the technology piece is central to this. That means getting in place the right regulatory systems, it means getting in place the right structures in terms of support between government and the industry and the regulators, in terms of incentivising innovation, incentivising investment, incentivising growth in those areas. Historically, if you look at what's kept any major international financial centre competitive, and particularly with the UK, it has been openness, it's been transparency, it's been predictability in a positive sense, it's been moving away from political interference in regulation, in industry and so on, and we are moving into a world of greater protectionism and greater populism. That is just a simple reality that we're seeing, and that I see when I go, as I'm sure Darren when you go and see clients or counterparts in other parts of the world. There is a sense that the expectations that we had that the, for lack of a better term, liberal order that we've had over the past 30 years would continue endlessly, and that's clearly not where we are.

Against that backdrop, an international financial centre like the UK, which is 80% international, 20% domestic, almost the exact opposite of an international centre like New York, which is predominately domestic, because of the size of the American economy, that means we are both, I would argue, in a very vulnerable place in that sort of backdrop. But we’re also in a terrific place because what we ought to do, and I think the report comes out very strongly on this, and the interviews absolutely endorse this approach, is that we need to be the best place in the world to come and do business, where you know that you will have the minimum amount of interference from regulators, or the minimum amount of interference from politicians on regulators, and that you know that when you deal with a British Court, there's a minimum amount of political interference in that, and that if you are a foreign company or a foreign entrepreneur or a foreign investor you will be treated in exactly the same way that a British company or entrepreneur or investor will be. There was a great line that David Cameron used to use when he was Prime Minister, when he was trying to attract investment to the UK, and he'd always say, 'You can come to the UK, you can invest here, and if it all goes wrong, you can sue me in the British Courts, and off the back of previous experience, you'll probably win,' and so it's that openness. It was a joke, and it was a thing he'd use to warm up an audience, at a drinks reception or something, but the beauty of it is there's a truth at the heart of that, and that means that we've got to continue to be open to ideas, to innovation, to investment, and to the sorts of people that we want to attract to the UK. The report absolutely endorses that.

Tessa: Absolutely, let's hone in now on that 20% in terms of domestic investment, and on that topic, the report calls for action to better connect capital to national priorities. Miles, can you bring that to life for us in terms of the recommendations?

Miles: Sure. So, I think again, if you look at the major public policy challenges that the UK, and indeed, pretty much any other major economy faces, there's a consistency. There's an ageing population, there's the debt that countries have built up over years. There's the challenges of defence. There's all sorts of areas where we need to make sure that money is going in, including, let's say net zero, and this came through in the report as well, and that is beyond the strained balance sheets that many countries have got. So rightly they need to look towards the private sector and what's the role the private sector can play in this.

From a private sector perspective, that is potentially another source of investment, another opportunity. Making sure that we've got the right regulatory perspectives in place, that we are working with regulators in government, when they talk about how you incentivise growth. You know, we all were, as an industry, very supportive of the secondary objective of growth and international competitiveness. Have we got the right prudential systems in place? Are the regulators structured in the right ways in order to do this? That’s something the report identifies. Now, it's not always going to be the case that we in the private sector have got all the answers, and I think one of the great things about the report is it doesn't pretend to. But what it does do is that where there isn't a clear answer, and Darren, you've touched on this already, we take it as part of our duty to actually start the debate and move the debate forward, and again, the beauty of this report isn't that it's going to sit on the shelf and gather dust after it's been launched. This is a live, working, living document that will certainly shape the work and the thinking of the industry, and the work and the thinking at TheCityUK over the next ten years,

Tessa: Brilliant. I think that point about connecting capital is important in the context of individual investing as well as that institutional piece, and that brings us neatly to the next imperative Darren, which is around building a nation of investors. Can you talk us through what changes are really needed to improve that investment culture in the UK?

Darren: Right now, households hold far too little in productive assets. If you look at household wealth, only 8% is invested in equities, mutual funds, or bonds, and that compares to over 30% in the US, and what does that mean? Well, it really means poorer longer-term returns for individuals, and a shallower domestic market for UK companies, and what the report calls for is a fundamental re-look at the way we save, and we invest. That will help improve people's financial resilience, it will get better retirement outcomes, and also unlock capital in the country to encourage more national and international investment into the UK. We have had recent policy initiatives that are welcome. If you look at targeted support, for example, or the UK retail investment campaign, they're really welcomed, but what we need to do is double down on those and really move at pace. We need, for example, the regulators to really deliver on their commitment to looking at risk disclosures, and build much more balanced, more understandable, and more contextualised risk warnings, that people can better understand rather than deter them from participation. We also need industry to develop simple, low-cost investment products and digital journeys that make investing as easy as savings today, and that will mean regular investment plans, money market ISAs, that really bridge the gap between short-term saving and long-term wealth building. I think providers should really strive to make those journeys very digital, to be able to simplify some of the risk warnings, and leverage open finance and open banking to automate some of those steps, and I think the prize is huge if we can get this right. What we'll get is deeper capital markets, we'll get better retirement outcomes, and a much more financially resilient UK.

Tessa: I think it's a really interesting example where there's a strong role for both industry and regulators, and when you look at the benefits, it's about the real-world impact for the man on the street, but also for the broader economy. If we turn now to our final imperative, which is really around reducing the core costs of doing business. We've talked a lot about regulation throughout our conversation, but perhaps Miles, you could walk us through why is this so fundamental in terms of ensuring that we have a pro-growth regulatory and tax regime in the UK?

Miles: I would argue, and again I think the report makes this clear, it's one of the things that, if you're not careful, will shackle an industry, and the whole point here is to unshackle the industry, and to unleash the contribution, the greater contribution that it can make, because it already makes a fantastic contribution. And so I'd say there's a number of areas here that we need to look at, and that the report identifies. The first is around making sure that you've got the right regulatory framework in place and we're going through, as we've already touched on in this conversation, we're going through a phenomenal amount of change in terms of how societies are organised, the role of technology, AI comes through very strongly in the report. So, have we got the right regulatory structures in place? As I say, we don't pretend that we have a monopoly of, of wisdom on this. This is something that will affect society, as well as affect business. So, we think there's an important role here for an active and curated conversation between business, industry and government, and others, civil society and others, about what we want from regulation. Is it in the right place? Is it structured in the right way? Recognising, I would argue that we're all after the same thing here. There is, as I said earlier, this alignment of interest.

I think the second is faster and more predictable regulatory processes, and we're already seeing some regulators move towards this, stripping out duplication, stripping our additional costs and measures. The FRC's done some interesting work on this, I'd argue, the Financial Reporting Council, but equally, it's very easy for us to sit here and cast stones at the public sector. The reality is, I've sat in companies where we have internally added additional layers of protection, because we wanted to have them there, and the GC sat there and said, 'Let's make sure that we're going a little bit beyond where the regulators are, because we don't want to find ourselves at the wrong end of something,' and what happens is, this stuff builds up like silt, over time. And so, I think there's something on us, as industry, in terms of turning round and saying, 'Well, look, we can actually work with the regulators and the government to reduce that as well,' and that leads me onto my third point, which is about the streamlining the tax system.

So, we have gone over recent years from having a tax system that's roughly in the middle of the OECD pack, in terms of complexity, to one of the most complex and longest tax codes in the world, and that is a cost in itself. I've worked at two large British multinationals that would regularly look at domicile as part of their process, and people think that when you look at tax, as part of that process, you're just looking at the headline rate if corporation tax, maybe personal tax. Yes, absolutely, but equally it's how complex, how difficult, how costly is the tax code? It's an easy win. There used to be an office of tax simplification. We need something like that again. That spirit to animate the approach to tax and make the UK a much more attractive place from that perspective.

Tessa: Thank you both. We've heard clear and tangible calls to action there, across those five imperatives, and one of the points that has really stood out to me is the role that everyone can play in this, and also the size and nature of the prize if we get this right: that £50bn in additional economic output is a really standout number. Thank you both so much, and to wrap up, I'd like to ask you both what's the key message that you'd like to leave listeners with, particularly if we think about what's next and how do we turn that ambition that you’ve both set out into a reality? Darren, I'll come to you first.

Darren: Thanks Tessa. For me, it's crystal clear. We need more ambition, we need more urgency, more pace, and better execution. What the report does set out is a clear industry roadmap that industry, government and the regulators, all need to get behind, and we've all got a role to play. What really matters here is turning these imperatives into real actions and acting with pace and urgency to deliver them, and I think if we together, as government, regulators, and industry can get this right, with more pace and more co-ordination, then we can unlock that magical £50bn of economic uplift and really reposition the UK at the frontier of global financial services.

Tessa: And Miles?

Miles: I think this is a phenomenally rigorous, impressive, comprehensive piece of work. I can't think of any other piece of work that is such a snapshot of where the industry is, and with such a practical and ambitious set of proposals and examples about where we can go from here. Based on that, and the fact that we've had more than 300 conversations and discussions with industry leaders, with stakeholders, with politicians, with regulators, with others, I think it really will stand the test of time. It's going to be a roadmap for where we as a country, and where we as an industry need to get to over the next ten years.

Tessa: That's a fantastic note to end on. Thank you both again and thank you as well to everyone listening. The full report is available via the link in the episode description, so please do take a look at the full report, and get in touch if you'd like to discuss the report in more detail. We're keen to hear your own reflections and to continue this conversation on the future of the industry. Thank you.