“EDINBURGH – THE NEXT FIVE YEARS”
February 22, 2010
22 February, 2010
REBUILDING TRUST IN FINANCIAL SERVICES
Ladies and gentlemen
It is a measure of the importance of financial services to the City of Edinburgh that the prominence of our industry in today's agenda looks in no way inappropriate or out of place. The four largest, and five of the six largest private sector employers in Edinburgh are financial services companies. And Edinburgh is the UK's second largest financial centre after the City of London and the only city other than London, in the UK, where you can find all sectors of financial services in operation, from retail banking to pensions to fund management to stockbroking.
I won't dwell on the history of financial services in Edinburgh, though there are hundreds of years of it. It is the current scale and value of the industry and, I believe, its potential, that makes it essential to any examination of the possibilities for Edinburgh in the next 5 years.
Which is what we are about today - vision, state of mind.
Of course, recent history - specifically the last three years - has been turbulent for Edinburgh's financial services industry, to put it mildly. We have seen our biggest banks hit very hard by the global financial crisis and a sizeable loss of personal wealth for many Edinburgh citizens, who may have stored it in the 'safe' form of shares or other investments in those banks. So the impact of the crisis for Edinburgh has been real and acute, which was with hindsight an inevitable consequence of our success in the preceding decade or so of rapid but unsustainable growth.
And one of the enduring impacts of the crisis, not only in Edinburgh but around the world, has been a massive loss of trust in financial services and banking in particular. And what I want to talk about today is what that means for an international financial centre like Edinburgh and for our expectations for the next five years.
Because without that trust, all of the aspirations we have so far been discussing will be harder to realise. And I also want to talk about the full half of the glass the John Swinney was referring to.
Because trust is the foundation of all service relationships; but especially those that relate to money. So how successful we are in rebuilding it will determine much about our future. I want to say few words on trust in general, before moving on to some specifics for next five years.
Rebuilding trust matters because the majority of people rely heavily on this industry, whether for personal bank accounts, insurance and pensions, or for business investment and lending. It matters because the 2008 crisis has resulted in direct taxpayer support for a number of banks here and around the globe, and indirect support for the wider industry through the very fact that such intervention was necessary to keep financial systems working.
Financial services was traditionally seen as conservative; safe and trustworthy - both as a profession and as a service provider. The rapid internationalisation of the industry in the 1990s; the increased complexity of its products; the pace of transactions and decision-making and the way in which parts of the industry responded to these factors, changed that. A few companies, and many reputations, were damaged in the crisis, and we are still in the process of recovery.
John Swinney referred to possible damage to Scotland's international reputation. I agree with him, we need to keep context in mind - people in Shanghai, Geneva etc are not looking at Scotland as some uniquely hard hit place - others don't see us as we see ourselves - we must guard against solipsism.
Rebuilding trust and re-structuring the industry go hand-in-hand. And however superficially appealing a thought, it is not feasible to try to go back to the pre-Big Bang and pre-internationalisation days. We must instead look at the industry as it is now, and introduce changes that will be effective in the 21st Century. Some of those changes will be universally applicable, and some will be for individual companies to take forward.
One of the issues facing the whole industry as we rebuild trust is the need for increased transparency. Companies need to get better at providing clear and appropriate information to shareholders and customers. They need to be more visible - to get out and meet customers and shareholders, and listen to them. They must make a concerted effort to cut out the sometimes impenetrable jargon, and to make their business understandable to all. One of big lessons of crisis is that what happens in our industry matters to all of us - can't become some priesthood, with only the initiated able to understand our language and rituals. SFE raised this in its response to the Turner Review because poor communication and lack of understanding were factors in the crisis. I am glad to say companies do recognise this, and are changing. But it is still too difficult, in my view, to obtain swift and simple understanding of too many products.
Bonuses
I was chastised at an event last week for talking about trust but not mentioning bonuses, which have dominated media debate more than perhaps any other issue.
I accept right off the bat that this is an issue that currently, as it is perceived, undermines trust in our industry. It raises suspicions that people are being paid large amounts to carry on doing what got us into trouble in the first place.
But the truth is more complicated. Companies compete for talent internationally and any solutions have to take account of that; it is a fact that investment banking makes money. UKFI, the body that manages the UK government's investments in our banks, has made it very clear, most recently in the Scottish Parliament, not only that it wants RBS to be in the investment banking business - because it makes money and thereby benefits the UK taxpayer who holds the majority of RBS shares - but also that "we have tens of billions of pounds tied up in the company, and we cannot afford to allow it to become a place where bankers go if they cannot get a job anywhere else."
And in last week seen Stephen Hester and John Varley giving up bonuses -so things changing - may be as Ben Thomson says, some big political change will make such payments just socially unacceptable- but not happened yet and we deal with world as it is.
An important thing for us in Edinburgh to keep in mind is that the very large majority of people working in our industry are not being paid bonuses at headline-grabbing levels. This is a big issue for the industry as a whole, but we should not let it muddy the waters of our ambitions for Edinburgh.
Diversity
There is a lot more to Edinburgh's financial services than banking.
Trust in Edinburgh's fund management sector remains strong. Major city companies such as Standard Life Investments, SWIP, Martin Currie, Baillie Gifford, Aegon Asset Management and smaller specialists including Artemis and First State between them manage around £400 billion of funds. That is great for the city, and shows the resilience of the sector. Indeed, some companies have grown, most notably SWIP which Lloyds Banking Group (LBG), as it integrates its businesses, has identified as its centre of excellence for fund management across the Group.
But our banks remain a big part of Edinburgh's future and I want to say a bit about some of them.
At RBS the focus is rightly on the future, and on getting the bank safer, profitable and sustainable again. New management, with strong leadership, has put in place a clear plan. Look at the changes. In barely 18 months, we have seen a full sweep of changes at Board and management levels. The legacy losses still have to work through but we can already see the emerging shape of the new RBS. They have been very honest about the fact that this will be a long journey but it is in all of our interests as taxpayers they succeed. And, contrary to some reports, the good news for Edinburgh is that RBS's commitment to its HQ in Edinburgh is strong and I made a point of asking them about that before making this speech.
And LBG has been equally clear in its commitment to Scotland. The building on the Mound - which I chose deliberately for the slide behind me - continues to operate as major UK centre for financial services. It is now headquarters to the Group's insurance division, which includes businesses like Scottish Widows (one of the UK's best life and pension companies), Clerical Medical and a large general insurance business. In fact, on its own, Division would be FTSE 100 company. The Group is also breathing new life into the Bank of Scotland. Archie Kane, the Group's Insurance Director and Board representative for Scotland, understands the value of senior roles, and has ensured 20% of the company's top 500 executives are based in Scotland. This meets Linda's point about decision makers.
So I come back to my earlier point about the impact of the financial crisis in Edinburgh - but I also emphasise how much things are changing to recover from it.
And competition between companies, in a well -regulated market, promotes trust. Without going over again the points Ben Thomson has made, it will be helped by the arrival of new forces in the market place like Tesco Bank. It has its headquarters in the city, and it will take forward the company's UK expansion. The last year has also seen a growth in the presence of HSBC and Barclays, in both retail and business banking. And Virgin Money is sending interesting signals about its plans for the future.
Asset servicing
Banking in any case takes many forms in today's international commercial system.
A great success for Edinburgh in the last 15 years or so - too little recognised, in my view - has been the arrival in the city of banking giants like Bank of New York Mellon, JP Morgan, HSBC, Blackrock, Citigroup and State Street.
These are all providers of what is known in the industry asset servicing - essentially, the plumbing that makes international financial transactions possible, providing services such as custody, treasury, valuation and pricing. These are the necessary supporting systems to make trading and investment of complex products possible.
It is not a business for the faint hearted - there is almost no room for error, it is extremely competitive and you have to get it right all the time, day in day out, in many cases round the clock as markets open and close around the world.
So these companies are all operating at a very high level of sophistication and complexity and it seems to me unlikely they have all ended up in Edinburgh by accident. There are others in similar lines of business operating in Glasgow and Dundee - notably BNP Paribas, on of France's largest banks, and Barclays - but Edinburgh has a powerful cluster of them.
They have been attracted by many of the things mentioned by Dave Anderson and others today - transport, quality of life, and so on. But for this sort of financial business, you need a stable and top class work force and that is what Edinburgh can offer.
One strand of my expectations for Edinburgh for the next five years would be to entrench our position as a leading centre for the business of asset servicing - a slightly opaque title, I admit, but one behind which sits a vital element in the international financial system. And one that demands top quality, all the time, without fail.
Which in turn means that it needs people not only with financial skills but also with the languages, flexibility and cultural insight to operate across time zones and yet provide the same quality of service. Just the people, in fact, we want to see coming to Edinburgh.
Pensions
Life insurance and pensions remain a firm fixture in the city's economy. Standard Life, Scottish Life and Scottish Widows are examples of names with long-standing brand recognition, and great reputations.
Life insurance was invented in Scotland at the beginning of the 19th century by two clergymen who saw it as a way of providing for the futures of the dependents of those who might be killed in the Napleonic Wars. The first office of what was then called the Scottish Widows and Orphans' Fund was on Chambers Street, a stone's throw from here. The company still exists today, in a different form, in Scottish Widows.
I promised not to dwell on history but that was such a milestone in the development of financial services that I couldn't resist it.
Today, the life and pensions sector remains a cornerstone of Edinburgh's financial services industry. Indeed, one fifth of all those working in this part of the industry in the UK work in Scotland, many of them in Edinburgh.
Companies like Standard Life and Scottish Widows have been for many, many years, and remain, a very big part of Edinburgh's commercial and public life.
Aegon, which took over Scottish Equitable and has made a roaring success of it since doing so, is a leading international provider of pensions, life assurance and fund management services and its UK subsidiary is headquartered here in Edinburgh.
In thinking about the next five years, one only has to look at the demographics to see that provision for the future of people who are ageing and their dependents, and the financial services that make that possible, is only going to grow in importance.
So the base of skills and expertise we have in Edinburgh must be of particular value to the City in the next five to 10 years, when we will certainly see some further quite rapid evolution in this sector, driven by changes in regulation and the growth in demand in China and India.
But trust is perhaps more important for this sector than for almost any other. Pensions have been hit by the recession and many people retiring recently have not received as much as they may have been expecting. And yet, pensions are a form of savings and we all know that we need to save more. So without trust in the companies that offer life assurance and pensions, that big task of saving more becomes harder.
Professional services
Edinburgh is home to the oldest professional body for accountants, the oldest professional body for bankers, and (I think) the second oldest professional body for actuaries - in the world.
I don't know where the first lawyers appeared but wherever it was, Edinburgh can't have been far behind.
In terms of professional heritage, that is incomparable.
We have seen many suggestions for changing the ways in which financial services are regulated, at national level and at international level. Mostly, these suggestions focus on rules and things to be checked - supervision, in other words.
But equally important, and central to rebuilding trust, is the role of standards and ethics.
Professionals play a key role in financial services and perhaps a larger role than in any other industry. Having something legally watertight, soundly audited and calculated to the highest achievable standards, in a world governed with the frailty and capacity for error common to all human endeavour, is of prime importance.
And the strength and reputation of our professional services is a crucial buttress to Edinburgh's position as an international financial centre. We need to maintain the critical mass of decision making that supports that community and allows them to export their services beyond the City boundaries.
That should be on our ‘to do' list for the next five years.
Conclusion
So does any of this help us in our efforts today to chart a course for Edinburgh for the next five years?
Let me try to summarise where we are:
- trust is a prerequisite for recovery;
- the banks most deeply affected by the financial crisis, as well as their peers, are embarked on achieving that;
- other sectors in our diverse financial services industry are doing well despite tough market conditions.
But what of the next five years?
In my view, the most significant determinants during that period, in our industry, will be:
- the fact that all sectors of our industry demand skills of the highest order, and they can get them here in Edinburgh;
- the fact that we are better placed in our industry than almost any other city in the UK to do that thing we need to do to grow out of recession, namely export services. We can export insurance, pensions, fund management, asset servicing, banking and professional services.
- how successful we are in rebuilding trust; and
- the fact that international markets will remain unpredictable and nothing is guaranteed.
That is not a Pollyanna view, as I hope that last point in my summary recognises. There remain great uncertainties about the pace of our economic recovery. Most recently, to take just one current example, we have seen waves of speculation about the future of the Eurozone, our biggest export market.
But the fundamental strengths of Edinburgh in financial services - skills, international networks, strong professional services and a diverse mix of sectors - leave us well placed to succeed in whatever conditions materialise.
Financial services have been an inextricable part of Edinburgh's success for the last 300 years - I believe the next five will be no different.
Thank you
Owen Kelly
