The City of London and its role as a financial centre

The City of London and its role as a financial centre

Тhe city of London and its role as a financial center

Chapter 1.

Introduction. The Concept of the City of London.

Britain is a major financial centre providing a wide range of specialised

services. The country’s economy has for a long time been directed through

the great financial institutions which together are known as “The City”,

capital “C”, and which are mainly located in the famous “Square Mile” of

the City of London.

The “Square Mile” in the Roman Times historically emerged on the Thames as

the business and industrial nucleus of the future London. Through centuries

of business and religious developments the City assumed its role of the

world commercial centre as it is known today . When in the 20th century

Great Britain lost its empire and other financial centres got established

in the world, the city adapted itself to changed circumstances to remain

a world financial leader. The City of London has the greatest

concentration of banks in the world (responsible for about a quarter of

total international bank lending) , the world’ s biggest insurance market

(with about 1/5 of the international market ), a Stock Exchange with a

larger listing of securities than any other exchange, and it remains the

principal international centre for transactions in a large number of

commodities. A large proportion of Britain’s wealth has been invested by

the City overseas. The City’s annual foreign income roughly double that of

the British manufacturing industries. The above proves the City’s world

significance as a financial centre. Geographically the City is a large

office area bubbling with life at daytime and comfortably quiet outside the

office hours. It’s historical sights like the Tower of London, St Paul’s

Cathedral, the Museum of London, the Monument and others as well as the

beautifully impressive architecture of the office buildings attract crowds

of visitors. The only housing project, the Barbican, provides very

expensive accommodation along with an arts centre, a school and some

official premises.

Since after the mid - 80s financial and related services have started to

expand outside the “Square Mile” though the City of London remains the

symbol and actual reality of the country’s power.

C h a p t e r 2

Britain’s Economic and Financial Position Today at Home and Abroad.

Finance and industry of the British economy go hand in hand as industry

requires a diversified network of financial institutions to develop

successfully. Although Britain’s financial power today exceeds that of

the country’s industrial achievement, the country was for years “the

workshop of the world”. It still remains a highly industrialised country

but the end of the 20th century saw tendencies for the economic decline.

Historically, after two world wars and the loss of its empire Britain found

it increasingly difficult to maintain its leading position in Europe. The

growing competition from the United States and later Japan aggravated the

country’s position.

Britain struggled to find a balance between the governments intervention in

the economy and almost completely free-market economy of the United States.

The theories of the great British pre-war economist J. M. Keynes

stated that capitalist society could only survive if the government

controlled, managed and even planned much of its economy. These ideas

failed to get Britain out of the image of a country with quiet market

towns linked by steam trains puffing slowly through green meadows. Arrival

of Margaret Thatcher, the Conservative prime-minister in office between

1979 and 1990, discarded these theories as completely wrong. Mrs. Thatcher

claimed that all controls and regulations of the economy should be removed

and a market economy should recover. Her targets were nationalised

industries. She refused to assist the struggling enterprises of the coal

and steal industries which were slimmed down in order to improve their

efficiency. In the steel industry, for example, the workspace was reduced

from 130000 people to 50000 by 1990s and the production of 1 ton of steel

by 1990 took only 3,7 man hours instead of 12 man hours in 1980. The

government believed that privatisation would increase efficiency and

economic freedom would encourage private initiative. A lot of big publicly

owned production and service companies such as British Telecommunications,

British Gas, British Airways, Rolls Royce and even British regional Water

Authorities were sold into private hands. Britain began to turn into a

country of shareholders. Between 1979 and 1992 the proportion of the

population owning shares increased from 7 % to 24%.

The Conservative government reduced the income tax from 33% to 25% as an

incentive in production. This did not lead to any loss of revenue, since at

the lower rates fewer people tried to avoid tax. At the same time the

government doubled the VAT on goods and services to 15%. Today it is 17%.

Small business began to increase rapidly. In 1984 for example there was a

total of 1.4 million small business though including “the black economy”

the figure was nearer to million. Proportionately, however, there were 50%

more of them in West Germany and the United States and about twice more in

France and Japan.

Many small businesses fail to survive mainly as a result of poor management

and also because compared with other European Community Britain offers the

least encouraging conditions. But small businesses are important because

they can grow into big ones and because they provide over half of the new

jobs. It is particularly important because unemployment in Great Britain

rose to nearly 2.5 million people and a lot of jobs are part-time.

Energy is a major component of the economy, which depended mainly on coal

production until 1975, began to rely on oil and gas discoveries in the

north sea. Coal still remains the single most important source of energy,

in spite of its relative decline as an industry, so oil and coal each

account for about one third of total energy consumption in Britain. Over a

number of years British policy makers promoted the idea of energy coming of

different sources. One of them was nuclear energy as a clean and safe

solution to energy needs. In fact Britain constructed the world’s first

large scale nuclear plant in 1956. However, there were a lot of public

worries after the US disaster at Three Miles Island and the Soviet disaster

in Chernobyl. Also nuclear research and safe technology is proved to be

very expensive - by 1990 the real commercial cost of nuclear plant was

twice as high that of a coal power station. Renewable energy sources such

as wind or solar energy, are planned to provide 1% of the national energy

requirements in the year 2000.

Research and development (R&D) in Britain are Mainly directed towards

immediate practical problems. In fact British companies spend less on R&D

than any European competitors. At the end of the 1980’s, for example 71% of

German companies were spending more than 5% of their annual revenue on R &

D compared with only 28% of British companies. As a result Britain has been

automating more slowly than her rivals. In fact it may be the consequence

of Margaret Thatcher’s views on public spending which includes medical

service, social spending, education and R&D. “The Iron lady” argued that

“if our objective is to have a prosperous and expanding economy, we must

recognise that high public spending kills growth of industry”, as money is

taken from the productive sector (industry) to be transferred to

unproductive part of it. As a result in the 80’s only 6% of Britain’s

labour had a university degree against 18% in America, 13% in Japan and 10%

in Germany. Technical education has always been compared with Britain’s

major competitors. According to government study “ mechanical engineering

is low and production engineers are regarded as the Cinderella of the

profession”. Very few school leavers received vocational training. Since

1980’s among university graduates the tendency has been to go from the

civil service to merchant banking, rather than industry. And according to

analysts resulted from the long-standing cultural roots. Public school

leavers considered themselves “gentlemen” too long to adjust fast to the

changes of time. Efforts are now taken by the labour government to boost

technical and enterprise skills in schools. The 1999 Pre-budget report

outlined a 10 million pounds for the purpose.

Despite the favourable effect of “Thatcherism” Britain’s economic problems

in the 1990s seemed to be difficult. Manufacturing was more efficient but

Britain’s balance of payments was unhealthy, imports of manufacturing goods

rose by 40%, and British exports could hardly compete with those of its

competitors. Car workers in Germany, for instance, could produce a Ford

Escort in help the time taken in Britain. In the 90’s among the European

countries British average annual productivity per worker took the 6th

place. The revenue softened the social problems but distracted Britain from

investing more into industry. Many analysts thought that much more should

have been invested into engineering production, managerial and marketing

before the North Sea oil declined.

The Labour government undertakes to improve the situation. In his Pre-

budget report on 9 November 1999 the Chancellor of the Exchequer Gordon

Brown set out new economic ambitions for the next decade. Under them

Britain will raise its productivity faster than its competitors to close

the productivity gap and a majority of Britain’s school and college leavers

will go on to higher education.

In the 80s British companies invested heavily abroad while foreign

investments in Britain increased too. Today in a speech in Tokyo on 6

September1999 the Foreign Secretary Robin Cook said that “Britain is a

chosen country for more investment from Japan than anywhere else in Europe

and more than thousand companies operate in the U. K.”

Mr. Cook added that the huge European Market of 370 million people was “the

largest single market in the world, a market that is set to expand even

further with the arrival of new member states”. In fact he said investment

in Britain is the highest bridge into Europe.

Britain as a world leader in “high-tech” industries

One of the three British microprocessor producers was making 70% of British

silicon wafers required for new information technology even in the

seventies. On Nov.3.1999 Techmark, a new technology market, was launched at

the London Stock Exchange. According to Gordon Brown, Chancellor of the

Exchequer, Techmark will be the London Stock Exchange “market within a

market” for innovative technological companies.

The specialised institutions are agencies created to meet the needs of

specific groups of borrowers mostly industrial and commercial - which are

not adequately covered by other institutions. They operate in both public

and private sectors. In general they offer alternative funding to that

provided by banks and building societies. Some of them were set up with

Government support and with financial backing from banks and other

financial institutions. Some public sector agencies offer financial support

to industry in Scotland, Wales, and Northern Ireland.

The main private sector institutions are finance houses and leasing

companies, factoring companies, finance corporations and Venture Capital

Companies.

Finance houses are major suppliers of hire-purchase finance for the

personal sector of short term credit and leasing to the corporate sector.

Leasing companies buy and own equipment required and chosen by businesses

and lease it at an agreed rental rate.

Factoring companies provide cash for a company in exchange for the sums

they owe. A factoring company buys up a client’s invoices as they arise and

finances up to 80% of the value of the invoices; the rest is paid after a

period, after deduction of administration and finance charges.

Finance corporations meet the need for medium and long term capital when

such funds are not easily or directly available from traditional sources

such as the Stock Exchange or banks.

Venture Capital Companies offer medium term and long term equity financing

for new and developing businesses when such funds are not readily available

from banks and other traditional sources. The British Venture Capital

Association has 103 full members, which make up over 99% of the industry.

Financial markets is a collection of sophisticated securities, futures and

options the money market, the euro currency market, Lloyd’s insurance

market, the foreign exchange market and markets in bullion and commodities.

The Stock Exchange

The origin of the London Stock Exchange goes back to the coffee houses of

the seventeenth century where those who wished to invest or raise money

bought and sold shares in joint stock companies. Brokers later opened their

own subscription Economy of the country has been directed through the City

which is the nerve center of the national finance. The greater part of the

country’s income comes from invisible exports - operations originating from

the City and flowing through its channels.

A large proportion of Britain’s wealth has been invested by the City

overseas. A number of banking institutions have their head offices in

Britain but operate mainly abroad in particular regions such as Latin

America or East Asia through extensive branch networks. The major bank in

this sector is Standard Chartered. This shows how the City of London

expands its activities beyond the country’s borders; the same goes for the

influence of the London Stock Exchange and Commodities Exchanges

(particulars of the City of London as a financial center will be dealt with

in Chapter three).

Chapter 3.

The City of London as a Financial Center, its Main Institutions.

There has been a long tradition in Britain of directing the economy through

the great financial institutions together known as “the City”, which until

1997 were located in the “Square Mile” of the City of London. This remains

broadly the case today, though the markets for financial and related

services have grown and diversified greatly.

Banks, insurance companies, the Stock Exchange, money markets, commodity

shipping and freight markets and other kinds of financial institutions are

concentrated in the solemn buildings of the City and beyond its borders.

The City of London is the largest financial center in Europe. London is

also the world’s largest international insurance market and has the biggest

foreign exchange market.

Britain’s financial service industry gives about 6.5 % of its gross

domestic products (GDP) and contributes some 35 thousand million pounds a

year. The largest contributors are banks, insurance, institutions pension

funds, and securities dealers. To help Britain’s financial services to

respond to the competition and at the same time to protect the public

investment, the Government introduced 3 pieces of legislation to supervise

financing the industry: the Financial Services Act (1986), the Building

Societies Act (1986) and the Banking Act (1987). Under these acts

investment businesses need to be authorized and they have to obey rules set

in the legislation. The main responsibility to supervise were the Bank of

England, the Building Societies Commission, the Treasury and the Department

of Trade and Industry. The Serious Fraud office was set up to investigate

and prosecute significant and complex fraud.

The Bank of England.

The Bank of England was established in 1684 by Act of Parliament and Royal

Charter as a corporate body. Its entire capital stock was acquired by the

Government under the Bank of England Act in 1946. It is the heart of the

City of London and Britain’s central bank. The Bank’s main functions are to

execute monetary policy, to act as banker to the Government, to issue

banknote and to provide central Banking facilities

for the banking system that is the Bank is responsible for the financial

system as a whole; it is “lender of last resort”. The Bank’s main objective

is to support the Government in achieving low inflation. Unlike some other

central banks the Bank can not act independently of the Government.

Decisions on changes in the interest rates are taken by the Chancellor of

Exchequer. The Bank’s role is to advise the Chancellor and to carry out his

decisions. The 1999 (November) interest rate was 5.5%.

As banker to the Government the Bank of England is responsible for managing

the National Debt. It has the sole right in England and Wales to issue

banknote. The note issue is no longer backed by gold but the Government and

other securities. The Scottish and Northern Ireland Banks have limited

rights to issue notes and those must be fully covered by holdings of the

Bank of England notes. Coins can be provided by the Royal Mint.

The Bank of England can influence money market conditions through discount

houses. If on any day there is a shortage of cash in Banking system, the

bank relieves the shortage either by buying bills from the discount houses

or lending directly to them.

The Bank of England is responsible for supervision of the main wholesale

markets in London for money, foreign exchange or gold bullion.

On behalf of the Treasury the Bank manages the Exchange Equalization

Account (EEA). Using the resources of EEA the Bank may intervene in the

foreign exchange markets to check undue fluctuations in the exchange rate

of sterling.

Discount Houses.

The Discount Houses are unique to the City of London (and to Britain as a

country). They occupy the central position in the British monetary system.

They act as intermediaries between the Bank of England and the rest of the

banking sector promoting an orderly flow of funds between the Government

and the banks. In return for acting as intermediaries the discount houses

have privileged daily access to the Bank of England as “lender of last

resort”.

Banks.

Banks in Britain developed from the London gold miths of the 17th century.

By the 1920s and the 1930s there were five large clearing banks with a

network across the country. In February 1996 there were 539 institutions

authorized under the Banking. Act of 1987. In British banking retail banks

should be described as dominant.

Retail banks primarily serve personal customers and small to medium-sized

businesses. They operate through more than 11.350 branchers offering cash

deposits withdrawl facilities and systems for transferring funds. They

provide current accounts, deposit accounts various types of loan

arrangements and a growing range of financial services.

The main banks in England and Wales are Barklays, Lloyds, Midland, National

Westminter and the TSB group. The major Scottish banks are the Bank of

Scotland, Clydesdale and Royal Bank of Scotland.

With a relaxation of restrictions on competition among financial

institutions major banks have diversified the services they provide. They

have lent more money for house purchases, have more interests in leasing

and factoring companies, merchant banks, securities dealers, insurance and

trust companies. They provide low facilities to industrial companies ands

now support a loan guarantee scheme under which 70% of the value of loans

to small companies is guaranteed by the Government.

Plastic card technology has revolutionized cash transfer and payments

systems. There are around ninety two million plastic cards in circulation

in Britain. There are different types of cards but they often combine

functions. Cards can be used overseas too to obtain cash from bank ATM (

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