Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.
Nicolas Mackel . – “Welcome to Shaping Finance, a podcast which offers a platform to high level decision makers and shapers in international finance. My name is Nicolas Mackel, I’m the CEO of Luxembourg for Finance and the host of this podcast. It is my great privilege to welcome for our second edition of this podcast, my counterpart from London, Miles Celic. Miles is the CEO of TheCityUK, the industry led body representing UK based financial and related professional services. Miles has been in this position since September 2016, and in those four years, he certainly has seen more than his fair share of different crises. Starting of course, with the aftermath of the Brexit referendum, and stretching today, obviously into completely new territory with the COVID crisis. How the city has reacted to these crises and to the economic situation deriving from the COVID crisis are among the issues that we are looking forward to discussing with Miles today.
Miles, how has the covered crisis impacted London’s financial industry and where do you see the role for the financial sector in the economic recovery?
Miles Celic. – “Well, Nicolas, first of all, thank you very much for asking me to participate in this series of podcasts. I think the relationship between our industries in the UK and Luxembourg is a long-standing and very important one, and I suspect that the challenges that we’ve had to face through COVID-19 both in the UK and in Luxembourg are very similar. The British industry has had a short-term challenge in terms of adapting to the COVID-19 situation, and then there are longer term challenges as well.
So, in terms of the short term, I think the industry has adapted well to the lockdown. We moved very quickly to having a very large number of people, the vast majority of the industry, working from home, and that has meant that we’ve been able to look after staff safety, it’s meant we’ve been able to look after the safety of customers, but we continue to be able to provide services. So, if anything, the evidence here is that the productivity in the industry has increased. So far, the technology has been able to keep up with the demand that both customers and employees have had. I think there are some interesting questions over the long-term and I’ll come to that in a second.
But then from a very practical economic perspective, there’s been a challenge of providing economic support into businesses. And so far, the industry has facilitated dozens of billions of pounds worth of loans, over £50 billion so far, into British businesses to support them through the crisis. It’s worked extremely closely with the central bank, with regulators, with government in delivering that. It’s kept the economy supported through this process. And in fact, some institutions lent more in a single day during the crisis and they would normally do in a month. I think that leads to some questions over what the long-term here is. In terms of the amount of money that has been lent, clearly that raises questions over the creation of unsustainable debt, and that’s something that our industry has been working with government and the Central Bank on.
So, we’ve had a group led by Sir Adrian Montague, who chairs our leadership council, and Omar Ali of EY, who is one of our board members, looking at how you recapitalize businesses. How can you utilize the private sector to recapitalize millions of small and medium sized enterprises and to keep them going through the recovery and therefore providing a foundation, a springboard for that recovery. But also, I think there are question marks, as I was alluding to earlier, about what this means in terms of some of the trends that we’ve seen. Remote working, the use of technology, and the acceleration that we’ve seen in those trends that COVID has created. It’s been, as many pandemics historically have been, a major point of disruption. They act as accelerators of pre-existing trends. And that’s something that the industry is grappling with at the moment.
One of the trends that this crisis has clearly underlined the importance of is that of sustainable finance. Now obviously a financial centre like London, just as much as a Luxembourg, Paris, or many other financial centres have not only discovered this important trend with the current situation but have been busy and involved in it for quite a while. Nevertheless, we see not only an acceleration of this trend, but also the trend has really been underlined in its importance. Miles, what is the City and you at TheCityUK doing to really push this agenda forward?
MC: “So, I think you’re absolutely right Nicolas, in identifying this as a really critical element in the future of the industry and the future of society, but also in expectations that society has of business generally, our industry in particular. But also the nature of what our industry does. It is in so many cases, part of the solution to social and economic and public policy challenges. And I think the sustainable finance dimension is just one example of that, but a critically important one. And we’ve seen on ESG and SRI standards more and more of an expectation from the industry to play its role. We’ve issued reports working particularly with Imperial College London just last year on the way that our industry is part of the solution on the development of low carbon infrastructure. You cannot have a low carbon economy without low carbon infrastructure underpinning it, and you can’t have low carbon infrastructure created as easily without having the appropriate financing in place, and that’s something that our industry is central to.
And London has been, and the UK more broadly, has been one of the trailblazers in this space. I was especially pleased in the most recent Z/Yen survey that London was identified as the leading centre for the quality of its green finance offering. It’s something that we’ve been, as I say, alive to for some time. So, UK Treasury, HM Treasury set up working with the City of London Corporation, which looks after the physical square mile and something that we and others were very supportive of. The Green Finance Institute, which is there to convene and lead coalitions of experts, not just from the UK, but globally to identify where the barriers are that if you can unlock them would allow you to have impactful outcomes for the rest of the economy? And that is something that benefits the environment, benefits consumers, benefits the citizen, and benefits businesses. So, I entirely agree with you. This is absolutely critical.
And whilst COVID has obviously been a dreadful tragedy, as I said earlier, what it has created is this accelerator effect. We need to look at what we can do in order to seize the potential changes that COVID has created, that we can then utilize to the benefit of the economy as we build back better and to the benefit of society as we build back better. I’d also add that obviously from the point of view of COP26, which was due to be held in Glasgow this year and is clearly still being taken forward under the auspices of the UKs business secretary, Alok Sharma, that’s an enormous opportunity for the industry. It is something we’re very alive too, to look at how we can support that broader agenda. And I think it’s important that people realise, as I say, that there is no meaningful or sustainable solution to the environmental challenge that we’re facing without the utilisation of the financial and professional services industry.
Another trend that this crisis has underlined is that of de-globalisation, which obviously started a couple of years ago, but has really been accelerated by this current crisis. How do you see this in the City of London, what does it mean for the financial industry, and what do you think can be done in order to counter this particular trend?
MC: “I mean, I think you’re absolutely right to raise this Nicolas. The UK industry, the Luxembourg industry, the financial and professional services industry globally is an international industry. It is an industry that brings people together, that provides finance across borders, and is one of the underpinnings of the enormous benefits that globalisation has brought across the world over the last few decades. I think it’s important to look at this in the round. So, this isn’t something that has necessarily kicked in just in recent years. In fact, I think I’m right in saying that if you go back to 2005, that’s when you see the beginnings of a decline in global trade. And obviously a large part, not all, but a large part of what our industry does is supporting and financing global trade. So, these are longer term trends, but they are nonetheless very worrying longer-term trends.
So in particular, when you think of our industry and when you think of banking, for instance, a lot of the standards that are set, are set at international level, and it’s in my view entirely regressive to move towards a period of regulatory fragmentation, financial market fragmentation, isolationism, protectionism, and the risk, I was talking earlier about some of the things, the changes that COVID has accelerated that may allow us to do things better. One of the risks on the other side of the coin is the acceleration of trends that are unwelcome. So, 70 countries have so far implemented tariffs or export controls or import controls of some form on goods, particularly those related to pharmaceuticals or medical supplies. But historically what that tends to be is the thin end of the wedge. You see those sorts of controls and restrictions issued in one part of the economy and they tend to spread to others.
The other elements of this is that the gap, the difference between trading services and trading goods is much more blurred than it used to be. An occasionally you’ll hear people saying in politics, in some parts of the world, that it makes sense from their perspective to limit imports in goods, but actually their sense is that you can separate that from trading services. And that’s just not the case anymore. 40% of all goods exports have some form of service contracts attached to them, and that is only increasing. If you think of iPhones, of jet engines, of computer technology, in many ways and in many cases, those products, the services element, the contract that comes with them, the apps that can be downloaded to them are often a source of greater value than the product itself.
So, I think this is a really worrying area. I think it’s incredibly important that [the financial] industries that are outward facing such as the British industry and the Luxembourg industry continue to make the case for open markets, for international markets, for the higher standards at international level, and the avoidance of global fragmentation in markets and in regulation. Because ultimately if we do go down that route, it will increase costs, it will decrease growth, it will have an impact on job creation, and the ultimate losers will be citizens themselves.
Building on this issue of de-globalisation, let us switch to Brexit, because you have taken up your position in September 2016, following the referendum in which one of the main arguments was for Britain to be able to arrange its own affairs on a global scale. Now, doesn’t de-globalisation also impact the way that Britain can play this role of global Britain going forward? What has Brexit meant for the city and where do you see the future of it?
MC: “But I think that’s absolutely a fair question. What I would say, and certainly I’m not here as a spokesperson for Brexit or the Leave campaign, but certainly my understanding of where that campaign was coming from was not for an isolationist Britain, or certainly not in terms of most of those involved, but a more globally outward facing Britain. From the point of view of our industry, however, which is what my remit is, now we’ve always made the case that there is a single European ecosystem when it comes to financial and related professional services. One that includes not just the EU, but also the UK, Switzerland, other centres. This is a closely integrated, highly efficient industry.
From the point of view of the British industry, and again, Nicolas, this is something that you and I both had direct experience of, the British industry and the British government when it came to financial services regulation was always able to punch above its weight in Brussels. When you look at the shape of financial services regulation that emanated within the European Union, the UK entirely understandably because of the size of the industry here, was always one of the most influential voices in that. And I think it’s notable that when you look at the approach the UK government has taken on regulation, there has been no radical departure, nor do I anticipate a radical departure in standards from the European norm, because we helped set the European norm.
Now it may well be that over time there is a gentle divergence in particular areas where there may be a particular British exceptionalism because of the nature of the way the industry operates, that sub sector of the industry might operate. I’m thinking here, particularly for instance of Solvency II, and the fact that there is a much greater reliance on annuities for pensioners in the UK than there are in most other parts of Europe. So, there may be sense to do something specific in that area. But there is no particular desire in the industry that we speak for, no particular desire in government from the conversations that we’ve had for some sort of regulatory bonfire.
Quite the contrary, there is absolutely a recognition that you’re successful internationally by having the highest standards. And I think that can be seen by the fact that if you consider the old economic argument of revealed preference, actually the moves out of London have so far been relatively minor. The hope is that once we get through the politics of the current negotiations and some of the emotion that obviously comes around these times, that we can continue to build a close and deep relationship in financial and indeed professional services between the UK and the EU.
Luxembourg would certainly hope to be able to build such a relationship for the future with London, and we have said so on many occasions. London has over the last couple of years managed to build itself into not only Europe’s, but the world’s FinTech capital. My question is, how has both Brexit and the COVID crisis impacted this success story? Given the investment figures one would have the impression that the impact is relatively little, or is it maybe just too early to say?
MC: “The role of FinTech in the UK is absolutely one of the key underpinnings for the long-term success of the industry. As you say, Nicolas, the UK is already a leading global hub for FinTech. What we’ve seen in FinTech as we’ve seen in other tech, parts of the tech industry, is COVID-19 again, acting as accelerator of adoption of some of this technology, and I’d anticipate that that will continue. We’ve been very fortunate in the UK through the FCA sandbox and other ways that the UK regulators have operated, but the UK regulators have taken a very encouraging approach to innovation, to looking at how they can support the development of skills in this space, which is absolutely vital, and to working very closely with the industry on that.
I think what’s also really fascinating is the way that FinTechs and the established players are partnering up to a greater and a greater extent. We did a report for the UK government on this about 18 months ago, and you’re seeing the FinTech’s bringing their technological expertise, their innovation, their creativity, and matching that with what’s happening in the work that established players are doing. But also, what the established players have is the advantage of pre-existing relationship of trust with their customers, so both sides looking at how they can collaborate more closely on that. And I think that will just become closer and closer over time. One of the interesting things is that occasionally you’d hear criticism that FinTech had never had to experience a recession, that FinTech has particularly emerged post-financial crisis, and that was a criticism of how resilient will the FinTech firms be when we do hit economic hard times? And as I said earlier on, I think what we’re actually seeing is that they are coming into their own in these times, and I expect that will merely continue.
I think one of the big challenges as we go forward is the contest for talent. And this is not just a challenge for the UK industry, it’s a challenge for the industry across Europe and globally, which is how can you persuade talent to join FinTechs when they might want to join some of the big tech firms, or they might want to join tech start-ups in other parts of the economy? And I think that is something that means we’re going to need to look at a lot of the issues that I was alluding to earlier in terms of working practices, how we encourage and attract people, what we do on diversity, equality, and inclusion issues in the industry. So, I think, again, very exciting, huge amounts of opportunities, but a number of challenges that we’re really going to have to grapple with.
Well obviously, notwithstanding all the technological evolution that we have seen over the last couple of years, financial services are and will remain mostly a people’s business.
Miles, let me ask you a last question on this 10th anniversary of TheCityUK’s founding. What are the greatest achievements that you’re most proud of and where do you see the future in the next five years?
MC: “Well, Nicolas, thank you for the birthday wishes, which are much appreciated. So, what I am I most proud of? I think three things in particular. Firstly, I think we have succeeded in the mission that we were set when we were established a decade ago to represent the ecosystem, the whole ecosystem across the UK of financial and related professional services. And I think we’ve done that and the feedback that we tend to get through member surveys and engagement with stakeholders, I think, underpins that we have achieved that. Secondly, I think we helped drive the industry, coordinate the industry response to the entirely unexpected, when we were set up 10 years ago, unexpected development of Brexit. So that has been an opportunity for us to bring that 10% of UK GDP together to engage both the UK government and the European authorities.
Thirdly, the work that we’ve done around COVID. We’ve brought together more than 200 experts across the industry to drive our recapitalisation work. We’ve engaged the highest levels of governments, central banks, and elsewhere on that, and that is work in progress. I think if I had to summarise, I’d say a lot done and a lot still to do, and that will be the challenge over the next five years as we adapt to the changes that we’re seeing.
Looking at it from the outside, we can certainly confirm that the work you were doing at TheCityUK is impressive. I myself love reading the different reports that you publish, and my team enjoys very much working with your team and we certainly are looking forward to doing so for the next couple of years. So, from our side, wholeheartedly, congratulations on the achievements of the last 10 years.
Maybe before we conclude, let me ask you a more personal question. Namely, over the summer, you’ll have certainly had time to do a little bit of reading. What was one of the books you have read and what are the thoughts you might want to share with our audience in this regard?
MC: “Well, thank you for the kind words about TheCityUK, Nicolas, and we very much mutually appreciate the work that we’ve done together. The relationship with Luxembourg for Finance is one of our most important.
In terms of books that I’ve read over the summer, as you say, it’s been an opportunity to catch up with a very large pile of books and a very large backlog. The last book I read was George Magnus’ book, Red Flags, on the Chinese economy. The history of the Chinese economy and the opportunities and the challenges that it faces in the years ahead. I was particularly struck by George Magnus’ thinking on the demographic impact of what happened in China.
One of the facts that I think people often lose sight of is that the largest mass migration in human history has taken place in the last 25 years. We’ve seen nearly 300 million people move from the Chinese rural interior into the cities, and that has had a huge impact on the shape of the Chinese economy and will have a huge impact when you think about aging challenges in the Chinese economy and what that also means in terms of the development of services and the role of financial services in supporting an aging population. It was a very thought provoking, fascinating book, and one that I’d absolutely recommend.
NM: “Well, thank you very much Miles. This was a fascinating discussion. We covered a lot of ground. I’m sure that given the uncertainties that remain both on Brexit and on the developments in the COVID crisis, we will certainly have another opportunity to discuss these in the coming month between us.
Thank you also to our listeners who have tuned in again to this a second edition of our podcast. In our next episode we will be discussing economy and finance in Asia with Fred Neumann, the Chief Economist for HSBC in Hong Kong. To stay up to date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website, luxembourgforfinance.com .”