City reforms are waste of time, warns financier Rolet
Ex-LSE chief tells Simon Foy that taxes and red tape must be cut to arrest the decline of London as global centre of fiscal excellence
The former boss of the London Stock Exchange (LSE) has warned that “sideshow” reforms aimed at boosting the market’s competitiveness will not save the Square Mile from perpetual decline.
Xavier Rolet, who led the LSE between 2009 and 2017, said government and regulatory efforts to make London a more competitive financial centre were a “sideshow of a sideshow” and a “complete waste of time”.
Speaking to The Sunday Telegraph, the Frenchman warned that the only way to arrest the City’s decline was to cut taxes and axe red tape in a total “recalibration of the UK’s punitive fiscal and regulatory framework”.
The intervention comes amid fears that the City of London is losing its position as a leading global financial centre. A stream of companies have chosen to list in the US in recent months, including the building materials business CRH and gambling giant Flutter. British tech darling Arm has also said it will snub the City in favour of a New York listing.
Arm’s decision was regarded as a particular blow to the Government after intensive lobbying, and added to growing concerns about the City’s competitiveness.
In March, Paris also extended its lead over London as Europe’s largest stock market, heightening fears that the LSE is losing its allure.
Rolet, who is now non-executive chairman of City broker Shore Capital, said the current regime was forcing high-growth companies to flee to rival financial hubs. He said London will never compete with New York unless long-term investors, such as pension funds and insurers, increase their exposure to the stock market.
He said: “We need a recalibration. We have to lower the quadruple taxation of equities in the UK.
“At present, we have dividend tax, capital gains tax, income tax and a transaction tax via stamp duty, of which the UK has the highest rate in all of Europe. The same pound of income from equities is taxed four times.
“On the other side you have a regulatory framework that forces long-term investors, namely pension funds and insurers, to effectively short the real economy by preventing them from investing in the stock market.”
Jeremy Hunt, the Chancellor, last December outlined a set of proposals to boost the City’s position, dubbed the Edinburgh Reforms. They include relaxing ring-fencing rules on smaller banks, mandating that financial regulators focus on boosting economic growth and loosening rules that hold bankers personally responsible for rule breaking on their watch. The package was meant to encourage risk-taking in the City to boost growth.
The Financial Conduct Authority (FCA) has also pledged in recent weeks to make it easier for companies to float on the London Stock Exchange. Changes include scrapping premium and standard listing classes in favour of a single segment with less onerous rules. However, Rolet fears that these measures will fail to have a meaningful impact on Britain’s standing in the international financial landscape. He said London will continue to struggle when it comes to competing with New York and creating multibillion-pound technology companies.
He said: “The UK does not have a start-up problem. There’s lots of good start-ups in the UK. But what the UK doesn’t have, what Europe doesn’t have, is the equity markets to scale up those start-ups and retain them.
“For this to happen, a recalibration of the fiscal environment is a requirement. If you don’t do that, don’t waste your time with sideshows and minor rule changes, which in my view, are not going to really change anything.” He added that the UK has all the ingredients to create £100bn technology companies apart from the capital market to scale-up and retain these businesses.
Rolet said: “If the UK is to fully leverage its fantastic universities and capacity for science and innovation, all of which are without a doubt part of the UK’s advantages, the only way you’re going to transform that, and mark my words, is to unleash the power of its equity markets. The rest is just going to be at the margin … and is not going to move the dial.”
Rolet also said that Brexit presents the UK with an opportunity to slash “bureaucratic” European regulation that he argued was “deeply adverse to equity markets”.
One of Rolet’s legacies at LSE was acquiring a majority stake in clearing giant LCH. Clearing houses act as middlemen in derivatives trades between banks and have become a vital part of the financial system since the 2008 financial crisis.
However, the industry has become a key Brexit battleground as Brussels seeks to build “strategic autonomy” to boost its own capital markets.
Rolet fears that London’s €660 trillion (£563trillion) clearing market is at risk, owing to plans in Brussels to stop its banks clearing trades through London.
Mairead McGuinness, the European commissioner for financial services, has given EU banks and money managers until June 2025 to shift their clearing from London to the bloc.
She has pledged to punish banks on the Continent for failing to shift lucrative clearing business out of the City of London post-Brexit. Last year, she raised eyebrows after saying the EU’s reliance on the Square Mile was a vulnerability similar to its dependence on Russian oil and gas.
Rolet warned that Brussels’ plan to onshore clearing activity poses a “systemic risk” to the European Union.
He said: “The Europeans see Brexit as a political decision, so their answer clearly is a political one. They do not understand why people would put economic argument [first],” adding that the Commission had “very little of understanding” of clearing and saw Brexit as an opportunity to “grab it”.
“If the EU forces EU-headquartered banks and asset management to clear their euro denominated interest rate swaps inside the eurozone … if that were to happen over time, because they cannot just force it overnight, it’s a systemic risk that they cannot afford to take.”
He added that the policy will likely force activity from London to the US, where the EU has an equivalence deal that encompasses clearing.
“It’s not going to happen in six months. But if the engine moves, it will move to the US … the clearing engine of LCH is at risk.
“For me, the litmus test for London – the ability for it to retain its global crown in financial services – is over the coming years whether it retains the global clearing engine in interest rate swaps.”
Rolet last year resigned from PhosAgro, a Russian chemicals company, following Putin’s invasion of Ukraine. He said: “I was on the board of a Russian company, there were sanctions published by the EU, and so the same day I resigned. That was it.”
Andrew Griffith, the City minister, said: “We have a track record of attracting the brightest and best companies in the world built on the long-standing competitive advantages of the UK and its attractiveness as a place to do business.
“But we are not complacent which is precisely why our Edinburgh Reforms are so important and that getting them into play swiftly is our focus. From changing the culture of financial regulators, streamlining the time and process that it takes to list to improving investment research and much more, the reforms are an ambitious and comprehensive regime.”