New Financial

Report: Unlocking productive investment


March 2021 • Topic: Unlocking capital markets • by William Wright


‘Water, water, everywhere – nor any drop to drink’
The Rhyme of the Ancient Mariner, by Samuel T Coleridge

This report shows that while the UK is bursting with over £5.6 trillion in pools of long-term capital it faces a drought of the sort of long-term productive investment that the economy needs in the wake of the Covid crisis. Just 1% of pensions and insurance assets are invested in unlisted UK equities: this report highlights the barriers to unlocking more of this capital and suggests some solutions to put more of it to work in the UK economy.

As we approach the first anniversary of lockdown in the UK, the economy needs all the help it can get to rebuild in the wake of the Covid crisis. In particular, it needs more ‘productive investment’: long-term capital that is put to work in the form of equity markets, unlisted equities, growth capital, patient capital, and infrastructure investment. But does the economy have access to the sort of funding that it needs?

This paper sets out in stark terms an apparent disconnect in the UK: on the one hand, the UK is overflowing with long-term capital in the form of pensions and insurance assets. On the other, it is suffering a drought in terms of patient and productive capital, with only a tiny proportion of the abundant pools of long-term capital in the UK being put to work in the form of productive investment.

The paper analyses this disconnect by mapping the available pools of long-term capital in the UK; drilling down into the asset allocation of different ‘buckets’ of long-term capital; and mapping that asset allocation against different markets to identify how much (or how little) of that long-term capital is in the form of productive investment. It identifies the main barriers to unlocking more of this capital, and suggests some potential solutions.

In theory, investors with long-term time horizons and long-term liabilities like pensions funds and insurers should be ideally placed to provide long-term productive investment to the UK economy. In practice, we found that:

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would like to request a copy of the full report, please click here.

Here is a 10-point summary of our paper on ‘Unlocking productive investment’:

1. An embarrassment of riches: the UK is overflowing with big and deep pools of long-term capital. We estimate that the combined value of pensions assets, insurance assets, direct retail investments and endowment funds in the UK is around £5.6 trillion, nearly three times GDP. This means the UK has the biggest and deepest pools of long-term capital in Europe (and in terms of depth not far behind the US).

2. A clear disconnect: only a tiny proportion of this capital is allocated to long-term, patient, productive assets. Just 12% of this huge pool of capital is invested in the UK stock market and less than 4% is invested outside of the FTSE 100. Less than 1% of the £4.6tn in pensions and insurance assets is invested in UK unlisted equities (and just 0.5% of defined contribution pensions are).

3. Growth potential: on the plus side, this presents a significant growth opportunity. Given the sheer scale of pools of long-term capital in the UK, a small shift in asset allocation could have a huge impact. If the asset allocation to UK unlisted equities across pensions, insurance and retail pools of capital increased by just one percentage point (to 2.1%) it would put an additional £55bn to work in the UK economy.

4. A post-Covid recovery: the UK economy will need all the help it can get in the wake of the Covid crisis. Companies will need more equity and equity-like funding, and the economy will need more investment in infrastructure, innovation and growth. Smaller companies in the private sector that are most likely to be hit by Covid are probably going to be the least able to access the equity funding that would help them rebuild.

5. The decline in UK assets: over the past 20 years the asset allocation of UK pensions, insurers and asset managers has fallen sharply. Defined benefit pensions schemes (the largest component of UK pensions) have reduced their allocation to UK equity from 48% in 2000 to less than 3% today (meaning that in real terms they have cut the value of their investment in UK equities by nearly 90%). UK asset managers and insurers have roughly halved their allocation to the UK stock market over the same period.

6. A minority stake: the low allocations to productive UK assets means that pools of long-term capital in the UK owns less than 30% of the UK stock market between them, around a third of venture capital and growth funds in the UK, and less than 10% of buyout funds.

7. The flow of investment: the flow of investment in productive assets in the UK is relatively low. Over the past five years, UK companies have raised about £30bn a year in equity on the stock market. Private equity firms have invested about £13bn a year in the UK, venture capital funds about £1.5bn a year and growth funding has averaged £2.5bn a year. Infrastructure investment is harder to identify because it straddles different sectors and asset classes, but we think it less than £10bn a year.

8. A structural challenge: two of the biggest challenges in unlocking more productive investment in the UK are the ubiquity of open-end / daily dealing investment funds, and the growth in passive investing. Open-ended funds account for 85% of investment funds in the UK, but are a poor vehicle for illiquid assets. The government is focused on developing a new long-term fund structure to address this. Low cost passive investing is also unsuitable for investment in illiquid assets: 30% of all assets under management in the UK are run on a passive basis, rising to 44% for equity assets.

9. The main barriers: the low level of productive investment in the UK is the rational outcome of a system that has grown in size, complexity and interconnectedness over the past few decades, and which has been repeatedly overlaid with new regulation and structures. There are also specific barriers within each bucket of long-term capital, such as the charge cap for DC pensions and capital requirements for insurers.

10. Opening the taps: there is of course no silver bullet to unlocking more productive investment. Broadly we think the government and industry should focus on getting more money into pools of long-term capital, making those pools of capital more efficient, ensuring they have right the vehicles and structures in which to invest, and recalibrating the regulatory and tax regime around them. More ambitiously, the government and the investment could work together to create a growth fund with a specific focus on productive capital.

NewFinancial print Report: The wider context on UK public equity markets
New Financial

Report: The wider context on UK public equity markets


January 2021 • Topic: Capital markets • by William Wright


One of the biggest challenges and opportunities for UK capital markets is how to reinvigorate the new issue market and to make listing in the UK more attractive to UK and international companies alike.

Our latest paper ‘The wider context on UK public equity markets’ is our submission to the UK listings review, being led by former European Commissioner Lord Hill. We are delighted to have hosted two events this week with Lord Hill to debate the wide range of range of perspectives on one of our favourite topics with different market participants.

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would like to request a copy of the full report, please click here.

The report provides a wide-ranging and long-run analysis of the shifting trends in the UK, US and global public equity and new issue markets. It shows that while the listings process and regulations in the UK can always be improved, the causes of the relative decline in public equity markets and new issues over the past 25 years are more structural – and will therefore require a wider strategic response.

The paper is in the form of a slide presentation with notes and has a lot more charts than words. It  updates and expands our report from 2019 on ‘What are stock exchanges for? And why should we care?’  that we published in collaboration with Pension Insurance Corporation.

Here is a 10-point summary of our paper on the UK public equity and new issues market:

1) Why public equity markets and IPOs matter: without equity there is no other finance. Equity markets drive growth and investment by providing long-term risk capital to companies; they fuel innovation and productivity growth; they democratise wealth creation; they set standards in governance and accountability; and they support the social licence for business and finance. Post-Brexit the UK can build on its position as the dominant market in Europe for IPOs and the second biggest market globally for international IPOs.

2) A structural decline: over the past 25 years, public equity markets in developed economies have been in structural decline. While stock markets are bigger, deeper, and more liquid and more efficient than ever, the number of companies listed on them in developed economies has roughly halved, the value of new issues has fallen by two thirds, and the number of new issues has dropped by three quarters.

3) The international context: the UK has the largest stock market in Europe and one of the deepest stock markets (relative to GDP) in the world. It has more than twice as many listed companies as the next biggest market in Europe. It also has the largest and deepest IPO market in Europe, and relative to GDP IPO activity in the UK is slightly higher than in the US (in the three years to 2019).

4) So, what’s the problem? Over the past 20 years the number of listed UK companies (including the main market and AIM) has nearly halved (-44%), the value of new issues has fallen by around two thirds in real terms to about £5bn a year, and the number of new issues has dropped from over 400 a year at its peak to less than 100. A small but significant number of high growth UK companies have opted to list in the US instead of London.

5) The main drivers: we think there have been three main drivers of this decline in developed markets:

6) The US and UK new issue markets: there are a number of key differences between the IPO market in the US and the UK:

7) The international picture: the UK is the second largest market for international IPOs after the US with a global market share of 17% (compared with 67% for the US): since 2015 around 90 overseas companies have IPOd in London raising $18bn. The US dominates the market for international tech IPOs with half of all IPOs by number (144) and two thirds by value ($33bn): that’s five times bigger than the UK’s share of international tech IPOs.

8) The opportunity ahead: there is a significant opportunity for the UK to increase listings in at least four specific areas:

9) Rethinking the listings process: we think there is scope to explore tweaks to the listings requirements in the UK. Any changes would obviously need to be carefully balanced with the needs and concerns of investors. The UK could explore the following:

10) Recalibrating the wider framework: in addition to rethinking the listings framework, there is scope to address the more structural factors that act as a drag on public equity markets and new issues:

NewFinancial print Report: Brexit & the City: some initial reflections – January 2021
New Financial

Report: Brexit & the City: some initial reflections – January 2021


January 2021 • Topic: Brexit • by William Wright


In the past few weeks, it has been quite surprising to see how many people appear to be surprised that the UK’s financial services industry / the City ended up with so little from the Brexit deal, or that there would be an immediate impact on some parts of the industry. This short paper summarises where we are, how we got here, and where we might go from here. In short:

1) Where are we?

As we have been warning for the past year, financial services has ended up with a ‘No Deal+’ Brexit: in other words, virtually nothing. There is very little of substance on finance services in the trade deal itself, and the blow has been softened a little with two equivalence decisions (clearing and settlement). To be clear, this is a lot better than a straight ‘No Deal’ Brexit, which would have caused significant economic and market disruption, and poisoned the political relationship between the UK and the EU.

2) How did we get here?

A deliberate approach: most importantly, the outcome for financial services is the direct result of a series of deliberate decisions by the UK government (though that should not be confused with ‘the UK got what it wanted’). Here are four specific ‘deliberate’ decisions taken by the UK that have steered us to where we are:

An accidental outcome: while the exclusion of financial services from the deal was largely the result of deliberate decisions, there are some more accidental reasons for ending up where we are:

3) So, what is the problem?

What happens next?

We are where we are with Brexit, whether you like it or not. Here are some initial thoughts on the outlook for the next few months and how the UK can respond to Brexit in the longer term. For a more detailed analysis of these options, please refer to a playbook of 25 recommendations from our recent report on ‘Beyond Brexit’:

NewFinancial print Report: What do EU capital markets look like on the other side of Brexit?
New Financial

Report: What do EU capital markets look like on the other side of Brexit?


December 2020 • Topic: Brexit • by Panagiotis Asimakopoulos


This report shows that post-Brexit capital markets in the EU will be significantly smaller and less developed relative to GDP than they are today – and that the UK’s current dominance of EU capital markets activity will be replaced by the dominance of France and Germany.  The report also raises some difficult questions over the future relationship between the EU and UK in key sectors.

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would like to request a copy of the full report, please click here

With the end of the transition period less than a month away, this short paper is an updated and expanded snapshot of what capital markets in the EU will look like on the other side of Brexit. In summary, the departure of the UK means that EU capital markets will be significantly smaller, less developed, and more French than they are today.

EU capital markets will shrink by around a third overall – and in some sectors by more than 80% – and the current dominance of the UK will be replaced by an effective duopoly of France and Germany, who between them will account for 45% of all EU activity.

This is likely to lead to a shift in the tone and direction of policy around capital markets in Europe, not least on the future of the capital markets union initiative and the future supervisory framework. The EU is not only losing its largest and deepest capital market but also much of the supervisory and regulatory expertise that the UK has built up over many decades.

The EU will also lose a significant part of its footprint in global capital markets, with implications for both the EU and the UK in terms of their role in shaping future global standards.

At the same time, large parts of EU capital markets activity will effectively be based offshore in the UK – particularly in sectors such as trading and asset management where firms have chosen to concentrate large parts of their EU activity in London. This will pose difficult questions for the EU in terms of its ‘strategic autonomy’ and how much of that business it seeks to repatriate, and will be a big factor in what may be a difficult future relationship with the UK.

For example, more than three quarters of euro-denominated FX and derivatives trading in the EU today takes place in the UK, along with around two thirds of all trading in EU27 bonds, and over 40% of trading in EU27 stocks. How much of this business will the EU happy to continue being conducted in the UK? How much of it will seek to ‘repatriate? And how much of this business it will the UK be able to hold on to?

And, in highlighting the relative underdevelopment of capital markets in the EU27, the report also underlines the urgency for policymakers across Europe to focus on developing bigger and better capital markets to support growth and investment.

Here is a 10-point summary of ‘What do EU capital markets look like on the other side of Brexit?’:

1. That shrinking feeling: Brexit means the EU is losing its largest and deepest capital market. The UK accounts for nearly a third (32%) of all capital markets activity in the EU across the 25 different sectors we analysed, meaning that EU capital markets post Brexit will be nearly a third smaller than they are today. The UK’s share is nearly double that of France and more than France and Germany combined.

2. A smaller global footprint: Brexit will significantly reduce the EU’s global footprint in capital markets. Today the EU is the second largest capital market in the world with a combined share of 22% of global activity. That is nearly half the size of the US, but a significant lead over its nearest rival China. The departure of the UK will reduce this share to 13% – around one third the size of the US and roughly the same as China.

3. The impact by sector: the impact of Brexit on the size of capital markets in the EU will vary hugely between different sectors. In derivatives and foreign exchange trading, more than 80% of EU-wide activity is in the UK. Bond markets in the EU will be around one fifth smaller, equity markets will shrink by around one quarter, while pensions assets and assets under management will shrink by nearly half.

4. Less developed: in addition to being significantly smaller, capital markets in the EU will be less developed relative to GDP than they are today. Capital markets in the UK are roughly twice as deep relative to GDP as in the rest of the EU, meaning that on the other side of Brexit the overall depth of capital markets in the EU will shrink.

5. A loss of UK dominance: the UK currently dominates EU banking and finance and is the largest market in the EU in 21 out of 28 sectors that we looked at (France is the largest market in four sectors). This has given the UK an outsize influence in EU banking and finance: the UK will lose much of that influence, and the EU will lose much of the UK’s experience.

6. An offshore hub: Brexit will pose particular challenges in sectors where firms have chosen to concentrate their EU activities in the UK and could (in the short-term at least) mean that significant amounts of EU business are conducted ‘offshore’. More than three quarters of trading in the EU of euro-denominated derivatives and FX is conducted in the UK; more than half of all euro-denominated derivatives are cleared through UK based CCPs; nearly half of all trading of EU27 stocks is conducted on UK-based platforms, and around two thirds of trading in bonds issued by EEA firms and governments is conducted in the UK.

7. Vive le Brexit?: France will be by far the biggest capital market in the EU on the other side of Brexit with a share of total activity of around 24%, ahead of Germany on 20%. It will be the biggest market in the EU in 16 of the 28 sectors we looked at, ahead of Germany with eight sectors. This shift in influence from the UK to France and Germany is likely to lead to a change in the tone and direction of policy and regulation in EU capital markets on the other side of Brexit.

8. A wide range: there is a wide range in the depth of capital markets in the EU27 between different sectors. In all but two sectors markets in the UK are bigger relative to GDP than in the EU27. In some sectors of the fixed income market, such as high-yield bond issuance and leveraged loans, Brexit will have a minimal impact on the depth of EU capital markets, but in others, such as pensions and asset management, the depth of EU capital markets relative to GDP will fall by nearly one third.

9. Banking on banks: Brexit means that the EU economy will be even more exposed to a struggling banking sector than it is today. The share of corporate debt coming from bank lending in the EU27 is 77% (compared with 74% if you include the UK), with corporate bonds representing just 23% (versus 26% for the wider EU). Listed equity and corporate bonds represent a much smaller share of the total liabilities of companies in the EU27 than for companies in the UK.

10. Safety first: the same effect is apparent with savings and investments. The share of household financial assets held in bank deposits in the EU will increase slightly as a result of Brexit to 32%, while the share held in pensions or insurance products will fall. Total household financial assets as a percentage of GDP in the EU will decrease by around one tenth to 229%.

Acknowledgements

Thank you to Panagiotis Asimakopoulos at New Financial for conducting much of the heavy-lifting in this report; to the many individuals who have fed in to this paper through our events programme; and to our members for their support for our work in making the case for bigger and better capital markets in Europe. We welcome feedback on our approach and conclusions: to email us about the report, click here. We apologise for any errors, which are entirely our fault.

NewFinancial print Report: A reality check on capital markets union
New Financial

Report: A reality check on capital markets union


November 2020 • Topic: Capital markets • by Panagiotis Asimakopoulos and William Wright


This report analyses the development of EU capital markets since the conception of the capital markets union initiative and shows that while steady progress has been made at an overall EU level, growth has been patchy and there is still a lot of work to be done in individual member states.

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would like to request a copy of the full report, please click here.

At a time when Europe needs bigger and better capital markets more than ever to help support a post-Covid economic recovery, the latest report from New Financial on the progress of capital markets union is a sobering reality check.

The report analyses the progress in capital markets in the EU27 since the launch of the CMU project in 2014, and measures growth at a granular level across 24 individual sectors of capital markets and in each of the 27 member states.

On the one hand, at an overall EU27 level capital markets are heading slowly but steadily in the right direction: broadly speaking, capital markets are growing both in size and depth relative to GDP. But on the other, when you zoom in on the progress at an individual country level, the picture is much less promising. In many cases the gap between those countries with well-developed and those with less-developed capital markets is widening rather than narrowing.

At its most basic level, capital markets union is about reducing the reliance of EU companies for their funding on bank lending and reducing the dependence of EU savers for their future financial security on bank deposits. These two measures highlight the dichotomy with CMU. Over the past five years, the EU27 economy in aggregate has become less reliant on bank lending as more companies have turned to the corporate bond market – but the reliance on bank lending has increased in 11 of the EU’s 27 members, and the vast majority of the shift to corporate bonds is accounted for by just a handful of countries.

In more positive news, pools of long-term capital in the form of pensions and insurance assets have grown across the EU, but the proportion of household wealth sitting in cash savings has stayed stubbornly high and remarkably constant over the past five years.

The depth of capital markets relative to GDP in individual countries (across 24 sectors of activity):

A long-term game

We have argued from day one that CMU is a long-term game and will take decades to become a reality. In this report we do not attribute any growth in EU capital markets over the past five years to CMU itself – it’s far too early for that – nor do we blame CMU for a lack of progress.

Instead, at a time when the EU economy needs all the help it can get, this report highlights the increased urgency of the CMU project in the wake of Brexit and the Covid crisis. We hope the report acts as a wake-up call to member states in underlining the need to step up a gear in building bigger capital markets from the bottom up, and helps support the argument for more radical action at an EU-wide level for top down reforms and for better outcome-based metrics to measure progress.

In the global financial crisis more than a decade ago, capital markets were a big part of the problem. In response to Covid, we think they are a big part of the solution. They have responded well so far in providing additional funding for the economy, and we think they can play a bigger role in future in helping to drive an economic recovery by boosting the competitiveness of EU companies and supporting jobs, investment, future financial security, and the transition to a more sustainable economy for the benefit of European citizens. However, the recent surge in emergency bank lending in response to Covid is likely to have reversed a lot of the progress made so far.

In September the European Commission published a new action plan for CMU for the next five years to a mixed reception. On the one hand, the plan has been criticised for lacking vision and ambition, for avoiding the detail, and for not addressing some of the big politically-sensitive areas such as supervision. On the other, it has been praised for being more practical, achievable and more focused than previous iterations. While the new action plan is unlikely to be a game changer on its own, this report argues that it should be embraced by member states as the best way to lay the foundations for bigger and better capital markets in the longer term.

Here is a 10-point summary of ‘A reality check on capital markets union’:

1. A strong backdrop: at an aggregate level EU capital markets are heading in the right direction. The value of capital markets activity has increased since 2014 in all but four of the 27 different sectors we analysed by an average of almost 40%, and the overall depth of capital markets relative to GDP has grown by 14% in the five years since the launch of CMU. While this growth is welcome and provides a strong backdrop for the CMU project, it is too early to be directly attributed to it.

2. A mixed picture: at an individual country and sector level, the picture is less promising. Capital markets have shrunk relative to GDP in a third of the 27 member states over the past five years and the availability of funding for corporates has fallen in real terms in more than half of them. In key sectors like equity markets and corporate bond markets, activity has shrunk relative to GDP at an EU level and has fallen in more than half of countries.

3. Mind the gap: while capital markets in the EU27 are bigger and deeper than they were before CMU, they are still relatively underdeveloped. On average, capital markets across the EU27 are half as large relative to GDP as in the UK, which in turn is roughly half as developed as the US. In more than half of the sectors we analysed, capital markets in the EU27 have grown at a slower pace over the past five years than in the UK and US.

4. A wide range in depth: there is a wide range in the depth of capital markets across the EU. The good news is that there are a number of countries in the EU27, such as the Netherlands, Sweden, Denmark and France with well-developed capital markets that can lead the way in terms of the future growth across the EU27. On the other hand, capital markets in large economies such as Germany, Italy and Spain are significantly under-developed and they may struggle to play a significant and much needed role in supporting the economy post-Covid.

5. A lack of convergence: the range in the depth of capital markets across the EU has widened rather than narrowed since 2014. The small number of countries which already had well-developed capital markets in 2014 have seen the highest growth in capital markets over the past five years, while countries with less-developed capital markets have in most cases struggled to gain momentum in closing the gap with the EU average.

6. The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding. While significant progress has been made at an overall EU27 level over the past five years – the average share of corporate bonds in total borrowing has grown from 19% to 23% – companies have become more reliant on bank lending in 40% of member states. Three quarters of the growth in corporate bond markets has come from just four countries, and in a third of countries the value of corporate bond markets has gone down.

7. Deeper pools of capital: deep pools of long-term capital are the foundation of deep capital markets so it is encouraging that the value of pensions and insurance assets has grown in every country in the EU27 since 2014 and increased relative to GDP in all but a handful. While the proportion of household financial wealth sitting in bank deposits is still high (at 32%) the reliance on cash savings has decreased in two thirds of member states and the value of investment in equities, bonds, and funds has grown in real terms in all but three.

8. A renewed sense of urgency: Brexit and the Covid crisis have injected a new sense of urgency into the CMU project and underlined the need for more capital markets to help fuel an economic recovery than ever before. The new action plan published last month by the European Commission reflects this urgency and the language used in the action plan is designed to win political support across member states at the highest level.

9. Striking a balance: any grand project like CMU involves a trade-off between ambition and achievability, and between impact and timeframe. The new action plan may lack vision and concrete proposals in politically sensitive areas like supervision and it will not be a game changer on its own. But it is more practical and focused than previous versions, and makes useful proposals in areas that can have a longer-term impact such as retail participation and company information that will help lay the foundations for the next phase of CMU.

10. Pulling the big levers: building deeper and more integrated capital markets will take decades and long-term success depends on a long-term commitment by members states and the implementation of both bottom up measures and top down EU-wide initiatives. The Commission and member states can and should work together to develop more radical and high impact proposals to accelerate CMU in the next few years.

Acknowledgements

Thank you to Panagiotis Asimakopoulos at New Financial for conducting much of the heavy-lifting in this report; to Dealogic for providing much of the data behind it; to the many individuals who have fed into the analysis through our events over the past few months, and to our members for their support for our work in making the case for bigger and better capital markets in Europe.

NewFinancial print Report: Beyond Brexit – the future of UK banking & finance
New Financial

Report: Beyond Brexit – the future of UK banking & finance


October 2020 • Topic: Brexit • by Panagiotis Asimakopoulos, Manuel Haymoz & William Wright


This report analyses the shifting trends in European and global markets and identifies the big strategic choices the UK will need to make in the coming years on the future of banking and finance, capital markets, and the City of London.

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would like to request a copy of the full report, please click here.

Whatever the outcome of the negotiations in the next few days and weeks, Brexit will be a seismic change for the European banking and finance industry, the UK economy, and the UK’s place on the global stage.

This paper analyses the big strategic decisions that the UK will need to make in the coming years on the future of banking and finance, capital markets, and the wider economy. Brexit provides the UK with an opportunity and an imperative to review and recalibrate its approach to banking and finance at a domestic level and on the global stage. More recently, the Covid crisis has underlined the value that banks and capital markets provide to the wider economy and the vital role they will play in helping drive a recovery.

A global context

We think it is important to frame these choices in the context of the shifting trends in global banking and finance. Our starting point is that Brexit means Brexit – whether you like it or not – and that whatever the outcome of the negotiations in the coming months, Brexit will inevitably raise significant barriers in financial services between the UK and EU. This will require a degree of relocation of activity from the UK to the EU and will lead to gradual supervisory and regulatory divergence over time, at a time when the EU and US frameworks are evolving in different directions.

This gives the UK the opportunity to recalibrate its own framework and tailor it to the unique nature of the banking and finance industry in the UK. In many areas this framework will look and feel remarkably like the EU’s, but in some crucial aspects it will be different.

While the EU is the single most important overseas market for UK financial services and is readily accessible on its doorstep, the global context for the banking and finance industry has been transformed over the past few decades. Markets in Asia have significantly increased their share of global activity in the decade since the global financial crisis, are growing much faster than the EU, and will account for the vast majority of future growth in banking and capital markets activity over the coming decades.

In contrast, in a global context EU markets are small and shrinking in relative terms. Capital markets and the wider banking industry in the EU are fragmented and operate in an overly complex regulatory patchwork, acting as a drag on economic growth and innovation. Given the challenging geopolitical environment, the UK will need to work hard to develop closer partnerships in financial services with like-minded economies around the world.

While Brexit presents many challenges, it also provides an opportunity and a wake-up call for policymakers in the UK – and the EU – to set a clear strategic direction for the financial industry and capital markets in the face of structural global changes. We have included 25 suggested policy recommendations and areas of focus for discussion but we think the key questions for the UK boil down to:

Here is a 10-point summary of ‘Beyond Brexit: the future of UK banking and finance’:

1.An opportunity and imperative: Brexit will be a seismic change for the UK economy, the UK’s place on the global stage, and the UK banking and finance industry. At the same time, Brexit – combined with the recent Covid crisis – provides an opportunity and an imperative for the UK to review, rethink, and in some areas recalibrate its approach to banking and finance at both a domestic and international level. 

2. Brexit means Brexit: whatever the outcome of the negotiations, Brexit will involve significant disruption for the banking and finance industry. In some key areas mutual access may continue, but in many sectors some business will have to relocate to ensure continued access to the EU. Instead of focusing on how to retain as much access to the EU market as possible we think the UK should consider at least some of this relocation as a sunk cost.

3. Alignment vs divergence: in some key areas such as clearing the UK will most likely stay aligned with the EU in order to retain some access and reduce market friction. But over time gradual divergence between the UK and the EU is inevitable, particularly in prudential supervision. While the EU is (not unreasonably) defining what business must be done in the EU, the UK will aim to be a financial centre where people want to do business.

4. Part of the solution: the Covid crisis has underlined the vital role that banking and capital markets play in supporting the wider economy and how they can be part of the solution. Bank lending and capital markets funding injected more than £120bn into the economy in the first few months of the crisis and the industry will play an important role alongside government in helping fuel an economic recovery. This has highlighted the value of UK banks and the need to ensure that the supervisory framework in the UK supports this important function.

5. The wider context: Brexit means that the EU is losing its biggest and most developed capital market. The UK accounts for just under one third of all capital markets activity in the EU. On the global stage, EU capital markets will shrink from just over a fifth (22%) of global activity, making it comfortably the largest bloc in the world after the US, to around 13% of global activity (the same as China). This separation, combined with a revised UK perspective, poses a profound challenge to the EU and highlights the urgency of the capital markets union project.

6. A strong platform: financial services is one of the most important sectors of the UK economy; the UK is the dominant financial market in Europe and the second largest international financial market in the world after the US. In some key areas – such as derivatives and FX trading, fintech and sustainable finance – the UK is a world leader and it will need to build on this position to help set global standards and drive international business.

7. A structural shift: over the past 15 years in banking and finance the pendulum has swung decisively towards Asia, which has significantly increased its share of global activity in every sector we analysed and overtaken the EU. The EU’s share has shrunk by a third over the same period and its market share has dropped in all but two sectors. On our conservative estimates we think Asia will account for more than half of all growth in global capital markets in the coming decade while the EU will represent just 10% of global growth.

8. Future partnerships: just under 40% of the UK’s trade in financial services today is with the EU27 and inevitably some of that trade will be lost as a result of Brexit. While the geopolitical backdrop is acutely challenging we think there is an opportunity to develop trade in financial services and closer partnerships with markets like the US (currently 27%), Japan (6%), Switzerland (4%) and other smaller markets such as Singapore and Australia.

9. The future framework for UK financial services: the UK has played an important role in shaping the EU framework under which it currently operates and it should not diverge for the sake of it. But in time it will need to ensure that the UK financial sector remains competitive on the global stage, and review key areas such as the prudential supervision framework, bank capital and structure, tweaks to Mifid II and Solvency II, the taxation of banking and finance, and regulatory process, to create a framework more tailored to the UK market.

10. Renewing the UK economy: the Covid crisis has injected more urgency into the government’s plans to reform the UK economy and we think the capital markets can play a big role in areas such as infrastructure investment, supporting innovation and long-term investment to boost productivity, and financing the transition to a more sustainable economy. 

Acknowledgements

Thank you to Panagiotis Asimakopoulos and Manuel Haymoz at New Financial for conducting much of the heavy-lifting in this report; to the many individuals who have fed in to this paper through our events programme; to Barclays for supporting this important project, and to our members for their support for our work in making the case for bigger and better capital markets in Europe. We welcome feedback on our approach and conclusions: to email us about the report, click here. We apologise for any errors, which are entirely our fault.

NewFinancial print New Financial partner receives OBE for services to HM Treasury Women in Finance Charter
New Financial

New Financial partner receives OBE for services to HM Treasury Women in Finance Charter


October 2020 • Topic:by New Financial


We are delighted that Yasmine Chinwala, a partner at New Financial and head of our diversity programme, has been awarded an OBE for services to the HM Treasury Women in Finance Charter in the Queen’s birthday honours list.

New Financial is the official data partner to HM Treasury on the Women in Finance Charter and we produce an annual review of the progress made by Charter signatories towards their targets, and a biennial signatory survey.

Yasmine said: “While I am humbled to receive this honour, this award is really a tribute to the hard work of our fantastic team at New Financial – past and present – who have contributed to building our research capacity, integrity and reputation.”

“None of New Financial’s work on the Women in Finance Charter would be possible without the generous sponsorship from Virgin Money, City of London Corporation and Refinitiv – thank you for your investment, commitment and support – and the support of New Financial’s member firms and partners for believing in us”

Our diversity programme

At New Financial, we believe that diversity in the broadest sense is a fundamental driver of cultural change in banking and finance and an essential part of building a sustainable business. Our diversity programme represents around a third of our work at New Financial and we run a managed programme of events and research on different aspects of diversity.

New Financial will continue to push for financial services to become more diverse and inclusive. Our latest research on the impact of the Covid crisis on the D&I agenda and our forthcoming project on Accelerating Black Inclusion underline why diversity is more important to the industry than ever before.

William Wright, founder and managing director at New Financial, said: “I am extremely proud of Yasmine for her award and of the hard work over the past five years by her and the team at New Financial for making it possible. We make the case for bigger and better capital markets, and we think diversity is a central part of the industry making a public commitment to concrete change. In time, this will help shift the tone and direction of debate around the role and value of this vital sector of the economy”.

For more information on our diversity programme at New Financial contact Edwina Dowling, head of marketing and business development.

To read our latest annual review of the HM Treasury Women in Finance Charter click here

NewFinancial print Report: Covid and D&I – Time for radical action
New Financial

Report: Covid and D&I – Time for radical action


September 2020 • Topic: Diversity • by Yasmine Chinwala and Jennifer Barrow


This report, in collaboration with Refinitiv, explores how the Covid crisis is catalysing a step change in diversity and inclusion across the financial services industry. The Covid crisis presents huge challenges – but there are also opportunities. It has propelled the diversity and inclusion agenda to the fore like never before, and shown us that rapid change is possible, desirable, and necessary.

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would in government, regulation, academia or the media and would like to request a copy of the full report, please click here.

The report discusses how the Covid-19 crisis is catalysing a step change in diversity and inclusion across the financial services industry in five key areas:

1) Why is radical action necessary? – how the financial services industry is under pressure to change from all directions, both internally and externally, including government, regulators, policymakers to investors, clients, customers, and society.

2) Updating the business case for diversity – how the business case for diversity has been both tested and elevated by the industry’s response to the pandemic.

3) A forensic approach to diversity data – how organisations are using diversity data to better understand how Covid is impacting their employees.

4) The evolving role of the D&I function – how the role of the D&I function is adapting to the increased demands and responsibility placed on it over the past six months.

5) Shifting to an evidence-based approach for people decisions – the stage is set for new criteria for measuring and rewarding performance in a remote working world.

The report also includes a case study of Refinitiv’s approach to radical action to drive D&I forward.

NewFinancial print Report: EU capital markets & a post-Covid recovery
New Financial

Report: EU capital markets & a post-Covid recovery


September 2020 • Topic: Unlocking capital markets • by Panagiotis Asimakopoulos & Eivind Friis Hamre


This report analyses how banks and capital markets have responded to the Covid-19 crisis and identifies the potential for game-changing growth in EU capital markets to support investment, jobs, and growth.  We estimate that an additional 4,000 companies could raise an extra €470bn per year in the capital markets, and that an additional €11 trillion in long-term capital could be put to work to support a recovery.

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would in government, regulation, academia or the media and would like to request a copy of the full report, please click here and you can download the accompanying infographic here.

In the global financial crisis more than a decade ago, banks and the capital markets were a big part of the problem. In response to the Covid-19 crisis, they are a big part of the solution. The latest report from New Financial – Driving growth: how EU capital markets can support a post-Covid recovery – analyses how bank lending and capital markets have responded to the crisis, assesses the vital role capital markets can play in driving a post-Covid economic recovery, and identifies both the need for deeper capital markets in Europe and the huge potential for longer-term growth.

Unprecedented growth in bank lending

Bank across Europe responded to the Covid with an unprecedented increase in bank lending to companies, supported by government-backed lending schemes. Net new bank lending to non-financial companies (new loans minus repayments on existing loans) in the EU between March and June of this year was over €300bn – or nearly five times higher than in the same period last year. This has reversed more than a decade of declining bank lending in the Europe: the total value of outstanding bank lending to companies in both the EU27 and UK is now at its highest level since 2009.

Capital markets have stepped up a gear

Capital markets have played a valuable role in providing an additional €370bn in funding for around 800 companies across the EU between March and June this year, an increase of 45% on the same period in 2019. Companies raised €260bn in the corporate bond market (nearly double the what they raised in the same period last year); €47bn in equity markets (up by more than a third); and €65bn in leveraged loans (down by a fifth), according to Dealogic.

Capital markets add vital capacity to corporate funding

Capital markets act as a ‘spare tyre’ for economies in times of crisis and complement bank lending. Across the EU, capital markets funding for companies in the four months from March to June added up to about 2% of GDP and represented just under a fifth of all external funding to companies. In more developed capital markets such as the UK and the Netherlands, capital markets accounted for around 40% of external funding for companies.

Huge potential growth for capital markets

Capital markets in the EU27 are only half as developed relative to GDP as in the UK and they could play a much bigger role in supporting the EU economy in future. We identified huge potential for growth in European capital markets to help support a longer-term post-Covid recovery: we estimate that more than 4,000 additional companies a year in the EU27 could raise an extra €470bn a year in the capital markets – an increase of roughly 75% on current levels of activity.

The report highlights that many countries in the EU don’t have deep enough capital markets to benefit from this additional funding. This makes a strong case to develop bigger and better capital markets and injects a new sense of urgency and ambition into the capital markets union project.

Here is a short 10-point summary of this report:

1) Part of the solution: in the global financial crisis more than a decade ago, capital markets were a big part of the problem. In response to the Covid crisis, they are a big part of the solution. In the first few months of the crisis capital markets provided €370bn in financing to companies across the EU on top of €300bn in net bank lending. Capital markets will play a vital role in helping fuel a recovery by adding scale, flexibility and diversity to funding for companies, in facilitating EU initiatives like the Recovery Fund, and supporting governments.

2) Game-changing growth: there is huge potential for growth in capital markets across the EU27. On our ambitious but achievable analysis, an additional 4,000 companies in the EU27 could raise an extra €470bn per year in the capital markets – not far short of double the current levels of activity. This growth (or significant progress towards it) would significantly reduce the reliance of the EU economy on bank lending, drive innovation, and boost investment in jobs and growth.

3) A more sustainable future: our analysis shows the potential to transform pools of long-term capital in the form of pensions and insurance assets that the EU needs to provide for a more sustainable future. An additional €11tn in long-term capital could be put to work in the EU27 economy – roughly double today’s levels – with the average value of long-term capital per household rising from €58,000 today to €113,000.

4) Mind the gap: capital markets in the EU27 are relatively underdeveloped – which will limit the role they can play in response to Covid – and the departure of the largest and deepest capital market in Europe has highlighted the urgency of the capital markets union initiative. On average, capital markets across the EU27 are half as large relative to GDP as in the UK, which in turn is roughly half as developed as the US. 

5) A wide range in depth: there is a wide range in the depth of capital markets across the EU. The good news is that there are a number of countries in the EU27, such as the Netherlands, Sweden, Denmark and France with well-developed capital markets that can lead the way in terms of the future growth across the EU27. On the other hand, capital markets in large economies such as Germany, Italy and Spain are significantly underdeveloped and could play a much bigger role in supporting the economy post-Covid.

6) The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding. In the US, companies use corporate bonds for three quarters of their borrowing, three times more than level in the EU27. While the Covid crisis has demonstrated the value of bank lending to the economy, banks will be unable to provide the necessary funding for European companies on their own.

7) Deeper pools of capital: deep pools of long-term capital such as pensions and insurance assets – as well as direct retail investment – are the starting point for deep and effective capital markets. But pensions assets in the EU27 are less than a third as big relative to GDP as in the UK. Shifting more savings from bank deposits to investments would deploy more patient capital to help drive a more sustainable recovery in the longer term.

8) Fuelling the growth economy: the EU doesn’t have a start-up problem but it does have a problem channelling investment into high growth and scale-up companies that drive job creation. On our analysis, nearly 2,500 additional companies a year could benefit from an extra €4bn a year in venture capital funding – double current levels – and the number of companies listed on growth stock markets could quadruple.

9) Laying the foundations: it is important to distinguish between what measures can be taken at an EU level and at a national level to help develop capital markets. At the EU-level (the ‘more union’ part of CMU), there needs to be a renewed commitment from EU and national authorities to reform the supervisory architecture and accelerate convergence to reduce cross-border barriers, enhance competition and improve transparency.

10) Pulling the big levers: this top down approach can only go so far. We think a more fundamental, bottom up approach (the ‘more capital markets’ part of CMU) is needed. Ultimately bigger and better capital markets in Europe can only be achieved if national governments recognise the potential benefits to their economy of deeper capital markets and pull the big levers around pensions reform and tax policy to help them grow.

NewFinancial print Report: HM Treasury Women in Finance Charter: Annual Review 2019
New Financial

Report: HM Treasury Women in Finance Charter: Annual Review 2019


June 2020 • Topic: Diversity • by Yasmine Chinwala, Manuel Haymoz and Jenny Barrow


This third Annual Review analyses the largest cohort yet, with data from 187 signatories. Progress is steady – four out of five have met or are on track to meet their targets for female representation in senior management.  

The UK government launched the HM Treasury Women in Finance Charter in March 2016 to encourage the financial services industry to improve gender balance in senior management. The Charter now has over 370 signatories covering 900,000 employees across the sector.  

This third annual review monitors the progress of signatories against their Charter commitments and holds them to account against the four Charter principles. This year’s analysis is bigger and deeper as the number of signatories has grown – here we include data from 187 signatories, of which 90 are reporting for the first time, 43 for the second and 54 for the third time.  

This review also aims to offer the broadest possible insight into actions signatories are taking to drive progress towards their targets. The data provides important benchmarking for signatories, both against their peers and to our view of working life before the Covid crisis.  

To request a copy of the full report, please click here 

The highlights of the third Annual Review are: 

1.The power of the Charter: The Charter provides uniquely rich insight into gender diversity in financial services. Now with three years of signatories’ annual updates, we have an even greater understanding into how companies are executing the Charter principles and where they will need to maintain focus as they face the consequences of the Covid crisis.  

2. Meeting targets: A third (33%) of the 187 signatories analysed in this review have met or exceeded their targets for female representation in senior management. A further 48% that have targets with future deadlines said they are on track to meet them (Fig.1).  

3. Moving in the right direction: Female representation in senior management at signatory firms is rising – three out of four (76%) signatories either increased or maintained the proportion of women in senior management during the reporting period (fig.2).  

4. Slow pace of change: On average across the group as a whole, female representation has edged up by one percentage point each year since the first cohort reported in 2017, and is on the brink of the critical 33% level on average – but far short of parity (Fig.3).  

5. Stretching targets: The majority of signatories have set ambitious targets for increasing their proportion of senior women, with 26 firms (14%) setting a goal of parity (Fig.9). Nearly 60% have set targets at 33% or above and HMTreasury would like to see all targets move to at least this level in order to align the Charter with the Hampton Alexander review.  

6. Defining senior management: There is an established consensus around signatories’ definitions of the senior management population to which the Charter applies – for half of signatories senior management accounts for up to 10% of the total workforce (Fig.12). However, there is a wide variety of definitions, even among firms of a similar size and sector.  

7. Top actions driving change: The most common actions signatories reported are focusing on diverse shortlists, providing diversity-related training and promoting flexible working. These actions are similar to those reported in previous years, but there is a notable shift in how signatories are using data to embed diversity into the business, drive accountability and quantify the impact of actions.  

8. Accountable at the top table: Accountability is sitting in the right kinds of roles and at the highest levels of seniority. Almost all (96%) accountable executives sit on executive committees, nearly half (46%) are CEOs, and around three-quarters (72%) are in revenue-generating roles (Fig.13).  

9. Linking to pay: A third (34%) of signatories believe the link between pay and diversity targets has been effective, while more than half said it is too early to tell (Fig.14). There are encouraging signs that firms are using the link to pay to drive accountability more widely, with 29% extending the link beyond exco members.  

10. Publishing updates: Signatories are improving their compliance with their transparency obligations around the Charter. Two thirds (68%) published an online update on their progress by the required deadline (Fig.15), but the quality and format of reporting in published updates varied significantly.  

Research methodology:  

This review analyses annual updates from 187 signatories that signed the Charter before September 2018, provided an annual update to HM Treasury in September 2019 and have at least 50 staff . 

The data was shared with New Financial on a confidential basis. All data has been anonymised and aggregated, and no data has been attributed without consent from the relevant signatory. The data was analysed by Manuel Haymoz and Jennifer Barrow under the supervision of Yasmine Chinwala.  

For more information on the Annual Review or on New Financial’s diversity programme, please contact Yasmine Chinwala on yasmine.chinwala@newfinancial.org   

About New Financial:  New Financial is a think tank and forum that makes the positive case for bigger and better capital markets in Europe. We think there is a huge opportunity for the industry and its customers to embrace change and reform, and to rethink how capital markets work. Diversity is one of our core areas of coverage. 

Acknowledgements: New Financial would like to thank all our institutional members for their support, and particularly Virgin Money, Refinitiv and City of London Corporation for funding our work on the HM Treasury Women in Finance Charter. 

NewFinancial print Report: the value of capital markets to the UK economy
New Financial

Report: the value of capital markets to the UK economy


May 2020 • Topic: Capital markets • by William Wright & Eivind Friis Hamre


This report shows that capital markets have a vital role to play in supporting the UK economy through the Covid crisis and driving a recovery.  The report identifies 1,000 large UK companies that use the capital markets to support their day-to-day business, raise capital, or manage their risks. These companies employ nearly six million people in the UK and represent nearly 90% of UK firms with revenues of more than £200m.

New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would like to request a copy of the full report, please click here and you can download the accompanying infographic here.

In more normal times, capital markets channel investment in the UK economy to help finance companies and drive growth, investment, jobs and prosperity. They diversify the range of funding for companies, complement bank lending, and expand the overall availability of finance to the economy. In the wake of the economic shock of the Covid crisis, this function is even more important: capital markets add flexibility, capacity and fast access to billions of pounds for companies.

People working in the industry understand the vital role that capital markets play in supporting the UK economy and how capital markets can help drive an economic recovery in the wake of the Covid crisis. The big question is: how can the industry better communicate this value to government, policy makers, and the wider public?

Our latest report in collaboration with BNP Paribas The value of capital markets to the UK economy analyses how relevant capital markets are to UK companies and the central role they play in supporting the wider UK economy.

Supporting the wider economy

This report shows that capital markets play a central role in the day-to-day functioning of the economy: we estimate that more than 90% of large UK companies use the capital markets to raise capital, invest in their business, or manage risk. These companies have a huge impact on the wider economy and employ nearly six million people across the UK (another seven million people around the world).

The most obvious value of banking and finance to the UK economy is that the industry employs more than 1.1 million people across the UK (two thirds of whom work outside London) and generates more than 10% of UK tax receipts. However, this report measures that value in terms of the industry’s customers: what proportion of large UK companies use the equity, bond or loan markets, and how much capital have they raised? What proportion of companies have been backed by private equity or been involved in mergers and acquisitions? How many of them use the derivatives market to help manage their day-to-day risks? And how many people do these companies employ in the UK?

The report underlines how relevant capital markets are to the ‘real’ economy and measures the direct economic contribution that companies that use the capital markets make to the economy in terms of employment and investment. We think it’s the first attempt to analyse the impact and value of capital markets in this way, and we hope it provides a useful starting point for the discussion on how the industry can help support the economy through the Covid crisis, help drive a recovery, and help ‘level up’ the regional economy across the UK.

Here is a short 10-point summary of this report

1) The relevance of capital markets to UK companies: capital markets may seem abstract and remote from the day-to-day business of UK companies but we identified 1,000 large UK companies – or nearly 90% of all UK companies with revenues of more than £200m a year – that used the capital markets between 2014 and 2018 to raise money or help manage their risks. Many of these companies have already received or will rely on funding from the capital markets (in addition to bank lending) in the wake of the Covid crisis.

2) The value of capital markets to the UK economy: large UK companies that use the capital markets play a vital role in the UK economy. They employ nearly six million people in offices, factories, plants, shops and outlets across the UK – around one fifth of the private sector workforce – and a further seven million people overseas. Their combined revenues of £3.1 trillion are 50% bigger than the size of the UK economy.

3) Capital markets and smaller companies: capital markets are not just for big multinationals. We identified 14,000 smaller UK companies that use the capital markets – including around 900 smaller firms listed on the stock market – who between them employ more than two million people in the UK.

4) The stock market and the UK economy: nearly half of all UK companies with revenues of more than £200m are listed on the stock market. These 500 companies employ more than 3 million people across the UK and are worth a combined £2.7 trillion. Over 40% of these companies used the stock market to raise nearly £120bn. Since the middle of March nearly 100 UK companies raised £5bn on the stock market.

5) The bond market and the UK economy: more than a fifth of large UK companies (excluding financials) used the corporate bond market to raise £270bn, and these 230 companies employ around 2.3 million people in the UK. Nearly 200 companies used the leveraged loan market to raise another £215bn. Since the middle of March nearly 50 UK companies have raised around £25bn in the corporate bond market.

6) M&A and the UK economy: nearly three quarters of large UK companies used the M&A market either to buy another business, or to be acquired by another company, or sell part of their business. These companies employ nearly 5 million people in the UK, and a further 13,000 smaller companies were involved in M&A activity of some form. M&A will be a vital part of company restructuring in the wake of the Covid crisis.

7) Private equity and the UK economy: private equity has become an increasingly popular source of funding for UK companies. Nearly a third of large companies in the UK have been involved with private equity in some form over the past five years (either owned by private equity or acquired or sold by a private equity firm) and these companies employ just under two million people in the UK.

8) Derivatives and the UK economy: trading floors at big banks in London may seem a million miles away from the ‘real’ economy in the rest of the country, but more than 80% of large UK companies use derivatives in some form to help manage the risks in their day-to-day business, according to our analysis of annual reports. Derivatives are particularly valuable in the sort of volatile markets we have seen over the past few months.

9) Pensions and the UK economy: the most direct connection between the capital markets and individuals is their pensions. Large UK companies contribute around £25bn a year to their employees’ pensions with an average company contribution per employee of around £2,400 a year. Large UK companies have combined defined benefit pensions assets of around £750bn, which aggregates the pension savings of millions of people into a valuable pool of capital that can be put to work in the economy.

10) Framing the discussion: the banking and finance industry is an important economic sector for the UK in its own right, but its real value is the underlying role that it plays in oiling the wheels of the wider economy and helping companies and individuals raise capital and manage risk. This report underlines the importance of the capital markets to large UK companies – and to thousands of smaller companies – and the vital role they will need to play in supporting the UK economy through this crisis and in driving more long-term investment across the UK to fuel a recovery and boost productivity and growth.

Summary methodology

The report analyses the value of capital markets to the UK economy through the lens of how large UK companies with revenues of more than £200m use six core sectors of the capital markets: the stock market and equity capital markets, corporate bonds, leveraged loans, M&A activity, and private equity. It also analyses how they use the derivatives markets and the role they play in pensions. We excluded overseas companies even though they employ millions of people in UK because the connection between their use of capital markets and their activity in the UK is harder to quantify.

We built a dataset from the bottom up of UK companies with revenues of more than £200m (including publicly-listed and privately-held firms) from a range of sources. We then mapped these 1,160 companies against data from Dealogic and the London Stock Exchange to measure how many firms used the capital markets in the five years between 2014 and 2018. For derivatives and pensions, we analysed the annual reports or company accounts across a sample of nearly one third of these companies.

From this we calculated the relevance of each sector of the capital markets to large UK companies, and their impact on the UK economy in terms of how many people these companies employ in the UK and the value of capital and investment that they put to work in the UK. We also analysed the role that capital markets play for around 14,000 smaller companies.

Acknowledgements:

We would like to thank Dealogic for providing much of the data in this report and Eivind Friis Hamre for doing the heavy-lifting on the research; BNP Paribas for supporting this important project; and our members for supporting our work. We welcome feedback on our approach and conclusions: to email us about the report, click here. We apologise for any errors, which are entirely our fault.

NewFinancial print Covid crisis: how banking & finance can be part of the solution
New Financial

Covid crisis: how banking & finance can be part of the solution


April 2020 • Topic: Rebuilding trust • by William Wright


The banking and finance industry can be part of the solution to the Covid crisis, but how the industry responds and how it behaves in the next few weeks and months will define its relationship with government and society for the next decade. This short paper summarises 10 things that the industry should and should not be doing right now.

New Financial is a social enterprise that relies on support from the industry to make the case for bigger and better capital markets. You can download the paper here:

We believe that capital markets have a vital role to play in supporting the economy through this crisis and in driving a recovery. But…it will be vital in the coming months that the industry demonstrates a clear sense of purpose and avoids the mistakes and types of behaviour that have got it into so much trouble in the past.

At its most basic level, when the history of this crisis comes to be written, public opinion will divide the financial services industry into those firms that saw the crisis as an opportunity to take advantage of it and those who instead stepped up to support their staff, their customers and wider society. The question is simple: which side do you want to be on?

This is the first in a series of papers and events from New Financial on how the banking and finance industry can respond to the Covid crisis. It is based on conversations with our member firms, examples of how many firms in the industry have already responded in the past few weeks, emerging examples of best practice, and some of our previous work.

Despite the huge operational challenges involved, we take as our starting point that firms should be focusing on their day job: helping companies raise capital, borrow money and manage risk; helping deliver long-term returns for investors; allocating capital as productively as possible; supporting liquid and resilient markets; and maintaining robust systems.

Here is a short summary of the paper:

1) A clear choice: the industry will in future be divided by public opinion into firms that took advantage of the crisis and those that supported their staff, customers, the economy and society. Which side do you want to be on?

2) Look after your staff…: the first priority for the industry is to look after its staff, keep them safe, treat them well and recognise that they are working hard in difficult circumstances.

3) …but not too much: nothing will accelerate a backlash against the industry as fast as banks and asset managers paying big bonuses when the rest of the economy is in crisis.

4) Look after your customers: firms should redouble their efforts to support and listen to their customers, putting their interests ahead of their own, and be as flexible as possible – particularly with smaller firms.

5) Give, give, give: the industry should donate or lend whatever it can spare – advice, staff, equipment, IT, time, money, real estate – to governments and charities.

6) A longer-term view: suspending measures that reward shareholders over customers such as dividends or buybacks and consciously stepping back from shorter-term or more questionable activities will send a powerful message to government and wider society.

7) Collective action: where possible the industry should work together to develop new standards and best practice and start thinking about creative ways in which firms can work together.

8) A suspension of hostilities: the industry should not confuse temporary relief in some areas of regulation with an opportunity to use the crisis to lobby for more substantial or permanent regulatory reform or changes in tax policy.

9) An eye on the future: firms will need to juggle firefighting the immediate crisis with keeping half an eye on big issues such as Brexit, industry restructuring, and preparing to support a recovery.

10) Don’t let a good crisis go to waste: on the other side of this crisis there will be huge demand for more investment in infrastructure, innovation and sustainability. How can the industry prepare and respond?

For more information about New Financial follow us on Twitter on @NewFinancialLLP or email us

NewFinancial print Report: A Reality Check on Equivalence
New Financial

Report: A Reality Check on Equivalence


February 2020 • Topic: Brexit • by Panagiotis Asimakopoulos & William Wright


Over the past few months the debate on equivalence – an arcane but vital part of the future of the City post-Brexit – has generated as much heat as it has light. This report cuts through the confusion and summarises how EU equivalence works, the benefits it provides, the trade-offs it involves, its limitations, what it is not and what it doesn’t achieve.

New Financial is a social enterprise that relies on support from the industry to support its work. If you would like to request a copy of the full report, please click here.

It’s not often that an arcane corner of European financial regulation finds itself on the front pages but over the past few months it has been hard to escape from ‘equivalence’, the regulatory framework that is likely to form the basis of the UK’s access to the EU in financial services on the other side of Brexit from January 2021.

This debate has generated as much noise as it has light: this short paper aims to provide a reality check on how equivalence works, the benefits it provides, the trade-offs involved, its limitations, what it is not and what it doesn’t achieve.

A complex but vital patchwork

In summary, equivalence is a complex patchwork of nearly 40 different regulatory regimes that provide different levels of access to EU markets. It doesn’t cover large parts of European banking and finance, is a poor substitute for passporting and it doesn’t eliminate the potential disruption from Brexit. But it may provide a temporary and politically acceptable bridge in key sectors for both the EU and UK to adjust to life after Brexit.

There is a wide gulf between the opening positions of the UK government and EU authorities. The UK has called for a ‘comprehensive’ and ‘permanent’ equivalence regime, which was almost immediately rebuffed with the EU saying it will not negotiate ‘general’, ‘open-ended’ or ‘ongoing’ equivalence and that the UK should ‘not kid themselves’.

We think the most likely outcome this year is that the EU and UK agree ‘selective equivalence’ in a few key sectors, such as stock exchanges, clearing and perhaps broker dealers, probably on a temporary basis (‘time-limited equivalence’) that would be reviewed in one or two years. 

Here is a short 10-point summary of ‘A reality check on equivalence‘:

1) There is no such thing as ‘equivalence’: equivalence is not a single regime that covers the supervisory and regulatory framework of a whole country, a whole industry, a specific activity or even a specific piece of legislation. It is a complex patchwork of micro-regulation: we counted 39 equivalence regimes across 16 of the 37 main pieces of EU banking and finance legislation.

2) Equivalence is not a substitute for passporting: equivalence offers a far less comprehensive framework for accessing the EU than the single market. Less than a third (12) of equivalence regimes provide similar levels of access to the single market as passporting, it doesn’t exist in more than half of EU regulations – including investment services to retail clients, some core banking activities, large parts of pensions, or payments – and hasn’t been granted to any countries in a third of the areas where it does exist.

3) Equivalence is not a long-term solution: the big risk with equivalence is that it can be withdrawn at as little as 30 days’ notice (without consultation). The process for reviewing and withdrawing equivalence is opaque and unpredictable, which makes it an unstable long-term framework for future EU-UK cooperation.

4) Equivalence is not a technical exercise: equivalence is officially a technical process with determinations made by the European Commission, but it has become politicised – just ask Switzerland, whose stock exchange equivalence was revoked after wider treaty negotiations with the EU reached a stalemate last year. Given its proximity and importance to the EU, the UK is likely to find that it faces a higher bar. The EU will also be wary of setting a precedent with the UK ahead of future negotiations with the US.

5) Equivalence is not the same as being a ‘rule-taker’: equivalence would not make the UK a ‘rule-taker’ in those sectors. The US has equivalence in 23 areas but few would consider it to be a rule-taker. And it doesn’t mean ‘the same rules’: officially it is about having equivalent outcomes. Having the same rules on 1st January 2021 as it had on 31st December 2020 would reflect the UK’s current level of alignment.

6) Equivalence is not a one-way street: terms and conditions apply. In each area or sector where the UK is granted equivalence, its room for manoeuvre would be limited if it chose to change its regulations in future or if the EU made significant changes to its own rules. This applies in both directions: from January 2021 the UK will also be able to grant equivalence to other countries to access UK markets.

7) Equivalence does not eliminate disruption from Brexit: equivalence would reduce but not eliminate the potential disruption to the City of London and its customers. Even if the UK has equivalence in all 39 areas many UK financial services firms would still need to have a presence in the EU to service clients and do business in the region – not least because it doesn’t cover large areas of business – but it should give firms more discretion over how much they move.

8) Equivalence is not a given: technically speaking the UK will be 100% equivalent on 1st January (having transposed EU law into UK law) so it should be relatively straightforward to complete the equivalence assessments by the end of June. But equivalence is gifted unilaterally by the EU and that the process for determining equivalence is opaque, lengthy and unpredictable. Most people in the industry think the prospect of achieving anything other than equivalence in a few key sectors is quite remote.

9) Equivalence is another word for trust: when the EU grants equivalence to a third country in a particular area it is essentially giving up a degree of control and relying on the supervisory and regulatory authorities of that country. That will require significant trust on both sides – and this trust has been undermined over the past few years by the tone of the political debate.

10) Equivalence is a work in progress: the equivalence framework has evolved over the past 20 years and while both sides recognise the need to improve the system, Brexit has probably reduced the likelihood of any substantial changes in the near future. Talk of super, enhanced, reformed, improved, comprehensive or permanent equivalence over the past few years is largely wishful thinking. The UK should not expect special treatment on equivalence, but the EU may agree to revising the equivalence framework on the other side of Brexit.

NewFinancial print Research: Radical Actions
New Financial

Research: Radical Actions


January 2020 • Topic: Driving diversity • by Yasmine Chinwala


This thought paper series introduces why we believe radical action is necessary to drive a step change in diversity to reach a new equilibrium, and proposes actions that together will deliver improvement steadily and sustainably.

New Financial is a social enterprise that relies on the industry to support its work. Our research is free to our member firms. To request a copy of the thought papers in this series please click here.

As HM Treasury’s official data partner for assessing the progress of signatories to the Women in Finance Charter, New Financial has unparalleled insight into how financial services companies are approaching the challenge of increasing female representation at senior levels. We have also analysed gender pay gap reporting for the sector and gathered feedback from our broad network across the industry.

While we see evidence of a great deal of activity (plenty of which is useful and long overdue), the vast majority of it is tinkering at the edges of legacy systems. We believe such actions will serve to maintain an equilibrium, but not drive the step change to a new equilibrium – not just for women but people from any under-represented group – and certainly not in an acceptable timeframe.

Some (arguably all the largest) companies have had a head of diversity for a decade or even two, yet change has been marginal at best. We often hear from diversity leads: “I’ve pulled every lever I can pull. What more can I do?” This sentiment is echoed by senior executives raising concerns about “diversity fatigue” because there is so much talk and busyness but little to show for it.

So, what then must we do? This is the question we are seeking to pose and answer with our Radical Actions series. We cover:

1. An introduction to the question: what must change?

New Financial’s hypothesis is it’s time to be radical – what has gone before is barely fit for purpose in today’s world, let alone tomorrow’s. The financial services industry must take a new approach if it is to derive the benefits from a diverse, skilled and innovative workforce. This introductory thought paper sets the scene for the need for radical action from an industry perspective and at firm level.

2. Stepping-up the role and expectations of the D&I function

This paper explores the impact that the changing diversity context is having on internal teams that have been charged with overseeing diversity initiatives. Does the changing backdrop and expectations of D&I need a different kind of skillset, reporting line and set of success measures? If so, what would that makeover look like? New Financial examines the evolving role of the D&I function and asks if it is equipped to deliver what is being asked of it by firms.

3. Taking a forensic approach to diversity data

The financial services industry is all about numbers, yet few firms apply even a fraction of the analytic rigour to their people data compared to their product and market data. In this report we look at why and how improving an organisation’s ability to gather, extract, analyse and share data can make a vital difference to recruitment, promotion and retention of female staff and those from diverse backgrounds, based on industry case studies.

4. Updating and expanding the business case

While research correlating increased diversity with performance from McKinsey and Credit Suisse has an important role to play, it is time to update and expand the business case for diversity and inclusion. In this paper we will explore why, how and what we talk about when we frame the business case needs to evolve and expand. We discuss how the business case should adapt to appeal to the different business areas and levels of seniority (such as middle managers) that are increasingly involved in delivering diversity, and how improving diversity data will quantify the impact of D&I.

5. Shifting to evidence-based decision making for people

Companies consist of people and products, yet few firms apply the level of methodical diligence to their people decisions that they do to developing, launching and maintaining their products and services. People decisions – even the most important ones – often boil down to an individual and their gut instinct. In this paper, we advocate a shift towards an increasingly evidence-based process for making people decisions. We discuss the early signs we see from organisations seeking to inject greater rigour, accountability and time into their systems, processes and policies underpinning people-related decisions, in order to improve diversity.

We call this our Radical Actions series, but these ideas are actually not that new. They are an extension of existing ideas that may partly be in place already but are not being executed properly, or without the necessary authority, or inadequate resource. We believe bringing all these threads together will drive diversity to the next level.

NewFinancial print Report: The Crisis of Capitalism
New Financial

Report: The Crisis of Capitalism


December 2019 • Topic: Unlocking capital markets • by William Wright & Christian Benson


Few sectors of the economy have been blamed more for fuelling popular anger with capitalism as banking and finance – and few sectors have as much to lose from the backlash against it. This report analyses why so many people are so angry, summarises the main causes of the widespread loss of faith in capitalism over the past few decades in the form of 10 different types of real and perceived inequalities, and outlines the main policy responses that have been proposed.

New Financial is a social enterprise that relies on support from the industry to support its work. If you would like to request a copy of the full report, please click here

Jamie Dimon thinks it is ‘fraying’, hedge fund manager Ray Dalio thinks it is no longer working for the majority of Americans, while Jeremy Corbyn, Bernie Sanders, Elizabeth Warren and millions of their political supporters want to turn it on its head. Capitalism, it seems, is in crisis.

Nearly 50 years after Milton Friedman declared that the sole responsibility of a company is to its shareholders, the mantra of shareholder value and the relentless pursuit of profits may have run its course. And you don’t have to be a flag-waving socialist to recognise that something has gone wrong.

Few sectors of the economy have done more to fuel popular anger with capitalism as banking and finance – and few sectors have as much to lose from the backlash against it. Finance can also be one of the most tin-eared sectors when it comes to understanding why so many people are so angry with capitalism and what they perceive as its failure to deliver on its basic promise of increased prosperity for all.

Real and perceived inequalities

We thought it would be useful to pull together a summary of the main reasons behind the popular backlash against capitalism, and to flag up the wide range of policy responses that have been floated as potential solutions. We have presented the drivers of the crisis of capitalism as a series of different types of inequalities; from the widening gaps in income and wealth, to regional and intergenerational inequality, and the perceived inequality of accountability, behaviour and power between big companies and the rest of us. They make for sobering reading.

The report is not a theoretical analysis of the merits or otherwise of capitalism and focuses instead on how the outcomes from capitalism are experienced and perceived by people around the world. And, with an election in just a few days, it is not a New Financial manifesto for change. New Financial was founded on the basis that markets can and should be a force for economic and social good. But capitalism is in danger of losing the social licence from which it derives its legitimacy.

The good news is that capitalism remains the best available system to address the problems that it causes – but only if those who practice and preach it recognise those problems, accept the need for change, and make concrete commitments to reform. Understanding the causes of the loss of faith in capitalism is the first step towards reforming and preserving capitalism for the greater good.

Here is a short summary of the main drivers of the ‘The Crisis of Capitalism’:

1) Income inequality: income inequality has widened over the past few decades as capitalism has failed to deliver on its promise of raising living standards for all. Since 1970, median pay in the US has flatlined in real terms, while the pay of the top 20% has doubled. Average wages in the UK have still not yet recovered in real terms to their 2008 peak – a decade on from the financial crisis.

2) Wealth inequality: the growth in wealth inequality has been even more pronounced. The share of total wealth owned by the top 1% has doubled in the UK and US over the past 40 years, and the combined wealth of the top 10% of adults in the UK is five times that of the bottom half of the population.

3) Regional inequality: globalisation and the shift to a knowledge-based economy has concentrated wealth, jobs and commercial activity in big cities and widened the income and productivity gap between regions. Economic output per capita in London is three times higher than in parts of northern England, and average incomes in London are twice as high.

4) Intergenerational inequality: the divide in wealth and income is particularly acute when viewed from a generational perspective. Capitalism is failing in its basic promise that the next generation will be better off than the current one: less than half of people in the UK believes this is true. In the US, only half of 30-year-olds earn more than their parents, compared with 90% in 1970.

5) Inequality of opportunity: people tend to accept unequal outcomes if they believe the system is fair but more than two thirds of people in the UK believe society is rigged towards the rich and powerful. Access to good education sits at the heart of this sense of widening inequality of opportunity. Social class, education, ethnicity and gender remain a huge barrier to the best jobs.

6) Inequality of representation: the loss of faith in capitalism is closely linked to the loss of trust in traditional politics, fuelling the recent rise of populism. Around two thirds of people in Western economies believe that ‘mainstream politicians don’t care about people like me’ and feel increasingly powerless.

7) Inequality of employment: the fault line between high-paid and high-productivity jobs in knowledge-based sectors and everyone else has widened, creating a two-tier employment system. Average pay in finance and technology is more than double that of retail and hospitality. A growing ‘precariat’ of workers are on insecure contracts with low pay, limited benefits and protections, and limited prospects.

8) Inequality of behaviour: the mantra of shareholder value and the relentless pursuit of profit over the past 50 years has stretched the social contract between business and society. This has fundamentally changed companies’ relationship with employees, suppliers and customers: workers feel expendable, suppliers are beaten into submission on price, and customers often feel exploited.

9) Inequality of power: ‘big business’ and ‘crony capitalism’ have long been problematic. The increase in market power and concentration means that larger firms are increasingly able to influence the rules under which business operates. This can create a vicious circle: large firms become more powerful and monopolistic, stifling competition and undermining the wider benefits of capitalism to consumers.

10) Inequality of accountability: ‘big business’ can give the impression that it doesn’t have to play by the same rules, such as paying tax, and being held accountable for failure. Too often governments appear to acquiesce, creating an uneven playing field between large and smaller companies – and between capitalism and consumers.

The full report includes the following sections:

NewFinancial print Report: A new sense of urgency – the future of capital markets union
New Financial

Report: A new sense of urgency – the future of capital markets union


November 2019 • Topic: Capital markets • by Panagiotis Asimakopoulos and William Wright


This report analyses the progress made by the capital markets union project so far, underlines why Europe needs more capital markets – and why it needs more integrated capital markets. It outlines a more ambitious and more focused roadmap for CMU over the next few decades that combines ‘top down’ initiatives at an EU level and ‘bottom up’ initiatives at a national level to build bigger and better capital markets.

To purchase a copy of the report, please use the order button at the end of this page. New Financial is a social enterprise that relies on support from the industry to support its work.

If you work in government, regulation, the media or academia and would like to request a copy of the full report, please click here

Capital markets union is five years old. Depending on your view, CMU is either an ambitious initiative to reduce the EU economy’s reliance on its struggling banking system, map the challenges facing capital markets in the EU, and lay the foundations for further growth in the decades ahead – or a missed opportunity for fundamental reform that avoids the difficult questions and that will do little more than tinker at the edges of the problem.

This report argues that while the concrete output from CMU over the past five years has been relatively modest, a lot of the criticism levelled at the CMU project is unfair. Not least, CMU has put capital markets on the political agenda and – for the first time – has framed capital markets as part of the solution to Europe’s economic and social challenges, instead of being part of the problem.

However, the EU and individual member states need to inject more urgency and ambition into CMU if it is to deliver on anything like its promise. This report outlines what we think is an ambitious but achievable roadmap.

Crucially, we draw a clear distinction between ‘top down’ initiatives at an EU level (‘more union’) to drive more integrated capital markets, and ‘bottom up’ initiatives in individual member states (‘more capital markets’) to build capacity. Too much of the focus of CMU over the past five years has been on ‘top down’ initiatives. While it is vital that CMU continues to focus on these areas, transformational change in EU capital markets can only be achieved if individual countries commit to building deeper capital markets from the ‘bottom up’.

The report addresses the following questions:

We are particularly grateful to more than 40 guests who took part in a series of workshops over the summer to thrash out some ideas for this paper; and to our members for their support of our work in making the case for bigger and better capital markets in Europe.

Here is a short summary of this report:

1) A strong backdrop: capital markets in Europe are heading in the right direction. The value of capital markets activity has increased by almost 50% across 28 different sectors in the five years since the launch of the capital markets union, and activity has increased in all but one sector. While this growth cannot be attributed to the CMU project it has provided a strong backdrop for it.

2) On the agenda: while the concrete output of the CMU project has been relatively modest in its first five years, we believe that much of the criticism of CMU has been unfair. Most importantly, CMU has put capital markets on the political agenda and – for the first time – has framed capital markets as part of the solution to Europe’s economic and social challenges, instead of being a big part of the problem.

3) The main barriers: in the coming decade the EU will have to work hard to ensure that CMU overcomes the main barriers that have limited its progress so far. Most obviously, it will need closer political alignment between the European Commission, European Parliament and member states – and a concerted effort by the financial services industry to regain the trust of European policymakers and citizens.

4) More capital markets: the arguments that made a compelling case for CMU back in 2014 are even more compelling after Brexit. The EU27 needs bigger and deeper capital markets to reduce its reliance on bank lending, to diversify funding for companies, to help address the pensions time bomb, and to help fund the investment needed to address climate change. Much of this work needs to be done at a national level.

5) More integrated capital markets: the EU also needs more integrated capital markets. Despite significant progress over the past few decades, EU capital markets are largely a patchwork of 28 national markets. EU-wide initiatives to help integrate capital markets can help drive growth and reduce costs, but will not be enough on their own.

6) Some principles for the next phase: five core principles can help guide the next phase of CMU: i) a clearer distinction between ‘more union’ (EU-wide initiatives to drive integration) and ‘more capital markets’ (at a member state level); ii) making a better case for capital markets; iii) a more focused and prioritised action plan; iv) a focus on competition and transparency; and v) an ‘open CMU’ that retains a global perspective.

7) Regulation and supervision: redesigning the supervisory and regulatory framework in the EU will not on its own create a CMU, but it will be impossible to have a fully-integrated capital market without significant change. Moving towards centralised markets supervision and redefining the mandate for regulators will be an important step.

8) Deeper pools of capital: you cannot have deep capital markets without deep pools of capital. This should be the top priority for the next phase of CMU. While pensions reform is beyond the remit of the EU, it can work closely with member states to incentivise and encourage best practice, such as the phased introduction of auto-enrolment workplace pensions.

9) Laying the foundations: there are few better examples of the barriers ahead to CMU than the complex patchwork of stock exchanges and market infrastructure. The EU should encourage more consolidation, more competition, and more transparency to accelerate closer integration. At the same time, it can work with member states to develop a more appropriate and consistent tax regime to incentivise more investment and a longer-term focus.

10) A national prerogative: ultimately most of the big levers to encourage the growth of bigger and better capital markets can only be pulled by individual member states. If national governments want to ensure that companies in their country have access to a diverse range of short- and long-term funding to invest in jobs and growth, that savers have access to low cost and sustainable investment and retirement products, and that cross-border investors want to invest in their country, it is up to them – and not the EU – to act.

The full report includes:

NewFinancial print An update on ‘Brexit & the City – the impact so far’
New Financial

An update on ‘Brexit & the City – the impact so far’


October 2019 • Topic: Brexit • by Eivind Friis Hamre & William Wright


This updated report provides the most comprehensive analysis yet of the impact of Brexit on the City and the wider banking and finance industry. More than 330 firms in banking and finance have moved or are moving business, staff, assets or legal entities away from the UK to the EU – and these numbers are likely to increase in the near future. 

To purchase a copy of the report, please use the order button at the end of this page. New Financial is a social enterprise that relies on support from the industry to support its work.

If you work in government, regulation, the media or academia and would like to request a copy of the full report, please click here

With just weeks to go until a potential ‘no deal’ Brexit – and a possible deal imminent – the latest report from capital markets think tank New Financial underlines the scale of the impact of Brexit on the City of London and the UK financial services industry.

We have identified 332 firms in the UK that have moved or are moving some of their business, staff, assets or legal entities from the UK to the EU to prepare for Brexit, which we think makes it the most comprehensive analysis yet of the impact of Brexit on the banking and finance industry.

Around 310 firms have chosen specific post-Brexit hubs for their EU business, and we have identified an additional 63 firms that are moving something somewhere since we published our initial report on the impact of Brexit on the City in March 2019 (an increase of 23%).

These moves are the inevitable consequence of the delay and uncertainty around Brexit, which has forced firms to prepare for the worst and put their Brexit contingency plans into action. The scale of relocations so far means that are close to the point at which firms in the UK have sufficient access to EU customers and markets through local subsidiaries that the value of equivalence or any future deal is relatively limited.

With such access in place, the UK may be able to focus more on developing its business with the rest of the world and worry less about close alignment with EU regulation to ensure it retains equivalence. However, any significant moves by the UK away from alignment with the EU will likely prompt the EU to raise the bar in terms of what it requires from firms in terms of their local presence.

The report found that:

* Dublin is by far the biggest beneficiary with 115 relocations (an increase of 16 compared with our initial report in March), well ahead of Luxembourg on 71 (+11), Paris on 69 (+28), Frankfurt on 45 (+5) and Amsterdam on 40 (+8).

* The post-Brexit landscape is much more ‘multipolar’ than before: nearly 50 firms are moving staff or business to more than one financial centre in the EU.

* There is a wide range in how different sectors have responded: for example, nearly half of asset managers, hedge funds and private equity firms in our sample have chosen Dublin, while more than three quarters of firms moving to Frankfurt are banks or investment banks.

The good news is that the contingency planning by banks, exchanges and asset managers – combined with recent agreements between UK and EU regulators – means that the industry is pretty well-prepared for whatever happens between now and October 31st.

The bad news is that we think the report understates the full picture. Many firms will have quietly moved parts of their staff or business below the radar and others have held off making a formal move until they have greater clarity.

Absent a comprehensive deal, we expect the headline numbers to increase significantly in the next few years as local regulators across the EU require firms to increase the substance of their local operations.

Summary

Here is a short 10-point summary of the report:

1) A big headline number: we have identified 332 firms in the UK banking and finance industry that have responded to Brexit by relocating part of their business, moving some staff, or setting up new entities in the EU.  This is an increase of more than 60 firms (or 23%) since our initial report in March. These moves cover a wide range: from an asset management firm setting up a new authorised entity in Luxembourg to a bank like Barclays moving £160bn of assets to Dublin.

2) A significant underestimate: we think our analysis is the most comprehensive yet of the impact of Brexit, but we know that the numbers significantly understate the real picture. Over time, we expect the headline numbers of firms, staff, and business to increase significantly as the dust settles on Brexit, temporary arrangements agreed between the EU and UK expire, and local regulators require firms to increase the substance of their local operations.

3) The damage is done: for many firms in banking and finance, Brexit effectively happened last year.  The political uncertainty since the referendum has forced firms to assume the worst case scenario of a ‘no deal’ Brexit with no transition period, and to prepare accordingly. Many large firms have had their new entities in the EU up and running for months, and having spent tens or hundreds of millions of dollars on relocation are not going to move business back to the UK anytime soon. The scale of relocations significantly reduces the potential benefit of the granting of equivalence or of any potential future deal in financial services between the UK and EU.

4) And the winner is…: Dublin is the clear winner in terms of attracting business from the UK, with 115 firms choosing the Irish capital as a post-Brexit location (an increase of 16 since our report in March). This represents nearly 30% of all the moves that we identified, well ahead of Luxembourg with 71 firms (+11), Paris with 69 (+28), Frankfurt on 45 (+5), and Amsterdam on 40 (+8).

5) A multipolar world: no single financial centre has dominated these relocations. Many firms have deliberately split their business and chosen separate cities as hubs for different divisions, and we identified 48 firms that are expanding in other EU cities in addition to wherever they have chosen as their main post-Brexit hub. 

6) Sector specialisation: different financial centres have attracted different firms based on their sector of activity. Over 40% of all asset management firms that have moved something as a result of Brexit have chosen Dublin. Three quarters of the firms that have chosen Frankfurt as their main EU base are banks, while two thirds of firms moving to Amsterdam are trading platforms, exchanges, fintechs or broking firms.

7) Jobs on the line: we think the debate about how many staff have been moved so far and whether that is higher or lower than expected a few years ago is a red herring. Firms are keen to move as few staff as possible until they know what Brexit looks like and until they have to. This could change quickly: in the event of a No Deal Brexit, we expect firms to significantly increase staffing in their local EU operations.

If there is a deal, this expansion may not happen until after the end of a transition period.  That said, we have identified nearly 5,000 expected staff moves or local hires in response to Brexit, but this is from only a small minority of firms and we expect this number to increase. Note: we have not updated this part of the analysis since March.

8) A shift in scale: the scale of business, assets and funds being transferred from the UK is far more significant. Only a small number of firms have said what they are moving and already the numbers are very large: £800bn in bank assets is around 10% of the UK banking system. The final tally is likely to be much higher, which will reduce the UK’s tax base, supervisory influence and ultimately have an impact on jobs. Note: we have not updated this part of the analysis since March.

9) A loss of influence: the shift in staff, business, assets and legal entities will gradually chip away at the UK’s influence in the banking and finance industry not just in Europe but around the world, as a greater proportion of business is authorised by and conducted in the EU. It could also significantly reduce the UK’s £26bn trade surplus in financial services with the EU.

10) The impact on the City: while the headline numbers are stark, there is no question that London will remain the dominant financial centre in Europe for the foreseeable future. Firms are keen to keep as much of their business in London as possible and even the biggest relocations represent a maximum of 10% of the headcount at individual firms.

There is also a small boost to the City from the ‘reverse Brexit’ effect. We identified a small number of EU firms that have already applied for authorisation in the UK, and more than 1,000 firms from the EU27 have applied to the Financial Conduct Authority’s ‘temporary permission’s regime’.

However, it’s important to note that far more business flows from the UK to the EU than the other way round: in 2016, 5,500 firms in the UK used more than 336,000 passports to sell to the EU. Around 8,000 firms in the EEA used 23,500 passports to offer services in the UK.

The full report:

The full report ‘Brexit & the City – the impact so far’ includes the following:

1) A summary of the main findings

2) A map and infographic summarising how more than 300 firms are responding to Brexit and which financial centres they have chosen as their post-Brexit hub

3) A summary of the main moves to different financial centres broken out by primary moves (EU hubs) and secondary relocations

4) A summary of what has changed since our initial report in March 2019

5) Analysis of how firms in different sectors are relocating to different financial centres in different ways

6) A summary of the remaining concerns that firms and regulators have about Brexit

7) A summary of the implications of this report for the future of UK and EU financial services

8) A detailed appendix of relocations by individual financial centres including: Dublin, Luxembourg, Paris, Frankfurt and Amsterdam

9) A detailed appendix of relocations by sector of activity including: asset management, banks and investment banks, diversified financials (trading, exchanges, market infrastructure and fintech), insurance, alternatives (hedge funds and private equity)

About New Financial:

New Financial is a capital markets think tank launched in 2014. We’re having a growing impact among senior industry leaders and policymakers across Europe on making the case the case for bigger and better capital markets. We’ve hosted more than 100 private events and published more than 30 in-depth reports. New Financial is a social enterprise funded by institutional membership from across the capital markets industry.

NewFinancial print Report: what do EU capital markets look like on the other side of Brexit?
New Financial

Report: what do EU capital markets look like on the other side of Brexit?


September 2019 • Topic: Brexit • by Panagiotis Asimakopoulos


This report shows that post-Brexit capital markets in the EU will be significantly smaller and less developed relative to GDP than they are today. The UK’s current dominance of EU capital markets activity will be replaced by the dominance of France and Germany.

To purchase a copy of the report, please use the order button at the end of this page. New Financial is a social enterprise that relies on support from the industry to support its work.

If you work in government, regulation, the media or academia and would like to request a copy of the full report, please click here

With Brexit just a few weeks away, this snapshot of what capital markets in the EU will look like after the departure of the UK makes for sobering reading.

EU capital markets will be far smaller and less developed post-Brexit, and the EU economy will be even more reliant on a struggling banking sector than it is today. Brexit also means that the EU will replace the current dominance in capital markets of the UK with an effective duopoly of France and Germany, who will account for nearly 45% of all capital markets activity in the EU.

A shift in tone?

This is likely to lead to a shift in the tone and direction of policy around capital markets in Europe, not least on the future of the capital markets union initiative and the future supervisory framework. The EU will lose its largest and deepest capital market and the supervisory and regulatory expertise that has built up in the UK over many decades. A significant part of the EU’s footprint in global capital markets will also be lost, with its share of global activity shrinking by nearly one third.

At the same time, large parts of EU capital markets activity will effectively be based offshore in the UK – particularly in sectors such as trading and asset management where firms have chosen to concentrate large parts of their EU activity in London. In highlighting the relative underdevelopment of capital markets in the EU27, the report also underlines the urgency for policymakers across Europe to focus on developing bigger and better capital markets to support growth and investment in the EU economy.

The full report includes:

NewFinancial print HMT Women in Finance Charter Signatories Survey 2019
New Financial

HMT Women in Finance Charter Signatories Survey 2019


July 2019 • Topic: Driving diversity • by Olivia Seddon-Daines & Yasmine Chinwala


The HM Treasury Women in Finance Charter was launched in March 2016 and now has over 350 signatories covering 800,000 employees across the sector. Our latest report is based on a survey of 136 firms that have signed up and assesses the concrete impact the Charter is having on how they approach diversity, the benefits they are realising – and the challenges they face in meeting their Charter commitments.

The UK government launched the HM Treasury Women in Finance Charter in March 2016 to encourage the financial services industry to improve gender balance in senior management. The Charter now has over 350 signatories covering 800,000 employees across the sector.

The number of signatories illustrates how seriously the sector is taking the Charter. But what impact has joining the Charter had on signatory companies? What benefits are they realising and what challenges do they face in meeting their Charter commitments? New Financial surveyed Charter signatories in April 2019 to answer these questions.

The highlights of the survey include:

Methodology

HM Treasury invited all Charter signatories to participate in the survey in April 2019. We received responses from 136 firms.

Acknowledgements

We are very grateful to all the signatories that took part in the survey. We would also like to thank our institutional members for their support, and particularly Virgin Money, now owned by CYBG, and City of London Corporation for funding this research.

New Financial believes that diversity in its broadest sense is not only an essential part of running a sustainable business but a fundamental part of addressing cultural change in capital markets. We provided data to Jayne-Anne Gadhia’s government-backed review of senior women in financial services, Empowering Productivity, and we are working with HM Treasury to conduct an annual review of the HMT Women in Finance Charter to monitor the progress of charter signatories.

As part of our aim to move the diversity debate forward, we host a series of seminars and workshops on different aspects of diversity, and we publish surveys and research. If you have any feedback on this report or are interested in taking part in our events programme, please contact Yasmine Chinwala on yasmine.chinwala@newfinancial.org

NewFinancial print What is the point of stock exchanges?
New Financial

What is the point of stock exchanges?


June 2019 • Topic: The Purpose of Finance • by William Wright & Tracy Blackwell


This article was published in The Daily Telegraph in June to coincide with the launch of our recent report on ‘What are stock exchanges for? And why should we care?’

You can download a summary of the report here

Maybe it’s just that we’re getting older, but the questions on Mastermind seem to be getting easier. Until last week, when a pretty obscure question came up in the general knowledge round: “Which trading and financial institution has its headquarters at 10 Paternoster Square near St Paul’s Cathedral in the City of London?”

It was not immediately obvious why knowing that this is the address of the London Stock Exchange is an essential part of anyone’s general knowledge, but contender Allan, whose specialist subject was Leicester City Football Club, got it right.

Like most viewers of Mastermind, Allan probably doesn’t spend too much time thinking about the relevance of the London Stock Exchange to his daily existence. But the changes in the world of stock exchanges and stock markets over the past 20 years could have a profound effect on him, the wider economy and on society for decades to come.

Given the simmering anger with banking and finance since the financial crisis, it can be hard to make the case to politicians and the wider public that stock markets play a vital role in a healthy economy. At the most basic level, stock exchanges are in the business of capital formation: they help companies that are in need of capital raise money from investors who have it.

More than 1,700 UK companies are listed in London, they’re worth a combined £2.4 trillion, and in the past five years they’ve raised more than £125bn in capital to invest in their business, supporting growth, innovation and jobs.

They are the most powerful engines we have created for spreading the profits of wealth creation across society, allowing ordinary people as savers and investors to benefit from the innovations and entrepreneurialism to which they have contributed.

But a new paper, The Purpose of Stock Exchanges, published by the think tank New Financial as part of the Purpose of Finance series, warns that stock exchanges – and the vital role they play in raising capital, sharing risk, setting standards, improving accountability, and democratising wealth creation – are under threat.

While stock markets in the UK and US are bigger, deeper and more efficient than ever before, something is wrong. Many of the biggest growth companies have chosen to stay private for longer, and to raise money on stock exchanges when they are more mature – if they ever list on them at all. The number of listed companies has nearly halved over the past 20 years on both sides of the Atlantic; the number of new issues has dropped by three quarters; and the amount of capital being raised is down by around two thirds. At this rate, at some point in the next 50 years there won’t be enough listed companies in the UK to fill the FTSE 100.

The irony is that with 10m people effectively becoming investors for the first time under auto enrolment, we have a massive opportunity to strengthen their connection with capitalism and prevent a future pensions crisis.

Unfortunately, current trends suggest there will be fewer public companies to invest in.

There are a lot of different factors at play. The rapid growth over the past few decades of alternative sources of capital, such as venture capital, private equity or the bond market, means that companies have less need to raise money on stock exchanges. The increased burden of disclosure and public scrutiny of listed companies makes the stock market a less attractive place to be. And changes in the finance industry have brought complexity and structural misalignments that have helped to undermine the underlying purpose of stock exchanges.

This decline has an impact far beyond the arcane world of stock exchanges. Stock exchanges play a critical role in helping to finance growth and investment by providing long-term risk capital to companies. The capital that they help raise drives innovation, improvements in productivity and long-term economic growth. They improve standards and levels of transparency and accountability in business. And crucially, stock markets help democratise wealth creation by enabling millions of people to share in the growth of successful companies.

At a time when levels of public trust in business are already low and amid the debate on the crisis of capitalism, millions of individuals are being asked to carry more of the responsibility for their future pensions through initiatives such as auto enrolment in the UK. A growing section of the economy – perhaps the most dynamic part – is effectively off-limits to them. This sense of exclusion could heighten concerns over inequality and raise questions over the social licence to operate that is fundamental to sustainable capitalism.

There is no simple solution. Stock exchanges and investors cannot simply rewind the clock and hope for the best. It will require a concerted and collective response from exchanges, companies, banks, investors, regulators and government.

Politicians talk a lot about reconnecting society with capitalism. Companies talk a lot about reconnecting capitalism with society. Rethinking stock exchanges could be the ideal way to do both.

William Wright is the managing director of New Financial and Tracy Blackwell is the chief executive of the Pension Insurance Corporation

NewFinancial print Report: What are stock exchanges for? And why should we care?
New Financial

Report: What are stock exchanges for? And why should we care?


June 2019 • Topic: Unlocking capital markets • by by William Wright


This report analyses the changes in the world of stock exchanges, equity markets and the new issue market over the past 50 years. It highlights the vital role that stock exchanges play in the economy, analyses the main drivers of the significant changes over the past few decades – and suggests how we can get exchanges back on track.

New Financial is a social enterprise that relies on support from the industry to support its work. To request a copy of the report please click here and you can download the accompanying infographic here.

This paper is part of the Purpose of Finance initiative on which New Financial is collaborating with Pension Insurance Corporation. You can find more details of this project here.

Stock exchanges have played a vital role at the heart of the economy helping companies raise capital for more than 200 years. Healthy stock exchanges are crucial to financing growth and innovation. They provide access for companies to a deep pool of capital, enable price discovery, spread risk, help widen and share wealth creation, and they improve transparency, accountability and corporate governance standards. But something is wrong.

The paradox of stock exchanges

In this paper we highlight ‘the paradox of stock exchanges’: on many measures, stock exchanges are bigger, more liquid and more efficient than ever before – but fewer and fewer companies are choosing to be listed on them or to use them to raise capital.

The value of stockmarkets in the UK and US has risen more than six-fold in real terms in the past 50 years and the value of trading in listed companies listed in the UK and US has increased by more than 50 times in real terms.

But the number of companies that are listed on stock exchanges in the UK and US has roughly halved over the past 25 years, the number of new listings has dropped by three quarters, and the amount of capital being raised on stock exchanges has dropped by around two thirds.

We think that without urgent action, there is a risk that this vital engine for raising capital, sharing risk, and widening participation in wealth creation, could be seriously undermined.

The purpose of stock exchanges

The starting point for this paper is the fundamental purpose of stock exchanges, which we define as capital formation and intermediation: stock exchanges provide a centralised marketplace to enable companies that need money to raise capital from investors who have it, and to enable those investors to trade shares in listed companies.

This involves a delicate balance between overlapping and often competing interests of different groups (issuers, investors and intermediaries). This juggling act can be broadly split into primary markets (raising capital) and secondary markets (trading and price discovery).

The main thesis in the paper is that over the past 25 years the pendulum has swung from raising capital to trading (or from primary to secondary markets), creating a bifurcation between a hyper-efficient market for capital raising and trading for the biggest companies at the top end, and a less efficient and less active market for smaller companies at the other.

A structural shift?

There is no single factor behind the decline in listed companies and new issues, but we highlight three broad drivers:

The growth of alternative sources of capital

The cost and burden of being listed

Big shifts in the finance industry

Why should we care?

The fate of stock exchanges has a big impact beyond the world of the financial markets in at least three ways:

Growth, investment & innovation

Stock exchanges play a valuable role in financing growth and investment. Equity is a unique form of financing that is ideally suited to support long-term investment with an uncertain outcome. Equity encourages innovation and improvements in productivity that are required to drive economic growth.

Widening wealth creation

Public equity markets are a mechanism to reduce inequality and an engine for the wider participation in wealth creation through people’s pensions and direct investments. The shift from public to private capital over the past few decades means that high growth and high returns from venture capital and private equity-backed companies are increasingly limited to those investors who able to invest in private markets – such as wealthy individual investors and the shrinking number of people lucky enough to be part of a defined benefit pension scheme. Millions of individuals coming into contact with the stockmarket for the first time through auto-enrolment pensions are being excluded from this growth opportunity.

Standards & accountability

And third, stock exchanges play an important role setting standards, providing transparency and accountability, and supporting the social licence for businesses across the economy.

What can we do about it?

There is no silver bullet to reverse the structural decline in equity markets over the past few decades. It will require all market participants to work together to address three main areas:

Rethinking regulation:

Rethinking exchanges 

Collective action:

NewFinancial print Report: unlocking the growth potential in European capital markets
New Financial

Report: unlocking the growth potential in European capital markets


June 2019 • Topic: Unlocking capital markets • by Panagiotis Asimakopoulos & William Wright


This report outlines an ambitious vision of game-changing growth in European capital markets. It underlines the wide range in the size and depth of markets across the EU and highlights the potential benefits of deeper capital markets to the European economy in concrete and practical terms.

To purchase a copy of the report, please use the order button at the end of this page. New Financial is a social enterprise that relies on support from the industry to support its work.

If you work in government, regulation, the media or academia and would like to request a copy of the full report, please click here

The capital markets union initiative has laid some of the foundations for future growth, but in terms of concrete progress it has been relatively modest. One of the main factors behind this is the often lukewarm political commitment to – and continued mistrust of – bigger capital markets in many countries across Europe.

This report addresses this head-on by making a concrete and practical case for the benefits of bigger and better capital markets, breaking it down to a more accessible and tangible level.

Bigger capital markets are not an end in themselves. They help diversify the sources of funding for companies; reduce the reliance of the EU economy on bank lending; increase the availability and scale of risk capital to support innovation and growth; boost the pools of long-term capital that could be put to work in the economy; and help reduce the increasingly unsustainable burden of future pensions provision.

Making a tangible case

We have expressed the growth potential in terms of what it would mean for the number of additional companies in each sector and each country that could potentially access capital markets, and how much more money they would be able to raise. To pick one country, our model estimates that in Germany the realistic growth potential translates into an additional:

The report highlights the significant progress in capital markets in the EU over the past five years as markets have recovered from the financial crisis, and measures the wide range in the level of development of capital markets across the EU. It also forecasts where we might expect capital markets to be in 10 years based on some conservative growth assumptions based on current trends.

What if…?

More importantly, it also presents a much more ambitious growth analysis based on a ‘what if…?’ scenario: what if capital markets in each country in the EU were as large relative to GDP as they are in the five most developed countries in each sector? While this growth may seem improbable from where we are standing today, it is based on what five member states in each sector have already shown is perfectly possible.

This growth – or even modest progress in the right direction – would have a significant impact on national economies across Europe. We think that with a renewed commitment from EU policymakers, national authorities, and market participants, significant growth is realistically achievable.

The full report includes:

NewFinancial print Diversity from an Investor’s Perspective 2019
New Financial

Diversity from an Investor’s Perspective 2019


May 2019 • Topic: Driving diversity • by Olivia Seddon-Daines and Yasmine Chinwala


This report looks at why and how the most forward-looking asset owners (such as pension funds, insurers and sovereign wealth funds) are addressing diversity and inclusion.  Their opinions count – as an essential source of capital for financial markets, the needs and actions of asset owners have a big impact on how the whole system operates.  

New Financial is a social enterprise that relies on support from the industry to support its work. Our reports are free for our member firms. To request a copy of the report please click here

Diversity is firmly on the corporate agenda, yet much of the capital markets industry has been slow to act. In Diversity from an Investor’s Perspective 2019 we look at what asset owners are doing, both internally and externally.

Our research shows that the most progressive asset owners are not only stepping up their advocacy and engagement on diversity, they are increasingly bringing diversity criteria into mainstream investment mandates and decision-making processes. Asset managers will need to step up preparations to answer both quantitative and qualitative questions about the diversity and culture of their teams as appetite from clients and investment consultants grows.

This report addresses the following questions:

We also offer asset owners suggestions and ideas on how to approach diversity and prompt financial intermediaries to act.

We researched 100 asset owners globally with combined assets of more than US$8 trillion, and we gathered information from a wide range of market participants.  This report is an update to our ground-breaking November 2017 research Diversity from an Investor’s Perspective, and we have captured how thinking and actions have evolved (in some cases quite rapidly) over the past 18 months.

The research was conducted in collaboration with the Pensions and Lifetime Savings Association and supported by Pinsent Masons.

The highlights of Diversity from an Investor’s Perspective 2019 are:

1.On the radar: Diversity is firmly on the agenda of asset owners globally, although priorities and approaches vary. There are many examples of best practice from asset owners in North America, Australia, Scandinavia and the UK, but there is a considerable gap between the leaders and the rest.

2. Thought leaders: Progressive asset owners globally are doing more than ever to promote diversity and set an example, both internally and externally. They are increasingly vocal, transparent and confident on the subject of diversity and how it benefits the whole investment ecosystem, and their communications and advocacy are more explicit.

3. Motivations for tackling diversity: Asset owners’ understanding of why diversity is important to them is improving and becoming more nuanced, with improved decision-making as the top reason given for acting on diversity. However, views on the value of diverse managers to enhance fund performance remain polarised.

4. Inclusion and culture: For those addressing diversity internally within the investment function, the discussion is beginning to encompass inclusion and cultural change more broadly. Asset owners are drawing on common corporate action points to drive change, for example gathering more granular data across diversity strands and introducing flexible working.

5. Trustee diversity: Awareness of the need for and benefits of trustee diversity is growing and slowly turning into action, with a particular focus on encouraging more young people onto trustee boards.

6. Influencing manager selection: While not ubiquitous, more asset owners are asking questions of their potential and existing managers. Diversity queries are rising in number and frequency in requests for proposals, and discussions are becoming more difficult for asset managers to ignore.

7. Role of investment consultants: Thinking on diversity is evolving for the biggest firms. They are raising the topic in discussions with clients and being challenged on their own diversity by clients. Diversity and culture criteria are being integrated into manager assessment, but the approach is inconsistent across different consultants, asset classes and regions.

8. Mandate critical at the margin: Some asset managers take responses to diversity questions more seriously than others. High scores on diversity criteria may not be core to a mandate, however, answering diversity questions well could be the marginal difference between winning or losing a mandate when rivals are otherwise evenly matched.

9. An investment opportunity: The trend amongst US public pensions to allocate directly to diverse managers is growing, with schemes increasing allocations to emerging managers programmes. Diversity as a theme for investment analysis is also developing, with more indices and more products as the quality and quantity of data improves.

10. Gender takes priority: Diversity efforts are largely concentrated on boosting female representation, as this is where both qualitative and quantitative data is best established. Shareholder engagement activity is focused on board diversity, with some extending their discussions to the wider workforce and diversity strands other than gender.

Methodology and resources

In 2017 we conducted desk research on 100 asset owners globally, selected by size, activity and availability of information, with combined assets under management of more than $8 trillion. We have since updated our research for those identified as the most progressive on diversity. We analysed publicly available information (eg. websites, annual reports, responsible investment reports, press releases). We also gathered information from more than 100 market participants (including asset owners, investment consultants, trade bodies, proxy voting services, asset managers and corporate governance experts) via desk research of public information (websites, press releases, industry research) plus interviews and discussions. For further information on methodology and further resources on the subject, click here or contact New Financial.

NewFinancial print Brexit & the City: throwing the golden goose under a bus?
New Financial

Brexit & the City: throwing the golden goose under a bus?


April 2019 • Topic: Brexit • by William Wright


The City may not like the hand it has been dealt by Brexit – but there is a lot more to it than being hung out to dry by the government

Thrown under a bus, hung out to dry, or sold down the river: you don’t have to look very hard to find a lot people in banking and finance who think that the City of London has got a raw deal from the government when it comes to Brexit.

Banking and finance is one of the rare examples of a sector in which the UK leads the world. It accounts for more than 3% of all employment in the UK, produces more than 7% of our economic output, pays 11% of tax receipts, and generates a vital trade surplus with the EU of more than £20bn a year. And yet the industry has been left to fend for itself on the other side of Brexit. The government is bending over backwards to help limit the damage to car manufacturers by pursuing a ‘comprehensive arrangement’ for trade in goods with the EU after Brexit, even though goods account for only 20% of the economy. But it has abandoned the much larger services sector – and particularly financial services – to its own fate.

The problem with this widely held thesis is the argument that the government is killing the golden goose stands up to about as much scrutiny as a column on Brexit written by Boris Johnson.

First of all, the City has not been hung out to dry. It’s true that on the other side of Brexit, as things stand, the City will no longer be able to sell its services across the EU from London. For many firms, Brexit is a monumental pain in the balance sheet and the industry has collectively wasted millions of hours and hundreds of millions of pounds working out to adapt to it. In order to guarantee uninterrupted access to clients and markets in the EU many firms have shifted some of their staff, operations and legal entities to the EU. They may – repeat may – be able to access EU markets from London in future under the clunky and inefficient regulatory arrangements known as equivalence.

Asking for the moon

Many firms in the City would prefer a much closer post-Brexit relationship with the EU involving single market membership or ‘mutual recognition’ – a non-starter promoted in some corners of the industry that would have involved the EU allowing the City to enjoy the benefits of the single market without being a member of the EU.

However, it’s important to distinguish between being ‘hung out to dry’ and an inevitable consequence of the result of the referendum in 2016 and the government’s red lines that include an end to freedom of movement of people and leaving the single market. It’s also important to distinguish between being ‘thrown under a bus’ and not getting a unrealistic deal that was never going to happen. The reality is that there is no special version of Brexit that meets these conditions and works for the City.

Second, there is no such thing as the City. While it’s a useful shorthand for anything involving banking, finance, and big business, in reality the City doesn’t really exist. The financial services industry in the UK has atomised as quickly as it has expanded over the past 30 years. Different sectors of the industry have different business models, regulatory frameworks and priorities. And even within particular sectors, different firms have very different perspectives: a big US investment bank that uses London as a beachhead to access the rest of the EU market, has a very different view on Brexit  to a UK bank with its global headquarters and a large domestic business in the UK or a French bank headquartered in Paris with a large London office. If the City is criticised for not speaking with one voice, that’s because it’s a cacophony of competing voices with different agendas.

Big enough to cope

Third, one of the main reasons why the City has not been a top political priority is the widely held view in government that the City can cope. The industry has always been pragmatic and adaptable, and most firms in the City can and already have adapted to whatever form of Brexit we end up with by opening a new office in Dublin, Frankfurt or Paris, getting a new licence from the local regulator, and moving anything from a handful to a few hundred staff. For a car manufacturer in the north of England with complex EU-wide supply chains, it’s a little more complicated.

Our research on the impact so far of Brexit suggests that the industry is coping pretty well. Nearly 300 firms have moved something somewhere from the UK to the EU in preparation for Brexit, and while the headline numbers are stark – banks have moved more than £800bn in assets out of the UK – the longer-term impact is likely to settle at around 10% to 15% of business and activity moving. In the words of one US bank chief executive: “it’s big, it’s meaningful, but it’s not life-changing”. 11% of all tax receipts sounds big, but the reality is that the EU represents only a minority of financial services business in the UK, and much of that business will stay in the UK despite Brexit. The majority of the financial services industry in the UK will be largely unaffected by Brexit.

Fourth, and perhaps a back-handed compliment to the City, is that it is arguably too important and too successful to be tied to the EU. The only way for the City to enjoy the same sort of access from London to the EU that it has enjoyed for the past few decades would be for the UK to sign up to a Norway-style relationship with the EU: in other words, to remain a member of the single market with continued free movement, but with a much more limited say in setting the rules. In regulatory parlance, this would leave the City as a ‘ruletaker’ having to follow whatever rules come out of Brussels in perpetuity.

Building political capital

Finally, if the City feels that it has been thrown under a bus, perhaps it has only itself to blame. You have to build political capital long before you need to spend it. In the decade since the financial crisis – which shattered the industry’s social licence to operate – the City has instead often seemed to fight every regulatory reform as though it were Custer’s Last Stand. When it has sought to make a case for the value of what it does and its value to the UK economy, it has often done so in terms of itself: we’re important because we employ a lot of people and pay a lot of tax. This can sound like ‘you may not like us but we pay for your hospitals’. A better way of making this case is to frame the value of the City in terms of what it does every day in fuelling the wider economy, helping millions of people save for their retirement, and helping companies to manage their risks and to raise capital to invest in jobs and growth.

While lots of big firms with business across Europe would be perfectly happy with this – all firms in the financial services industry are ultimately ruletakers – UK regulators, domestic firms, and those who don’t have a big business in the EU, don’t want to be hamstrung by future EU regulation. This is particularly acute given the signs that the tone and direction of regulation in the EU is already going in a different direction: tougher on banking and finance, tighter on tax, more inward-looking, and more protectionist. ‘More French’, as one senior banker said recently.

At some point in the future – it may be another financial crisis, a radical Labour government, or a Brexit-induced recession – the City is going to need all the political capital it can get. If it doesn’t want to be really hung out to dry in future, it had better start thinking now about how to make a better case that it really is the golden goose.

NewFinancial print Women in Finance Charter Second Annual Review opening address by John Glen MP, Economic Secretary to the Treasury
New Financial

Women in Finance Charter Second Annual Review opening address by John Glen MP, Economic Secretary to the Treasury


March 2019 • Topic: Driving diversity • by New Financial


True diversity in the workforce isn’t just about the people we employ, it’s about the way we employ them. . .” John Glen, Economic Secretary to the Treasury spoke at the Women in Finance Charter Annual Review launch event on 14th March 2019.

You can read a the full speech below or download a PDF here.

Economic Secretary to the Treasury
Women in Finance Charter Second Annual Review, 14 March 2019

It’s a pleasure to be here among so many like-minded individuals. Each of us is here this morning because of our commitment to creating a better gender balance across the financial services sector.

It’s a commitment rooted in the belief that a more inclusive workforce is better for employees, better for businesses and better for customers. The importance of this shared endeavour was brought home to me last week, when I attended the launch of the FinTech for Schools programme.

It was held at the City of London Girls School, but included pupils from across the Square Mile. These wide-eyed young men and women were bright, enthusiastic and excited about the future. They asked genuinely probing and intelligent questions. And they had precisely the qualities that the financial sector needs. My message to them was simple.

Whatever their background, whatever their skill set, there was a place for them in the financial services sector. Male or female, it was a career in which they could invest their energy and talent – and, in return, it would take them as far as they wanted to go.

Our job – and the reason we’re here – is to make that promise a reality.

Today sees the publication of the Second Annual Review of the Women in Finance Charter.

It’s a moment to take stock…

… reflect on our progress to date…

…and to recommit ourselves to taking the next steps in this journey together.

And for my part, I’d like to use my remarks to encourage you to go further and faster toward our goals.

Women in Finance Charter

We’ve certainly come a long way. As many of you know, HM Treasury published the Women in Finance Charter three years ago. It asked financial service companies to commit to greater representation of women in senior leadership roles in the near term, with the long-term goal of an equal gender balance across the sector. In the early days, the challenge was getting firms to sign up. But today, the figure stands at over 330 organisations, representing more than 800,000 employees.

They come in all shapes and sizes, from the newest and most exciting start-ups to the venerable giants of global finance. I’d like to take this opportunity to thank Jayne-Anne Gadhia, our Women in Finance Champion. Jayne-Anne’s review in 2015 was the genesis of this Charter, and her tenacity since then has been instrumental in the progress we’ve made. I’d also like to thank all the signatories here today who’ve made that commitment.

It may only be the first step, but it’s a powerful one.

Because leadership matters. Public commitment is important. And it sends a signal to the rest of the sector that this is the right thing to do. The good news is that others are already following in your footsteps. Today, I’m pleased to announce that another 36 firms have joined us.

Progress towards goals

If signing the charter was the first step, the next was for firms to work toward specific targets for greater female representation at senior levels.

Today’s Review shows that you’re making progress.

45% of signatories have met or exceeded their targets already.

Another 42% are on track to do so….

…which means the vast majority of signatories have maintained or increased the proportion of women in senior management roles over the past year.

Challenge

But these are early days.

And, to be candid, the progress we’ve made over the past few years has been modest. There can be no hiding from the uncomfortable truth that we still have a long way to go. I’ve been in post for a little over a year. But I’ve seen examples of some of the institutional barriers we’re up against time-and-again. Why is it that so many talented women choose to leave the sector in their 30s? Why does the financial services sector have the largest gender pay of any sector? And why, in 2019, do women still report that some organisations still feel like ‘boys’ clubs?

There’s no doubt that the sector has the right intentions – but they don’t seem to be cutting through. For all the efforts you’ve made to date, too few women are making it to the top.

Sustained leadership

I recognise there are no quick fixes.

Changing the culture of any organisation is a slow and grinding process. It took 800 years for a woman to take her place as Lord Mayor of London. Which is obviously outrageous. And although I don’t expect the Charter to influence change overnight, I definitely expect change much quicker than that! So I expect to see evidence of your sustained commitment. And to see firms willing to take radical action to bring about the necessary changes.

At the same time, I’m asking Treasury officials to explore all the levers that are available to me within government to keep the pressure up from my end. But ultimately the onus is on you, as leaders within this sector. It’s not enough for gender to be a recurring item at monthly board meetings. Good intentions need to be translated into tough, tangible, action.

Because this is an injustice that needs to be put right.

I know that some of the firms here today have met your initial targets, and are already setting stretching new ones. That’s the right attitude and I encourage others to do the same. I’d like to see all signatories move to targets of 33% and above to align with the Hampton-Alexander Review. And I want firms to track and review their approach on a regular basis, so they can demonstrate the progress they’re making.

Collaboration

But this needn’t be a lonely journey.

We want to see change not just in individual companies, but across the length, breadth and depth of the sector.

Collaboration is essential.

I encourage you to take inspiration from one another’s achievements and share best practice within and between sectors. If you have ideas to bring your sector together, then the Women in Finance Team at the Treasury can assist you. And there are a range of trade bodies, networks and other allied organisations that can also help. There’s a huge amount we can learn from one another.

In both my ministerial roles – at DCMS and now at the Treasury – I’ve been fortunate to work with women who job share in senior Civil Service roles. I’ve found they can provide me with a wider range of skills and experience than a single person could in the same role. Likewise, the Annual Review includes some great examples of actions that firms have taken.

Lloyds Banking Group instructed external recruitment agencies to ensure women account for a third of candidates shortlisted for senior management roles, and they’ve already seen a rise in the number hired.

And Santander has run a leadership development programme for women – many have gone on to secure new roles in the company as a result.

If they can do it, so can the rest of you.

We hope that individual sectors will hold events over the coming year to help you share ideas. We have a significant opportunity to make fundamental changes throughout all parts of the financial services sector, whether it is within more traditional established areas, such as banking and asset management, or growing areas like Islamic finance, FinTech, and Green finance.

There’s a big role for men too.

Perhaps in the past we’ve shied away from the issue because we were worried we would say or do the wrong thing. Or because we felt we were part of the problem.

In fact, we’re part of the solution.

I was pleased to chair a roundtable discussion with industry leaders at No11 Downing Street in January that focused on the role of men as agents of change. We have an important job to champion and drive this agenda, and lead others to do the same. And let’s face it – a more equal and inclusive workplace is in our interests too.

 We have as much to gain from a better work life balance as anyone.

A more diverse and inclusive sector

And that leads me to my concluding point, which is about the scale of our ambition. Greater female representation is a stepping stone to gender parity. And gender parity is, in turn, part of a wider ambition for a more diverse, more inclusive, financial sector. The litmus test of our efforts isn’t just whether we’re hitting the right numbers. It’s about whether women can enter this sector and succeed on the strength of their merits alone. Our efforts must reflect and advance the cause of women in all their diversity.

And the same applies to men for that matter. Or disabled people. Or the LGBT community. Or people from different ethnicities or socio-economic backgrounds. We want an industry that is not only more open to women, but more open to everyone. A sector where the brightest and best can get ahead, irrespective of who they are or where they came from.

Today’s Annual Review reveals the Charter is helping to bring about the wider changes in workforce culture.

More flexible ways of working

Greater emphasis on mentoring and leadership development.

Better succession planning.

The kinds of practices that benefit men and women alike.

Because true diversity in the workforce isn’t just about the people we employ, it’s about the way we employ them.

It’s about being open to graduates and apprentices. To people who join mid-career. And those who work their way from the bottom all the way to the top. It’s about accommodating people who work part time. People who want to take career breaks or secondments or who serve as reservists. And it’s about nurturing people at every stage of their career. Supporting them through life’s ups and downs with a grown-up approach that can adapt when personal circumstances change. So the targets we set ourselves are a means to an end. And as we work towards them, we shouldn’t lose sight of what we’re trying to achieve. A sector that is not only diverse but truly inclusive.

To conclude.

I want to thank you for your commitment to date, and the progress you’ve made over the last year. The more you achieve, the clearer it becomes how much more we can achieve. So I make no apology for being restless and demanding in my desire for even greater progress. And I am watching this closely – no measures are ruled out for the future.

We’ve started this journey together. And there can be no let up, until we reach our destination. A stronger, more agile and resilient sector. One that has the best people – with the right skills – to meet the challenges and opportunities of the future.

“Original script, may differ from delivered version”

NewFinancial print Report: HM Treasury Women in Finance Charter Annual Review
New Financial

Report: HM Treasury Women in Finance Charter Annual Review


March 2019 • Topic: Driving diversity • by Olivia Seddon-Daines, Jennifer Barrow and Yasmine Chinwala


Three years since the UK Government launched the HM Treasury Women in Finance Charter, it is having the desired impact – signatories are taking action to improve gender diversity and beginning to see positive results, according to New Financial’s latest research.

New Financial’s second Annual Review monitors the progress of signatories against their Charter commitments and holds them to account against the four Charter principles. The Charter encourages the financial services industry to improve female representation in senior management by setting targets, publishing them, having an executive accountable for diversity and linking diversity to pay. The Charter now has more than 330 signatories covering 800,000 employees across the sector.

New Financial is HM Treasury’s data partner for the Charter. This review includes data from 123 signatories that signed the Charter before September 2017 and provided an annual update to HM Treasury in September 2018. This review also aims to offer the broadest possible insight into actions signatories are taking to drive progress towards their targets.

The highlights of the second Annual Review are:

1) Meeting targets: 45% of the 123 signatories analysed in this review have met or exceeded their targets for female representation in senior management. A further 42% that have targets with future deadlines said they are on track to meet them .

2) Moving in the right direction: Female representation in senior management at signatory firms is rising – 86% of signatories either increased or maintained the proportion of women in senior management during the reporting period.

3) The challenge ahead: For signatories that still have a target to reach, average female representation in senior management is 31%. If they can maintain their current rate of increase, these signatories are on track to meet their 38% average target in three years.

4) Stretching targets: The majority of signatories have set ambitious targets for increasing their proportion of senior women. A quarter (25%) have a goal of parity. Two-thirds have set targets at 33% or above and HM Treasury would like to see all targets move to this level in order to align Charter targets with the Hampton Alexander review.

5) Defining senior management: There is growing consensus around signatories’ definitions of the senior management population to which the Charter applies – for half of signatories senior management accounts for up to 10% of the total workforce. However, there is a wide variety of definitions, even amongst firms of a similar size, with the spectrum ranging from 0.3% to 100% of total workforce.

6) Top actions driving change: The most common actions signatories reported are ensuring they have female candidates on longlists and/or shortlists for senior roles; providing unconscious bias training; and promoting flexible working. These actions are similar to those reported last year, but there is evidence that actions are developing, they are becoming embedded within organisations and are available to more staff.

7) Accountable at the top table: Accountability is sitting in the right kinds of roles, at the highest levels of seniority. Almost all (96%) accountable executives sit on executive committees, nearly half (44%) of AEs are CEOs, and about 70% have revenue generating responsibilities.

8) Linking to pay: Nearly a third (29%) of signatories believe the link has been effective, while half said it is too early to tell. More than a quarter (28%) have extended the link beyond executive committee members.

9) Publishing updates: Signatories are still getting to grips with their transparency obligations around the Charter. Nearly half (46%) had not published an online update on their progress against their targets by the required deadline and less than a third (29%) met all reporting criteria.

10) An achievable number: About 2,500 women will need to join senior management across the 123 signatories in order for them all to meet their targets, equivalent to an increase of 12% based on the number of senior female managers today. The largest firms have an important role to play here, as they account for 95% of the 2,500, particularly the UK and global/investment banking sectors.

Research methodology: This review presents annual update information reported* to HM Treasury by 123 signatories† in September and October 2018. The data was shared with New Financial on a confidential basis. All data has been anonymised and aggregated, and no data has been attributed without consent from the relevant signatory.

For more information on the Annual Review or on New Financial’s diversity programme, please contact Yasmine Chinwala on yasmine.chinwala@newfinancial.org

About New Financial: New Financial is a think tank and forum that makes the positive case for bigger and better capital markets in Europe. We think there is a huge opportunity for the industry and its customers to embrace change and reform, and to rethink how capital markets work. Diversity is one of our core areas of coverage.

NewFinancial print Report: Brexit & the City – the impact so far
New Financial

Report: Brexit & the City – the impact so far


March 2019 • Ecommerce reports • Topic: Brexit • by William Wright, Christian Benson & Eivind Friis Hamre


This report provides the most comprehensive analysis yet of the impact of Brexit on the City and the wider banking and finance industry. More than 250 firms in banking and finance have moved or are moving business, staff, assets or legal entities away from the UK to the EU – and these numbers are likely to increase significantly in the near future. 

To purchase a copy of the report, please use the order button at the end of this page. New Financial is a social enterprise that relies on support from the industry to support its work.

If you work in government, regulation, the media or academia and would like to request a copy of the full report, please click here

With just weeks to go until a potential ‘no deal’ Brexit, the latest report from capital markets think tank New Financial underlines the scale of the impact of Brexit on the City of London and the UK financial services industry.

We have identified 275 firms in the UK that have moved or are moving some of their business, staff, assets or legal entities from the UK to the EU to prepare for Brexit, which we think makes it the most comprehensive analysis yet of the impact of Brexit on the banking and finance industry. Around 250 firms have chosen specific post-Brexit hubs for their EU business, and more than 200 firms have set up or are setting up new entities in the EU to manage their business.

These moves are the inevitable consequence of Brexit. The political uncertainty since the referendum and failure to reach a deal has forced firms to prepare for the worst and put their contingency plans into action. Much of the damage has already been done and for many firms, Brexit happened sometime last year. This shift will chip away at London’s position as the dominant financial centres in Europe; increase cost, complexeity and risk in European financial services; reduce the UK’s influence in the banking and finance industry at a European and global level; and hit tax receipts and exports in financial services.

The report found that:

* Dublin is by far the biggest beneficiary with 100 relocations, well ahead of Luxembourg (60), Paris (41), Frankfurt (40) and Amsterdam (32).

* The post-Brexit landscape is much more ‘multipolar’ than before: more than 40 firms are moving staff or business to more than one financial centre in the EU.

* The shift in underlying business is more significant than headlines about the number of staff: our conservative estimates shows that banks and investment banks are moving around £800bn in assets; asset managers have so far transferred more than £65bn in funds; and insurance companies have so far moved £35bn in assets.

* There is a wide range in how different sectors have responded: for example, nearly half of asset managers, hedge funds and private equity firms in our sample have chosen Dublin, while nearly 90% of firms moving to Frankfurt are banks or investment banks.

The good news is that the contingency planning by banks, exchanges and asset managers – combined with recent agreements between UK and EU regulators – means that the industry is pretty well-prepared for whatever happens between now and March 29th.

The bad news is that the impact of Brexit is bigger than we expected and we think the report understates the full picture. Many firms will have quietly moved parts of their staff or business below the radar, others will have held off making a formal move – and we think plenty of other firms aren’t yet ready.

And the worse news is that we expect the headline numbers to increase significantly in the next few years as local regulators across the EU require firms to increase the substance of their local operations. We also identified hundreds of firms that we think will have to move something somewehere to retain access to EU markets but which haven’t yet done so.

Summary

Here is a short 10-point summary of the report:

1) A big headline number: we identified 275 firms in the banking and finance industry that have responded to Brexit by relocating part of their business, moving some staff, or setting up new entities in the EU. Nearly 250 of them are setting up new hubs for their EU business, and over 210 have set up new entities or applied for new licences. Banks have moved or are moving around £800bn in assets from the UK to the EU, insurance firms are moving tens of billions of assets, and asset managers have transferred more than £65bn in funds.

2) A significant underestimate: we think our analysis is the most comprehensive yet of the impact of Brexit, but we know that the numbers significantly understate the real picture. Over time, we expect the headline numbers of firms, staff, and business to increase significantly as the dust settles on Brexit and local regulators require firms to increase the substance of their local operations.

3) The damage is done: for many firms in banking and finance, Brexit effectively happened some time last year. The political uncertainty since the referendum has forced firms to assume the worst-case scenario of a ‘no deal’ Brexit with no transition period, and to prepare accordingly. Many large firms have had their new entities in the EU up and running for months, and having spent tens or hundreds of millions of dollars on their contingency plans are not going to relocate business back to the UK anytime soon.

4) And the winner is…: Dublin has emerged as the clear winner in terms of attracting business from the UK, with 100 firms choosing the Irish capital as a post-Brexit location. This represents 30% of all the moves that we identified, well ahead of Luxembourg with 60 firms, Paris with 41, Frankfurt on 40, and Amsterdam on 32. We expect these numbers to increase significantly in the near future.

5) A multipolar world: no single financial centre has dominated these relocations. Many firms have deliberately split their business and chosen separate cities as hubs for different divisions, and we identified more than 40 firms that are expanding in other EU cities in addition to whichever centre they have chosen as their main post-Brexit hub. This redistribution of activity across the EU has wound the clock back by about 20 years.

6) Sector specialisation: different financial centres have attracted different firms based on their sector of activity. For example, roughly half of all asset management firms that have moved something as a result of Brexit have chosen Dublin. Nearly 90% of the firms that have chosen Frankfurt as their main EU base are banks, while two thirds of firms moving to Amsterdam are trading platforms, exchanges or broking firms.

7) Jobs on the line: we think the debate about how many staff have been moved so far and whether that is higher or lower than expected a few years ago is a red herring. Firms are keen to move as few staff as possible and so far at least regulators have been flexible. This will change in the next few years. We have identified nearly 5,000 expected staff moves or local hires in response to Brexit, but this is from only a small minority of firms and we expect this number to increase significantly in the next few years.

8) A shift in scale: the scale of business, assets and funds being transferred from the UK is far more significant. Only a small number of firms have said what they are moving and already the numbers are very large: £800bn in bank assets is nearly 10% of the UK banking system. The final tally is likely to be much higher, which will reduce the UK’s tax base, supervisory influence and ultimately have an impact on jobs.

9) A loss of influence: the shift in staff, business, assets and legal entities will gradually chip away at the UK’s influence in the banking and finance industry not just in Europe but around the world, as a greater proportion of business is authorised by and conducted in the EU. It could also significantly reduce the UK’s £26bn trade surplus in financial services with the EU.

10) The impact on the City: while the headline numbers are stark, there is no question that London will remain the dominant financial centre in Europe for the foreseeable future. Firms are keen to keep as much of their business in London as possible and even the biggest relocations represent a maximum of 10% of the headcount at individual firms. However, over time other European cities will chip away at London’s lead.

The full report: 

The full report The New Financial Brexitometer includes the following:

1) A map and infographic summarising how more than 200 firms are responding to Brexit and which financial centres they have chosen as their post-Brexit hub

2) Analysis of the multipolar landscape in EU financial services post-Brexit: which firms have split the location of their business by division, and which firms are distributing their business across multuple financial centres

3) Analysis of how firms in different sectors are relocating to different financial centres in different ways

4) Analysis of the number of firms that rely on passporting or branches that will need to respond in some way to Brexit if they haven’t already

5) Analysis of the impact on jobs and staffing in the industry

6) Analysis of the shifts in underlying business from the UK to the EU

7) Analysis of the impact on Brexit on firms using branches to run their business across the EU

8) A detailed analysis of the five main financial centres in the EU that have attracted the most firms in terms of relocations: Dublin, Luxembourg, Paris, Frankfurt and Amsterdam

9) A summary of the implications of this report for the future of UK and EU financial services

10) An appendix by sector summarising how more than 200 firms have responded to Brexit.

About New Financial:

New Financial is a capital markets think tank launched in 2014. We’re having a growing impact among senior industry leaders and policymakers across Europe on making the case the case for bigger and better capital markets. We’ve hosted more than 100 private events and published more than 20 in-depth reports. New Financial is a social enterprise funded by institutional membership from across the capital markets industry.

NewFinancial print Report: Diversity & culture
New Financial

Report: Diversity & culture


January 2019 • Topic: Driving diversity • by Olivia Seddon-Daines, Yasmine Chinwala & Jennifer Barrow


While culture and diversity have both moved up the agenda of the financial services industry, most firms treat them as distinct issues with discrete initiatives and separate reporting lines. Our analysis finds diversity and culture are closely interconnected and that a more holistic approach to both would yield better – and faster – results. Diversity & Culture analyses the differences and similarities in how companies approach diversity and culture and why it matters. 

New Financial is a social enterprise that relies on support from the industry to support its work. Our reports are free for our member firms. To request a copy of the report please click here

A lack of diversity and poor organisational culture in the financial services industry are widely accepted to undermine performance and to pose both operational and reputational risks. In recent years, both diversity and culture have moved up the corporate agenda with growing pressure from government, regulators, investors and employees. But how are companies approaching these two themes?

Our starting point is that diversity and culture are two sides of the same coin – it is impossible to change the prevailing culture that defines how people behave at work without acknowledging the impact of an individual’s background, experiences and perspectives. Equally, there is little point in creating a diverse workforce if the cultural norms, behaviours and incentives within a company do not allow them to contribute and flourish. Yet most organisations treat them as separate issues that they address with discrete initiatives and different reporting lines.

Summary

Here is a short 10-point summary of Diversity and Culture:

1) Moving up the agenda: in recent years, both diversity and culture have moved up the financial services industry’s agenda in the face of pressure from government, regulators, investors, customers and employees. While the two issues are interconnected, they are often treated separately within organisations.

2) Accountability and ownership: ownership of culture and diversity reveals how different organisations are tackling them. Culture tends to sit with the board and the chief executive’s office, while diversity tends to be owned by the HR department, which often doesn’t have a seat at the top table.

3) Mutually reinforcing: the financial services industry is in the early stages of drawing the links between diversity and culture, but a growing number of firms are moving towards folding their approach to diversity and culture – and responsibility for them – into one.

4) Disclosure indicates intent: there are stark differences in what organisations are required to and choose to disclose about diversity and culture. Disclosure on diversity is more comprehensive, but the quality of narrative disclosure about what organisations are doing to address both is patchy. We found very little public disclosure of how the two issues are linked.

5) The measurement challenge: the way in which firms measure and evaluate diversity and culture are very different. Diversity reporting is more clearly defined and quantified, but shortfalls in self-reporting impedes accurate measurement. Most firms see culture as something that is unique to them and more intangible, leading to a wide range in the quality and consistency of measurement across the industry.

6) Dispersal of power: more organisations are devolving the implementation of diversity and culture initiatives to the business units from the centre. While this gives teams more ownership of the issue and can accelerate progress, it can also lead to inconsistencies in the approach and prioritisation within an organisation.

7) Making it happen: diversity initiatives tend to be implemented by HR with input from representatives from across the business on diversity councils, while culture initiatives tend to be focused on conduct and sit within the risk and compliance functions.

8) Stuck in the middle: while the tone from the top in both diversity and culture may be clear, it can often get stuck in middle management. Without clear incentives, structures and training, middle managers will default to focusing on their day jobs and on the metrics that define their pay and career prospects.

9) Aligning incentives: for all of the noise about diversity and culture, there has been limited progress in aligning change with incentives. While the Women in Finance Charter has made some progress in linking diversity targets to pay, this only represents a small part of potential reward. And culture is usually only linked to pay in the form of reduced bonuses for poor conduct.

10) Joining up the dots: efforts have been fragmented and uneven, but the most advanced companies are starting to knit together their diversity actions as part of a more holistic approach to encouraging a broader cultural shift. Diversity and culture do overlap – each can help the other embed desired behaviours and outcomes. It is now time for firms to join the dots and accelerate change.

Methodology
New Financial conducted desk research on 30 financial services firms. All data was collected between December 2017 to March 2018 using the most recent annual reports, corporate social responsibility reports, diversity reports and corporate websites. We also conducted interviews with more than 20 market participants including corporate governance experts and practitioners across
HR, diversity and inclusion, and culture.

Acknowledgements
We are very grateful to our interviewees for their time and insight, Black Sun for providing data, our institutional members for their invaluable support, and particularly Legal and General for funding this research.

 

NewFinancial print Report: the New Financial global capital markets growth index
New Financial

Report: the New Financial global capital markets growth index


January 2019 • Topic: Unlocking capital markets • by William Wright, Panagiotis Asimakopoulos & Eivind Friis Hamre


Our unique index analyses the size, depth and growth potential of capital markets in 60 countries around the world across 25 different sectors of activity. It shows that capital markets in the US are by far the largest in the world today and are nearly twice the size of markets in Asia and Europe. But capital markets in Asia and emerging markets are catching up fast – and are set to dominate the potential growth in global capital markets in the coming decade. 

To request a copy of the full report, please click here

Over the past three years, the banking and finance industry in the UK and the rest of Europe has spent millions of hours and probably billions of dollars trying to understand the impact of Brexit on European capital markets. We thought this was a good opportunity to put things in perspective,  look a little further afield, and to try to understand what is going on in capital markets around the world.

The New Financial Global Capital Markets Growth Index analyses – we think for the first time – the size, depth and growth potential of capital markets in 60 economies around the world across 25 different sectors of capital markets activity. It highlights the wide range in the level of development of capital markets between different regions and different countries. And it shows that while developed economies have the largest capital markets in terms of sheer size, in many sectors emerging economies have the highest growth potential in the medium- to long-term.

The report provides a wake-up call to European regulators and policymakers: without a renewed sense of urgency, in 10 or 20 years’ time capital markets in Europe will represent a significantly smaller share of global activity than they do today. Our analysis suggests that Europe will account for only around one quarter of the growth opportunity in global capital markets over the next decade.

But it also highlights a huge opportunity for the industry: while there is clear potential to develop bigger and deeper capital markets in Europe, this is dwarfed by the potential growth in markets such as China, India, Brazil and other emerging markets.

The benefits of bigger and deeper capital markets

Large and deep capital markets are not an end in themselves. The value of deeper capital markets is that they support sustainable economic growth in several ways. Healthy capital markets diversify the range of financing for companies and reduce their reliance on bank lending. They boost the shock absorption capacity of an economy and strengthen financial stability. They improve productivity through more efficient allocation of capital. And they provide more people with more opportunities to invest or save towards their retirement.

We hope this report helps policymakers and market participants better identify development gaps and growth opportunities and how to address them, and better understand how deeper capital markets can benefit their economies.

Summary

Here is a short 10-point summary of the report:

1) Size matters: The US has by far the largest and most developed capital markets in the world with an average share of more than 44% of capital markets activity across the 25 sectors and 60 economies in our sample. US capital markets are more than twice the size of markets in the EU (21%) and nearly three times the size of markets in China (13%).

2) A wide range in depth: our analysis highlights a wide range in the level of development of capital markets between different regions and individual economies. Our ranking is dominated by a premier league of six economies with highly-developed capital markets relative to GDP. The top two positions are smaller economies which act as hubs for regional activity: Hong Kong is top with a score of 261 (compared with a global benchmark of 100), and Singapore comes second with 248. They are followed by the US on 170, Luxembourg on 149, the UK on 138, and Canada on 124.

3) The rise of Asia: while capital markets in the Asia Pacific region are on average less than half as deep as in the US, they are catching up fast. They have already overtaken European capital markets both in terms of size (Asia accounts for 27% of global activity compared with 24% for EMEA) and depth relative to GDP. Much of this is driven by China, which accounts for 40% of Asian capital markets activity and which has capital markets that are deeper than those in many large European economies. Even on relatively conservative assumptions, capital markets in the Asia Pacific region are set to dominate global growth over the coming decade.

4) The future of Europe: capital markets in Europe are currently punching below their weight and are less than half as deep relative to GDP as in the US (with an overall depth score for the EU of 70 versus 170). The EU’s capital markets union initiative to help reduce the cross-border barriers to deeper capital markets could help accelerate the growth of capital markets in future. Brexit has highlighted the urgency of the CMU project: without the UK, capital markets in the rest of the EU27 are around one third smaller and significantly less developed than in the EU28.

5) The reliance on banks: in every region outside of North America, companies are still heavily reliant on bank lending for their funding. In the US the split between bank lending and corporate bonds is 26% bank lending and 74% bonds. Economies in Asia and Europe are nearly three times more dependent on bank lending. While there are clear structural differences in banking systems around the world, this reliance exposes these economies to the cyclical nature of bank lending, which can quickly dry up after an economic shock.

6) Deeper pools of capital: deep pools of long-term capital such as pensions and insurance assets are the starting point for deep and effective capital markets. But in Europe they are only half as deep relative to GDP as in the US, and in Asia just a quarter as deep. While households in Europe and Asia save more than in the US, there is huge potential to shift more of these savings into long-term pools of capital by developing pensions systems and encouraging more retail investment. In the US, just 12% of household financial assets are held in bank savings, compared with more than 30% in Europe and over 40% in Asia.

7) The huge potential for growth: we estimate that over the next 10 years global capital markets activity could grow by between 40% and 70% in real terms in sectors like IPOs and corporate bond issuance, which would significantly reduce the reliance of companies in many economies on bank lending and support more sustainable economic growth. Global pools of long-term capital will increase by around one third (equivalent to $24 trillion in real terms) as billions of people become wealthier and more economies around the world introduce and develop workplace and private pensions systems to address the looming demographic timebomb.

8) A shift in the balance of power: capital markets activity in emerging markets is likely to grow at between two and four times the rate of developed markets. In absolute terms, markets in the Asia Pacific will account for as much as two thirds of the growth over the coming decade in sectors such as stockmarkets, IPOs and corporate bonds. In most sectors, the potential growth in Asia is two to four times larger than in EMEA in terms of value, and Asia will increase its share of global capital markets activity from around one third today to just under a half over the next 20 years.

9) The bigger picture: capital markets do not exist in a vacuum and bigger and deeper capital markets will not happen on their own. Efficient capital markets rely on a thriving business environment, stable government, and high levels of trust in the rule of law. Economies that want to develop deeper capital markets to support their economies will need to focus on wider issues such as structural economic reform rather than narrow regulation of banking and financial markets. Economies that are open and competitive are more likely to enjoy flourishing capital markets. (see section on policy from page 20).

10) Laying the foundations: there are plenty of measures that governments and regulators can take to support the growth of deep and effective capital markets, from encouraging the formation of pools of capital through the development of workplace and private pensions; promoting better financial literacy and a retail investment culture; ensuring and maintaining high standards of market integrity and investor protection; calibrating the need for high standards of supervision and regulation with the need for innovation and growth; and opening up capital markets to greater competition. While many of the barriers to deeper capital markets are national, the increasingly interconnected global economy means that some of these challenges can only be addressed at a cross-border, regional or global level.

Methodology:

The report analyses the size, depth and growth potential of capital markets in 60 economies around the world including all members of the G20, OECD and EU28. We collected data for 25 different sectors of activity in eight broad groups to measure the value of activity in each economy:

* Pools of capital: funded pensions assets, insurance assets, household financial assets (exc pensions, insurance & deposits)

* Equity markets: stockmarket value, value of initial public offerings, secondary equity issues, convertibles

* Bond markets: bond market value, corporate bond market value, value of high- yield bonds, investment grade bonds, corporate bonds relative to bank lending

* Leveraged loans & securitisation: leveraged loans, value of outstanding securitisation, securitisation issuance

* Assets under management: assets under management

* Corporate activity: M&A by target nationality, domestic M&A, M&A by acquiror nationality

* Private equity & venture capital: private equity deals, private equity fundraising, venture capital deals

* Trading: Equities trading, FX trading, OTC derivatives trading

For each metric, we measured the value of activity as a percentage of GDP in each economy in 2017. To enable a comparison in depth between the different sectors we rebased these percentages in each sector to the EU average, with 100 representing the average depth of activity relative to GDP in the EU in 2017. We used the EU as our benchmark for the sake of continuity as we have already developed a comprehensive and long-run dataset for EU capital markets. To reduce the impact of outliers, we capped the values for individual sectors for each economy at two standard deviations from the average score.

The overall ranking is the average of these scores across 25 sectors. We then adjusted these scores to the global average. The average score across all 25 sectors for the EU was 100, and the global average was 131, which means global capital markets are nearly one third deeper relative to GDP than the in the EU. We rebased our headline rankings to 100 = the global average, meaning that an economy with an overall score of 200 has capital markets that are twice as deep relative to GDP as the global average, and an economy with a score of 50 has capital markets that are half as deep.

We estimated the growth opportunity across the different sectors for each economy in three ‘what if?’ scenarios. Our headline numbers are the average of these three scenarios:

Conservative: what if the market depth remains the same relative to GDP as today and real GDP growth continues at half the historic average annual rate of real GDP growth?

Middle: what if the market depth continues to increase at half the historic annual rate at which it has grown relative to GDP and real GDP growth continues at half the historic average annual rate of real GDP growth?

High: what if the market depth continues to increase at the historic annual rate at which it has grown relative to GDP and real GDP growth continues at the historic average annual rate of real GDP growth?

Acknowledgements:

Thank you to Panagiotis Asimakopoulos and Eivind Friis Hamre for doing most of the heavy-lifting on the research; the Global Financial Markets Association for supporting this project and its three constituent trade associations AFME, ASIFMA and SIFMA for providing the analysis on the wider context of capital markets; and our members for supporting our work in making the case for bigger and better capital markets. We apologise for any errors, which are entirely our fault.

The full report:

To request a copy of the full report, please click here

The full report The New Financial Global Capital Markets Growth Index includes the following sections:

* Headline rankings: an overall ranking of the size and depth of capital markets in individual countries and by the three main geographic regions of Americas, Asia Pacific and EMEA, split between developed and emerging markets.

* Size & depth: it measures the size and depth of different sectors of the capital markets around the world (Stockmarkets & IPOs, Bond markets & corporate bond issuance, Pension funds & pools of capital, Bank lending & savings)

* The growth opportunity: we estimate the growth potential of different sectors of the capital markets in different economies and regions around the world. This include an analysis of shifting balance of power: an estimate of the regional share of global activity in capital markets across different sectors comparing today with 10 and 20 years’ time.

* Context: it looks at the wider context of capital markets, the main barriers to the growth of capital markets in different regions around the world, and the measures that policymakers can take to address these common challenges.

* Appendix: a detailed ranking of the depth of capital markets and their growth potential in each economy

 

NewFinancial print Report: the impact of capital markets on people’s everyday lives
New Financial

Report: the impact of capital markets on people’s everyday lives


October 2018 • Ecommerce reports • Topic: The role of markets • by William Wright, Christian Benson & Eivind Friis Hamre


This unique report analyses the impact of capital markets on people’s everyday lives through the lens of the economy in the North West of England. The report shows what goes on in the City of London is far more relevant to the everyday lives of millions of people living in the region than most people in the City or the North West would expect – and we hope that it encourages the industry to think differently about its role and impact. 

New Financial is a social enterprise that relies on support from the industry to support its work. To purchase a copy of the report, please use the order button at the end of this page.

If you work in government, regulation, the media or academia and would like to request a copy of the full report, please click here

Capital markets play a vital role in channeling investment into the economy to help drive growth and prosperity. But to most people outside of the industry, what happens in the City of London and in the financial markets seems complex, confusing and remote. The further from London you go, the less relevant capital markets seem to the day-to-day functioning of the local economy and to people’s everyday lives. And this sense of separation has not been helped by the economic fallout in the decade since the financial crisis and the high-profile scandals in the industry.

This report analyses that relevance and addresses one of the fundamental questions facing the banking and finance industry today: why should MPs, policymakers and individuals around the country care about the capital markets?

We chose the North West as our focus because it is a good example of the ‘real’ economy in the UK: it is a clearly defined region, it’s a long way from the City, it has a thriving regional economy in its own right across a wide range of business sectors, and levels of income and wealth are more representative of the rest of the UK than London or the South East. While the report is focused on the North West, ultimately it’s about the relationship between the banking and finance industry and the rest of society, and how the industry can make a better case for what it does in concrete terms that people around the country can relate to. The methodology could be applied to any region of the UK – or indeed any other country.

We think it’s the first time that anyone has tried to measure the impact of the banking and finance sector on a regional basis in terms of the industry’s customers:

* How many people in the region have how much money invested in their pensions?

* How many companies that are based in (or have significant operations in) the region have used the equity, bond or loan markets to raise capital and how much have they raised?

* How many companies in the region have been backed by private equity, venture capital, or have been involved in M&A?

* And – crucially – how many people do these companies employ in the region?

This has been a huge research project for New Financial – it has been more than a year in the making – and we are very grateful to Barclays for supporting this research.

Summary:

Here is a short 10-point summary of the report:

1) A direct contribution: while capital markets and the City of London may seem remote from the day-to-day functioning of the local economy to many people in the North West of England, they play a vital role in supporting the economy in the region and have a direct impact on people’s everyday lives.

2) Supporting business: capital markets provide finance and investment to more than 900 companies that are based in the North West or that have significant operations in the region. These companies employ more than 600,000 people in the North West, and we estimate that companies using capital markets support around one million jobs indirectly in the region – nearly a third of the total workforce.

3) An important financial centre: the most immediate contribution of banking and finance to the North West is that the sector employs more than 100,000 people in the region, making it the largest financial centre in the UK outside of London and the South East.

4) Providing pensions: the most direct link with the capital markets for most people in the region is through their pension. Around 2.1 million people in the private sector contribute to a workplace pension and a further 300,000 public sector employees are part of a funded defined benefit pension scheme. The combined pensions assets of people living and working in the North West add up to nearly £200bn. The majority of this money is invested in capital markets on their behalf by hundreds of asset management firms.

5) A stake in the economy: the stockmarket plays a direct role in the economy of the North West. More than 450 listed companies are based in the North West or have significant operations there, and between them they employ more than 415,000 people in the area. Of these, 80 companies are headquartered in the region, with a combined market value of £50bn.

6) Raising capital: more than 100 companies based in the North West have raised more than £35bn in the equity, corporate bond and syndicated loan markets over the past five years. When you factor in UK and overseas companies with big operations in the region, we estimate that nearly £70bn in funding from the capital markets is being put to work in the local economy.

7) Investing in growth: more than 1,100 high-growth companies in the North West have received £2bn in investment over the past five years from venture capital, crowdfunding, business angels, development funds, specialist lenders and bank finance.

8) Driving growth: private equity and M&A play a significant role in the North West economy. More than 125 companies based in or operating in the North West have received an estimated £11bn in private equity funding in the past five years, while more than 600 companies have been involved in mergers and acquisitions.

9) Real assets: capital markets are playing a growing role in financing infrastructure investment and real estate development in the region. We estimate that capital markets provide £3bn a year in local infrastructure funding, and asset managers invest around £1bn a year in local commercial real estate.

10) Day-to-day business: capital markets play an important role behind the scenes in the regional economy, in supporting day-to-day activities such as consumer credit, bank lending and insurance. Banks provide more than £80bn of mortgages in the region, nearly £10bn in lending to SMEs, and individuals in the North West pay nearly £10bn in annual insurance premiums.

Methodology:

The report analyses the impact of capital markets on the economy of the North West of England across the following sectors: pensions and asset management, stockmarkets and equity capital markets, bank lending, corporate bonds, syndicated loans, M&A activity, private equity, venture capital and growth investment, and investment in infrastructure.

In each sector we measured the value of capital markets activity in two ways. First, we looked at companies that are headquartered or based in the North West. This approach only captures a small proportion of capital markets activity in the region, so to get a more comprehensive picture, we built a dataset of UK and overseas companies with significant operations in the North West and used a range of sources to estimate their workforce in the region. We identified more than 900 companies based in the North West or with significant operations in the region that have used the capital markets to raise capital, and we allocated their capital markets activity in proportion to their local workforce.

For example, there are 80 listed-companies based in the North West with a combined market capitalisation of just over £50bn (this represents 4% of all UK-listed companies and 2% of their combined value).  However, there are an additional 370 listed companies from the UK and overseas with significant operations in the region. We estimate that between them, these 450 companies employ more than 415,000 people in the North West, and when you allocate their market value in proportion to their workforce in the region they have a combined market value of more than £125bn.

Acknowledgements:

I would like to thank Dealogic, Beauhurst, and Preqin for providing much of the data in this report; Christian Benson and Eivind Friis Hamre for doing the heavy-lifting on the research; Barclays for supporting this important project; and our members for supporting our work. This report is a work in progress, and we would welcome feedback on our approach and conclusions: to email us about the report, click here. We apologise for any errors, which are entirely our fault.

The full report:

The full report The Impact of Capital Markets on People’s Everyday Lives includes the following:

1) A summary of the main findings of the research

2) A foreword by Jes Staley, Group Chief Executive of Barclays, and comments from John Glen MP, Economic Secretary to the Treasury.

3) A social and economic summary of the North West of England

4) A summary of the main functions of the capital markets

5) 10 key examples of how different firms in the region use the capital markets to support their day-to-day business and growth.

6) A summary of activity across the UK in 12 different sectors of banking and finance

7) A summary of how different companies headquartered in the North West use different sectors of the capital markets and how many people they employ in the region

8) A summary of how different UK and overseas companies with significant operations in the North West use different sectors of the capital markets and how many people they employ in the region

9) An aggregate of the underlying role that capital markets play in supporting the economy in the North West across 12 sectors of activity and how many people are employed in the region by companies using the capital markets.

10) A case study on how BAE Systems, one of the largest employers in the region, uses the capital markets

11) Analsyis of employment in banking and finance in the region

12) A detailed sector-by-sector analysis (with individual case studies) of the impact of capital markets in the region, how companies in the North West use the capital markets, how many people they employ in the region in the following sectors:

* The stockmarket * Pensions * Asset management * Venture capital & growth investment * Equity capital markets * Corporate bonds markets * Syndicated loan markets * Private equity * Mergers & acquisitions * Infrastructure & real estate * Supporting day-to-day business

13) A detailed methodology