The UK financial services sector has traditionally been based in London, where the Bank of England and the UK’s only stock exchange are located, and Edinburgh, which has a strong insurance and asset management industry (half a trillion dollars of assets are managed from the city). Despite the growth in the industry, the proportion of financial services employees in the UK has gradually declined from around 4.4% to around 3.9%, with around 1.3 million in the sector.
Figure 1: UK financial services employees, 000s, 1997-2018
Many of these employees are in retail banking, including the declining network of high street bank branches, which we write about elsewhere.
The financial services industry has historically clustered around the physical locations of national stock exchanges and regulators to carry out its functions effectively. Over the last 30 years since the deregulatory Big Bang, the need for strict proximity has arguably progressively declined, leading to the development of financial centres in other parts of London, notably Canary Wharf – to which the financial services regulator has also relocated. However, even by 2012, the ONS was still able to find that four local authorities clustered in London (City of London, Tower Hamlets, Islington and Westminster) still account for more than 25% of Great Britain’s financial services jobs.
A specialisation of labour, and the costs of employment and commercial real estate within London have, among other drivers, created a ‘nearshoring’ trend (relocation to regional hubs) with the sector increasingly expanding into other big cities, such as HSBC’s move to Birmingham and Barclays expanding in Glasgow. And the prize for grabbing financial services firms is large, as they’re typically bigger than other types of firms. Increasingly, firms are moving ‘front office’ functions to other cities as well as more traditional call-centre activities which are themselves replacing bank branches.
What happens next? We might be on the brink of Big Bang 2.0 and a fresh dispersal. With the arrival of mobile technology, investment banks and other financial institutions might plausibly undertake a fresh dispersal from established centres, as we have seen with retail banking operations.
This would probably require, among other things, the emergence of an alternative market to the stock exchange. Blockchain technology looks like it might provide the basis for this. Blockchain technology (or ‘distributed ledger’ technology) records transactions in chronological order, with complete transparency and is regulated by its participants rather than a central authority. Considering that 45% of financial intermediaries responded to a 2014 PwC report saying they suffer cyber-attacks annually, it will also make exchanges more secure. In late 2017, Australia’s ASX announced that it would become the first exchange to use blockchain.
In recent years, there has been a rapid growth in cryptocurrencies, built and traded using blockchain. While this could replace exchange listings in theory, coin offerings first need to become compliant with accepted regulations and standards. Given concerns around cryptocurrency’s use for money laundering, it’s likely to be some time before regulators get comfortable with this.
Even if there is a technological capability to disperse financial services away from expensive locations, this does not mean it will actually happen. The nature of financial services clusters has been analysed intensively, and there are counterarguments that long-term economic success of any industry is dependent on the sort of innovation that can only come about from quick, and sometimes accidental, person-to-person contact and collaboration. You go where everyone else is, to learn, copy, and outperform. London continues to come top of most rankings of ‘fintech’ hubs.
Technology has typically had the effect of enabling the decentralisation and specialisation of financial services. However, these human effects, and the drag of nervous regulators, suggests to CBRE that existing city clusters will persist for some time. We predict that (even setting aside London and Brexit, about which we write elsewhere) the British financial services city hierarchy won’t have changed much by 2040. For those cities that do want to grab more of these big-hitting firms, the solution is the same as for other services industries: focus on attracting talent, and providing a high quality of life.