As the electorate head to the polls, it is clear that even a number of years after the financial crisis, Westminster’s handling of the City still remains a key political issue.
The Coalition would point to a growing economy and more resolute financial sector; the Labour party and others would suggest that there is much more to be done. Finance lawyers acting for banks, funds and corporates will look to the next government to protect and promote the City amid growing competition from other international financial centres.
Before even considering the impact of party policies, it is worth noting that the unusually unpredictable nature of the 2015 general election will automatically have a curbing effect on deal activity. A hung parliament seems near-certain, rendering a weak and fragmented government likely. Such an unsettled political backdrop is not conducive to long-term investment decisions.
There are also clear policy divides between the major parties to consider.
The Labour party has pledged widespread reform to the banking industry. Policies include a one-off 50% levy on bankers’ bonuses (following a similar tax in 2009) and extending the claw back period for pay and bonuses in cases of misconduct. More generally, Labour promises to increase corporation tax and a restore the 50p top rate of tax income tax.
Political arguments aside, UK-based banks would argue that such tax rises and pay caps could place London at a competitive disadvantage in relation to other international financial centres, where rival banks will be more able to attract top talent and protect their margins.
Indeed, it is the Conservative pledge to hold a referendum on the UK’s membership of the EU that presents arguably the greatest threat to the City. Certain aspects of EU membership are undoubtedly a concern to banks, for instance mounting regulatory mechanisms and the spectre of a financial transaction tax (recently invoked again by Francois Hollande).
However, the UK financial services industry enjoys an enormous trade surplus with the EU, and the increased barriers to entry to the single market and significantly increased costs and compliance hurdles resulting from a UK exit could have a debilitating effect on banks’ balance sheets and, once again, run the risk of forcing banks to relocate certain operations.
In March, London retained its second-placed position in the Global Financial Centres Index. To maintain its high standing and challenge New York for top spot, bankers must work with politicians and regulators to demonstrate a sound and well-run financial sector. Matching US reforms such as the leveraged lending guidelines, which appear to be working in limiting the more highly geared leveraged buyout transactions, could be one way to achieve this.
But whoever forms the next government must also balance the need to preserve the competiveness of the City against global rivals to attract capital and talent. It is to this balance that finance lawyers and their clients will be looking come 7 May and beyond.
Bhavesh Madia is an associate and Edward Hyde is trainee at Weil Gotshal & Manges
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