Xavier Rolet, former LSE chief, on what went wrong in London
Former boss of London Stock Exchange (LSE), has warned that reforms to boost the market’s competition will not be able to save the Square Mile from a perpetual decline .
Xavier Rolet who was the LSE’s chief executive between 2009 and 2017 said that government and regulatory efforts were a “sideshow on a sideshow”, and a complete waste of time. The Frenchman said that the only way for the City to stop its decline is to reduce taxes and cut red tape as part of a “complete recalibration” of the UK’s punitive regulatory and fiscal framework.
The intervention is a response to fears that City of London may lose its status as a global financial centre.
In recent months a number of companies, such as the gambling giant Flutter and the building materials company CRH, have listed in the US. Arm, the British tech darling , has announced that it will bypass City and list in New York.
After intensive lobbying by the Government, Arm’s decision was seen as a blow that added to the growing concern about the competitiveness of the City.
Paris extended its lead in March over London, Europe’s biggest stock exchange, causing fears that London is losing its appeal.
Mr Rolet who is non-executive chair of City broker Shore Capital said that the regime forcing high-growth firms to flee rival financial hubs.
He said London cannot compete with New York until long-term investors such as pension funds, insurers and insurance companies dramatically increase their exposure to stock markets.
He said: “We have to recalibrate.” We must lower the quadruple taxes on equities.
“At the moment, we have a dividend tax, a capital gains tax and an income tax. We also have a stamp duty tax which is the highest in Europe. The same pound in income from equity is taxed at four times.
“On the opposite side, you’ve got a regulatory structure that forces long-term, long-term investors – pension funds and insurance companies – to short the real economy, by preventing them to invest in the stock markets.”
Jeremy Hunt, chancellor of the United Kingdom, presented a package of proposals in December last year to improve the position for the City. The reforms were dubbed as the Edinburgh Reforms.
These include loosening the rules that limit smaller banks’ access to capital, requiring financial regulators to focus on economic growth and allowing bankers to be held personally liable for any rule violations that occur under their supervision. The package was designed to encourage the City of London to take more risks in order to increase growth.
In recent weeks, the Financial Conduct Authority (FCA), has pledged to make it easier to list companies on the London Stock Exchange. The Financial Conduct Authority (FCA) has also pledged in recent weeks to make it easier for companies to float on the London Stock Exchange.
Rolet, however, fears that the measures won’t have any meaningful impact on Britain’s position in the international financial scene.
He said London would continue to struggle to compete with New York in creating technology companies worth billions of pounds.
He said: “The UK doesn’t have a problem with startups.” The UK has many good startups. What the UK, and Europe, lacks is equity markets that can help scale those startups up, and keep them.
For this to happen, there must be a recalibration in the fiscal environment. Don’t waste time on sideshows or minor rule changes that will not change anything.
He said that apart from the capital markets to scale up and retain the businesses, the UK had all the ingredients needed to create technology companies worth PS100bn.
Mr Rolet stated: “If you want to leverage the UK’s fantastic universities, its capacity for innovation and science, which are all without doubt part of UK’s strengths, then the only way to do it is by unleashing the power of equity markets. Mark my words.
The rest will be on the margin…and won’t move the dial.”
Mr Rolet said Brexit offers the UK an opportunity to reduce “bureaucratic European regulation” that, he claimed, was “deeply detrimental to equity markets”.
He said: “If the UK wants to leverage Brexit to bridge the productivity gaps, generate substantial equity gains, and fully utilize its fantastic universities, capacity for innovation and science, then the only way to achieve that is by unleashing the power of the equity markets.”
One of the legacies left by Mr Rolet at LSE is his acquisition of a majority stake within clearing giant LCH. Since the 2008 financial crash, clearing houses have played a crucial role in the financial system by acting as middlemen for derivatives transactions between banks.
The industry is a major Brexit battleground, as Brussels tries to create “strategic autonomy” in order to boost its capital markets.
Mr Rolet is concerned that the €660 trillion clearing market in London (£563 trillion), which relies on London to clear trades, could be at risk due to plans by Brussels to prevent its banks from clearing trades via London.
Mairead McGuinness is the European Commissioner for Financial Services and has given EU banks until June 2025 in order to move their clearing from London to Europe.
She has promised to punish banks in the Continent that fail to move lucrative clearing businesses out of London after Brexit.
She raised eyebrows last year when she said that the EU’s dependence on the Square Mile is a vulnerability , similar to its dependency on Russian oil. Mr Rolet warned the European Union that Brussels’ plan for onshore clearing activities poses a “systemic threat”.
He said, “The Europeans view Brexit as a decision of politics. Their answer is therefore a clear political one.” They don’t understand why people put economic arguments first,” adding that they had “very little understanding” of clearing, and saw Brexit as a chance to “grab” it.
If the EU forces EU banks and asset managers to clear their euro denominated interest rate swaps within the eurozone… over time, as they can’t just force it overnight, that is a risk systemic that they cannot take.
He said that this policy would likely move activity away from London and to the US where the EU has a deal on equivalence that includes clearing.
It’s not going happen in six month. If the engine moves to the US, the clearing engine at LCH will be in danger.
The litmus test to see if London can retain its global crown of financial services is whether or not it continues to be the global clearing engine for interest rate swaps in the next few years.
Rolet resigned last year from PhosAgro – a Russian chemical company – following Vladimir Putin’s invasion in Ukraine.
He said, “I was a member of the board for a Russian firm, the EU had published sanctions, so I resigned the same day.” It was over.
“I brought some of the IPOs I pitched in China and Russia to London with several British Prime Ministers. “I don’t do geopolitics and you must change when the environment changes.”
Andrew Griffith, City Minister, said that the UK has a long history of attracting some of the best and brightest companies from around the world. This is based on its competitive advantages and attractiveness to business.
We are determined to implement the Edinburgh Reforms as quickly as possible.
The reforms are ambitious and comprehensive. They include changing the culture and practices of financial regulators and streamlining the process and time required to list.