Analysis-UK election brings few hopes or fears to cautious City of London

By Sinead Cruise and Huw Jones

LONDON (Reuters) – The UK financial sector is warming to Labour’s pro-business overtures and pledges to provide stability and support, but many in the City remain wary it could be targeted to prop up Britain’s stretched public finances further down the line.

Under leader Keir Starmer, the Labour Party – expected to win Thursday’s UK election – has assiduously courted the City of London, mindful that his plans for boosting economic growth will need a big dose of private capital.

In the last election in 2019, Starmer’s predecessor Jeremy Corbyn set out a radical manifesto to increase public investment by raising taxes on companies and top earners, resulting in Labour’s worst result since the 1930s.

“The most important change is that there has been a big shift in mindset by Labour towards the City in the past few years,” William Wright, managing director of think-tank New Financial told Reuters.

“That is reflected in a strong sense of continuity in the reforms to capital markets and pensions underway,” Wright said.

Labour, whose Rachel Reeves, a former economist at the Bank of England, is expected to become Britain’s finance minister, has backed the Conservative government’s post-Brexit ‘Edinburgh Reforms’ aimed at protecting the City’s global competitiveness.

The party has also promised a review of the pensions and savings industry, which could help Britain’s capital markets as well as boosting the financial resilience of the population.

But there is also speculation about changes to how capital gains and wealth are taxed, as well as Reeves’ plans to change the way private equity is taxed, which would likely hit hard.

Michael Moore, chief executive of BVCA, a private equity industry body, said Labour was, however, showing willingness to back up its “pro-business mood music with engagement on substance”.

Reeves had vowed to end a “loophole” that allows a portion of private equity earnings to be taxed as capital gains, rather than at the higher income tax rate, but last month signalled to the Financial Times that favourable tax treatment would continue in instances where fund managers put their own capital at risk.

SANGUINE AFTER BREXIT AND TRUSS

Many of Britain’s top bankers and financiers are taking the prospect of a left-leaning Labour government in their stride after the hit from Brexit, and the impact on the UK government bond market in September 2022 from then-Prime Minister Liz Truss’s plans for unfunded tax cuts.

“The industry has had positive and constructive conversations with Labour since 2019. If they win, very few new governments will have entered office better briefed on what our ecosystem needs to help act as a dynamo for growth and competitiveness,” said Miles Celic, chief executive of TheCityUK, which represents the UK financial sector globally.

The Labour Party did not respond to a request for comment.

Fixing the damage to investor confidence and leakage of financial services activities to the EU caused by Brexit – arguably the most enduring legacy of the Conservative Party’s 14 years in power – will be tough for Labour to fix.

France’s central bank said last year transactions between French-based financial services firms and the rest of the world hit a record 10.4 billion euros in 2022 – double the volume seen at the time of the 2016 Brexit vote.

According to figures published by CityUK in January, the UK had a 16% share of cross-border bank lending in 2016 but this fell to 14% by end Q2 2023.

Meanwhile, Amsterdam has overtaken London to become Europe’s top share trading venue since euro-denominated share trading by EU investors had to stop in Britain on Dec. 31, 2020.

SEEKING CERTAINTY AND STABILITY

Starmer has repeatedly made clear that rejoining the single market, essential for the City to regain direct access to the EU, is a red line he won’t cross.

Many market participants just want to see financial sector reforms already agreed properly implemented under Labour, to protect the industry’s massive contribution to state coffers.

A study by PwC for the City of London Corporation and TheCityUK published in May estimated the total tax contribution of the financial and related professional services industry was 110.2 billion pounds ($140 billion) in 2023.

This is equivalent to 12.3% of total UK tax receipts, more than the UK government’s education budget, or more than half the health budget.

Imminent changes to Britain’s rules on stock market listings have been designed to bring in more big-ticket initial public offerings, which could potentially include China-founded fast-fashion retailer Shein, and other similar deals that bring handsome paydays for those involved.

The Financial Conduct Authority is set to publish its listings revamp after the election, which could spur a flurry of corporate activity from end-July.

Britain’s economy pulled out of recession at a faster pace than previously thought in the first three months of this year, but the broader economic backdrop remains fragile.

UK public debt is high, nearly equivalent to GDP, with prospects of tepid growth, leaving analysts to conclude that taxes will inevitably rise to shore up health and other services, making the financial sector a potential target.

“It’s pretty simple really, business wants certainty,” said Naresh Aggarwal, associate policy & technical director at the Association of Corporate Treasurers.

M&G Investments said in a note to clients that a Labour election was unlikely to fundamentally alter the direction of the UK equity market where valuations are depressed compared with Wall Street.

But New Financial’s Wright cautioned that Labour may be more radical in government than it has been in opposition, a view echoed by Samuel Gregg of the American Institute for Economic Research.

“The City should recognise Labour is a more left-leaning outfit these days than it was in Tony Blair’s heyday,” said Gregg, speaking of the New Labour stronghold of the early 2000s.

“That cannot help but make life more uncertain for the City under a Labour government with a huge majority.”

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