Labour win brings few hopes or fears to London’s financial district

LONDON: Labour’s landslide election win shows few signs of unsettling London’s financial heartland after the party’s lengthy pro-business overtures, though many in finance remain wary they could be targeted to prop up Britain’s stretched public finances further down the line.

Under leader Keir Starmer, the Labour Party has assiduously courted the City of London, as the financial district in known, mindful that his plans for boosting economic growth will need a big dose of private capital.

“To realise Labour’s bold ambition to make Britain a clean energy superpower, private sector finance must play a central role,” Chris Hayward, policy chairman at the City of London Corporation, which administers the capital’s financial district, said on Friday.

The City, like hundreds of constituencies across Britain, switched from Conservative to Labour in Thursday’s election, in stark contrast to the last election in 2019, when 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 set 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 boost 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 could 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.

JP Morgan analysts said in a note on Friday that the incoming government was largely priced in for banking stocks such as NatWest and Barclays and would be broadly neutral for the sector.

However, the risk of an increase in capital gains tax meant Labour’s victory was “slightly negative” for other listed financial companies such as Hargreaves Lansdown, Abrdn and Schroders.

The pound and British shares and government bonds rose on Friday after Labour’s win.“The UK financial services sector can rest easy in the fact that radical change is unlikely to be on the horizon,” said Monique Melis, managing director at consultants Kroll.

SANGUINE AFTER BREXIT AND TRUSS

Many of Britain’s top financiers have taken 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 to plans from then-Prime Minister Liz Truss -- who lost her seat on Thursday -- for unfunded tax cuts.

“The industry has had positive and constructive conversations with Labour since 2019,” said Miles Celic, chief executive of TheCityUK, which represents the UK financial sector globally.

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 per cent share of cross-border bank lending in 2016 but this fell to 14 per cent 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.

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.