Is the City in trouble?

Perhaps it’s just as well that the Hongkong and Shanghai Banking Corporation no longer calls itself ‘the world’s local bank’.

With the company admitting that it is reviewing whether it should move its global headquarters away from London, its former slogan would be a gift to tabloid headline writers.

Even without that, an eventual decision to relocate the HQ from Canary Wharf to the lower taxation jurisdiction of Hong Kong or elsewhere is a reputational minefield for HSBC’s carefully-styled image as a conservative bank that integrates smoothly into the localities in which it operates.

However, with the UK representing a tiny per cent of HSBC’s global revenues, does the real reputational risk of such a move lie not with the bank but with the city it would leave behind?

What would be the impact on London’s reputation as a competitive, open and transparent place to do business and how would the City cope with the repercussions?

There’s a great deal at stake. According to the lobby group TheCityUK, financial and professional services sectors account for 11 per cent of the UK’s total economic output and employ seven per cent of all British workers.

They also contribute £66 billion of taxes to the Exchequer and then there is the harder to calculate but highly significant reputational value attached to London as one of the world’s leading financial centres.

‘Reputationally, the effect of HSBC moving its headquarters from the UK would be a much bigger hit for London than for HSBC globally,’ concludes Tony Langham, managing director of financial public relations agency Lansons.

‘It would massively impact HSBC’s influence on UK Government. There would also be a hit to its reputation in the UK but it would be more concerned about its global reputation and I think the hit to that might be quite slight.

‘It would hit the City, not as a place to do business, but as a place to headquarter your company, and Britain needs to have both. It is at least going to slow down the flow of business to the UK.’

Jonathan Clare, chairman of financial PR agency Newgate Communications who acted for HSBC when it bought Midland Bank in 1992, sees the issue the other way around. 

He says: ‘It’s ironic because when HSBC was trying to change its base from Hong Kong to London as a condition of the takeover, I remember a journalist asking why the bank [Midland] should accept an offer from a company operating in an unstable environment.

‘In the current situation, I actually think that HSBC’s reputation would be at more risk than the City’s if it does decide to move. Wouldn’t you prefer to be interfered with by banking regulators in London than in Hong Kong where you’re at the mercy of an unelected government that’s difficult to influence?

‘The other factor is that now that there is a Conservative government, it may be that there will be less bank-bashing going on and a better environment for banks to operate in for at least the next five years.’

Rupert Younger, the co-founder of financial public relations agency Finsbury who is now director of Oxford University’s Centre for Corporate Reputation, also sees more reputational risk sticking to HSBC than the City in the event of a change of the bank’s domicile.

He cites the poor public standing of most British banks and believes the key issues for the bank to communicate would be the legitimacy and authenticity of such a move.

HSBC chief executive Stuart Gulliver has already set out his stall, hitting out at the litany of taxes and regulations that the company is subject to in the UK and saying that the nation has rejected the universal banking concept that Europe’s biggest bank aspires to.

Chancellor George Osborne increased the unpopular bank levy to 0.21 per cent of balance sheets in his March Budget, while Gulliver also cited the European Union’s bonus cap measure and ring-fencing rules that would force HSBC to legally separate its UK retail bank from its investment banking operations as reasons supporting a relocation.

Younger says such arguments lend legitimacy to a move if the bank is able to communicate genuine business reasons why Hong Kong is a better place for its headquarters.

It could, for example, cite a principle of fairness, given that more than 80 per cent of the bank’s 257,000-strong global workforce is based in the UK.

However, if the bank is seen to be simply trying to dodge tax or get away with dubious practices that would not be permissible in harsher regulatory climates, Younger believes that it will struggle to establish legitimacy and could suffer serious reputational damage.

Authenticity then comes into play, he continues, in the tone and content of the bank’s justification for the move, particularly if it resorts to criticism of London and the UK.

‘If they say that London is a bad place for a bank to be then there is definitely potential reputational damage there for the City,’ he says. ‘But that would be a very stupid thing to do.

‘HSBC is a financial institution and financial institutions have recently had the spotlight shone on their moral compasses. I think people would see it in that light.’

As far as London is concerned under such a scenario, Younger believes the issues of capability and character are key.

‘What is the character of London that makes it attractive to business?’ he asks. ‘It’s about its fair and transparent regulatory system, its recourse to law, its fairness and openness and its multiculturalism. Are any of these attractions diminished by a bank going elsewhere?

‘If it is just one bank, then I don’t think so. If there are two, it’s a bigger problem; if there are ten, it’s a much bigger problem.’

That’s the nightmare of the British Banking Association and The Association for Financial Markets in Europe, which declined to comment on the issue for this article. BBA chief executive Anthony Browne would only talk generally about the perceived unfairness of the bank levy, saying that banks in Britain already pay more than £40 billion in taxes each year.

‘The bank levy imposes a significant cost on banking businesses in the UK, which is making many banks move work and jobs to other parts of the world, and is deterring international banks from investing in the UK,’ he says.

‘The recent major increase in the bank levy is likely to accelerate that process and damage the competitiveness of the UK economy.

‘This will also further disadvantage UK headquartered banks by increasing tax on their overseas activities, while their competitors in those markets do not pay this tax at all.’

Other London financial lobbying groups speaking off the record betray increasing resentment at the blackening of their sector.

‘There’s this whole question of whether the Government really gets the importance of financial services industry to this country and whether it can afford to continue to gouge the industry indiscriminately,’says one UK financial services communicator.

‘The British dilemma is that financial services is a fantastic industry and a great contributor to UK balance of payments and tax receipts but it also generates a seemingly unending series of scandals,’ he says.

‘The Government has a budget to balance and a choice between cutting spending on education, health and welfare or taking a bit more out of an industry that’s making money. Despite everything, you know which way it’s going to go.

‘HSBC has a specific issue around ringfencing. Then there is the bank levy and genuine shareholder pressure about where they should be domiciled.

‘The Government is acutely aware of this and understands that the industry is really hurting but I don’t know where that leads in terms of actions. You’d have to say it would be concerned to see such a major institution decamp. If they take actions that show they’re not committed to London as a financial centre, that becomes a very serious reputational risk.’

Langham also senses a growing feeling among UK-domiciled banks that the bank levy is politically motivated and unfair.

‘They would like to think that it is time to move on from being blamed for the 2008 financial crisis,’ he says. ‘There is some hope now that the rhetoric might change, with some Conservative MPs coming out and saying that maybe the banking bashing should stop.’

The danger for London is that it may take a decision like the one HSBC is contemplating to prompt a new public appreciation of the merits of strong British-based banks.One depressed financial services industry communicator even drew parallels with what happens to frogs when they find themselves in water that gradually rises to the boil.

‘It may well be that nobody will notice the danger until something like that happens,’ he says.

Financial frogs of all breeds as well as their keepers and regulators in London’s banking services community will be hoping that the heat is taken out of the water well before that happens.