Financial Regulation is one of the most important topics the City has to contend with today. Not only has London faced reputational damage to its position as a global financial centre following the financial crisis, the square mile risks further damage as finance leaders appear to rebut the need for greater regulation.
This week the Bank of England has confirmed previously announced proposals that include a seven-year bonus claw back, greater scrutiny of bonuses and the possibility of criminal charges for misconduct to be brought against specific individuals. Omar Ali, UK head of banking and capital markets at EY said that “The regime is likely to be the strictest of any market or industry.” In addition the proposals from the Vickers Commission that include the ring-fencing of retail and investment banking draw ever closer to implementation with Banks asking for delays and warning of potentially devastating consequences, as well as stricter stress testing and further legal battles hitting the industry hard in coming months and years.
Believers in the free market would say that regulation is restrictive and drives up business costs which in turn can reduce profits, force up prices and reduce international competitiveness. It is no doubt true that complying with regulation is costly and I would agree that it is possible an increase in regulation would cause competitiveness concerns however it is also possible, in the case of financial services that less regulation or lobbying against further regulation actually has a negative impact on international competitiveness.
For the short-term the regulations face significant resistance particularly when they seem to be stronger than those in other countries, however could stricter regulation today mean a more successful finance industry tomorrow?
One possibility is that greater regulation in London attracts investors to the UK looking to utilise the services of reliable, secure financial institutions that have a low probability of bankruptcy and hence their deposits or other investments are relatively safer in the UK than abroad. During the crisis the UK Government famously used Anti-Terrorism Laws to freeze Icelandic assets in the UK in order to return UK savers their deposits from Icelandic Banks; one example of how lax regulation was self-defeating; would you now invest in Iceland? If strict regulations are enforced effectively and the likelihood of a Bank failing is reduced as a result, in the long term the liquidity of credit in the London markets may improve as confidence returns and so too may the accessibility of funds for borrowing by UK firms hence impacting the wider economy. It is not too far-fetched to imagine greater financial security offered by UK domiciled institutions who fully comply with incoming regulation to receive greater fees from their services in the long term as individuals and investors may pay a premium for greater security, and the reassurances to be had from strict regulation and a robust legal framework.
The UK Government would undoubtedly favor such an argument when facing significant anti-regulation rhetoric in the media and while there may be claims that such ‘extreme’ measures are unaffordable, the real questions should be one that asks if it is affordable not to pursue such policies, not only from the prospective of the UK Taxpayer, but for the financial institutions themselves.
Breakfast Briefing: Space Race, Google in China and Zuckerberg
Google to Open in Beijing
Alphabet announced that it will open an AI research facility in the Chinese capital yesterday.
Editor’s Remarks: Under CEO Sundar Pichai, Google has been recommitting itself to China after it had most of its services blocked in 2010 when it refused to censor search content. In recent months, the tech giant has been marketing its new TensorFlow AI tools to the Chinese market, which aligns with the state’s ambitions to become a world leader in AI by 2030. Google’s new facility will consist of a small number of AI researchers, supported by hundreds of Chinese engineers. Google expects to face stiff competition for talent given how local tech giants, Baidu and Tencent, are ramping up their own AI efforts.
Telegram Is Not for Sale
Telegram’s elusive founder, Pavel Durov, insists that his messaging service will remain non-profit.
Editor’s Remarks: Durov and his brother Nikolai founded VK, Russia’s answer to Facebook, before they were forced to sell their stakes to a Kremlin-friendly oligarch. The pair has since relocated and built Telegram, an encrypted messaging service that they insist will never be sold. A libertarian – having enabled Telegram users to even send messages that will self-destruct – Durov and his product have gained popularity among cryptocurrency enthusiasts. Durov himself is bullish about the prospects of cryptocurrencies and owns at least 2,000 bitcoins. Pundits, meanwhile, reckon that Telegram is worth in the region of $5bn.
Japanese Space Startup Raises $90m
Ispace Inc raised $90m from Japan’s largest corporates in a bid to reach orbit by 2019.
Editor’s Remarks: Ispace is backed by Japan Airlines, Tokyo Broadcasting System Holdings and also government-backed Innovation Network Corp. of Japan. The company plans to sell advertising space on its spacecraft, which will then feature prominently in distributed images. However, Ispace also envisages the use of rovers that will offer a “projection mapping service”, which will essentially produce a tiny billboard on the surface of the moon. This is the latest announcement in what is rapidly shaping up to be a wider commercialisation of space exploration. Elsewhere, SpaceX and Blue Origin are developing reusable rockets, while Planetary Resources intends to mine asteroids.
Roy Moore Loses Alabama
Moore, who was backed by Trump, narrowly lost to Doug Jones, a largely unknown Democrat.
Editor’s Remarks: Moore’s election efforts appeared to have succumbed to allegations of child abuse that were made against him last week. Newcomer Jones won 49.9% of the vote against Moore’s 48.4% in deeply conservative Alabama, marking the Democrats’ first Senate victory in the state since 1992. Moore is a household name in Alabama but the accusations recently levelled against him have ruined his once impeccable reputation. Reluctant to concede defeat in his home state, Moore has said that Alabama must “wait on God and let the process play out”. Meanwhile, Democrats are jubilant that they have managed to reduce the Republican majority in the Senate to 51-49, which could impact Trump’s tax reform.
Zuckerberg Backs VR Firm
Dreamscape Immersive, a virtual reality (VR) company, is backed by 21st Century Fox, Warner Bros. and Mark Zuckerberg.
Editor’s Remarks: Dreamscape is developing new VR arcades for shopping centres and has just closed a $30m Series B funding round – 50% more than planned. Among its initial backers were Steven Spielberg, 21st Century Fox and Warner Bros. The company has now added to that impressive list the likes of Mark Zuckerberg and Nickelodeon. Dreamscape is capitalising on Hollywood’s interest in VR, which the film industry reckons will draw in greater numbers of viewers and provide an opportunity to raise margins. Dreamscape intends to open seven VR centres in locations across North America and the UK.
Google to Open Artificial Intelligence Centre in China
Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.
Fei-Fei Li, Chief Scientist of Google Cloud, said:
“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”
The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.
Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.
Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.
China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.
Europe Warns Trump on Tax
Finance ministers from Europe’s largest economies have said that Trump’s tax plans breach global agreements.
Europe’s leading finance ministers, including UK chancellor Philip Hammond, penned a letter to the White House in which they raised the possibility of retaliation if the Republicans push on with their tax reforms. Europe is worried that Trump’s “America First” doctrine will undermine global trade patterns and escalate ongoing tensions between the US and its key allies. With the UK looking to its closest ally for support post-Brexit, it is unlikely that Hammond’s latest move will sweeten any future US-UK trade deal. Meanwhile, Trump is unlikely to care about shaking up current trading arrangements, given that he ran for office on the platform of making the US more competitive.
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