Please don’t go…

The chancellor may have to drop his tough line over banks to stop HSBC quitting the UK. By The Times Aimee Donnellan and Dominic O’Connell

Published: 14 June 2015

Chancellor George Osborne has talked tough on banking regulation but he may have to soften his approach if he is to persuade Stuart Gulliver of HSBC not to go through with his threat to move the bank back to Hong Kong

Chancellor George Osborne told the Mansion House dinner he wanted banks to keep their global headquarters in Britain but he still has to persuade Stuart Gulliver of HSBC not to go through with his threat to relocate

George Osborne was on a high. Looking fit and still elated by an election victory, the chancellor beamed down on 350 members of the City elite, packed tightly along bench tables in the gilded magnificence of the Egyptian room at Mansion House.

Last Wednesday’s speech was Osborne’s sixth to the annual dinner for bankers and merchants in the heart of the Square Mile, but never has his audience been so appreciative. The City loves a winner — particularly when he is a Tory chancellor — and fuelled by 2007 Clos Rene Pomerol they roared with laughter at his jokes, and applauded munificent tributes to vanquished foes, the Liberal Democrat Danny Alexander and Labour’s Ed Balls.

On the surface all was well, but as ever in high politics and finance, dark currents swirled beneath. The Conservatives have promised a referendum on membership of the EU; that, and a string of regulatory crackdowns ushered in by Osborne, have pushed HSBC — Britain’s biggest bank — to consider moving its headquarters overseas. Osborne, in his hour of greatest triumph, was biting the hand that fed him.

He was prepared, however, to offer an olive branch. “Let me be clear. I want Britain to be the best place for European and global bank headquarters,” he said. Two seats down, Douglas Flint, Glasgow-bred chairman of HSBC, looking pale beside the tanned Antonio Horta- Osorio, Portuguese chief executive of Lloyds, stared ahead impassively.

It had been a rough 24 hours. On Tuesday, Flint informed anxious HSBC workers that the bank would be shedding one in five jobs worldwide in a quest for higher returns. This would mean a cull at its Canary Wharf headquarters. HSBC employs 257,000 worldwide, 48,000 of them in Britain.

But shareholders barely batted an eyelid about the mass redundancies. They wanted just one question answered. Is Britain’s biggest bank leaving?

The location of the headquarters is a key issue for big investors. A number feel that HSBC has been unfairly punished by the wave of new regulations, including Osborne’s permanent and increasing levy on bank balance sheets, a tax that raised £2.2bn last year.

Unfortunately, Flint and his chief executive Stuart Gulliver did not play ball during a shareholder presentation last Tuesday morning. They offered no guide as to which way the wind was blowing, but laid out 11 criteria for the domicile review. The management will look at measures including economic growth, tax systems and long-term stability.

Many City veterans assume HSBC will go. “I can see lots of reasons for HSBC considering a move back to Hong Kong and why this would be a blow to City prestige,” said Ewan Cameron Watt, chief investment strategist at BlackRock.

Wharf exit? HSBC’s London headquarters

Wharf exit? HSBC’s London headquarters 

On its own, the bank’s departure from London would not be a catastrophe. HSBC was founded 150 years ago by merchants in Hong Kong. It moved to London only in 1992, after completing its acquisition of the Midland Bank. However, the concern is that other banks, such as Deutsche, Goldman Sachs and Standard Chartered, may follow.

A City exodus would deal a crushing blow to the Tory government. It would mean further staff cuts in London, not to mention a dip in tax receipts. This would leave a hole in the budget at a time when the chancellor already needs to cut £30bn from spending over the next three years.

Osborne needs to tread carefully. Memories of the credit crunch, which tipped Britain into recession, are still fresh. Banks are still being exposed for rigging various markets, money-laundering and mis-selling. This means he cannot be seen to be rowing back on regulations introduced to make the system safer, but equally he cannot destroy Britain’s biggest export industry. The chancellor is confident he can balance the two. For him, there is no “trade-off between high standards of conduct and competitiveness”.

SITTING in his grand office in the heart of the Square Mile last Thursday, Alan Yarrow had the look of satisfaction that people get when they suddenly remember the answer to a quiz question.

Buoyed by a raucous response to the Mansion House dinner the night before, the lord mayor of London was reading and re-reading the same two paragraphs from Osborne’s speech. The chancellor had announced plans to sell RBS and had championed robust regulation, but it was the references to regulatory balance and keeping banks in Britain that prompted him to pull out his fountain pen. He carefully drew two black boxes around the text.

To the Kleinwort Benson veteran it was clear that the chancellor was delivering a covert message: in his July 8 budget Osborne would amend the bank levy. “It would have been nearly impossible for the chancellor to be re-elected and then immediately offer a concession to the banks,” he said.

The controversial levy was introduced by Osborne in 2011 and has steadily increased each year. HSBC bears the brunt — more than a third — paying £750m last year, equal to 11% of its profits for 2014.

Cutting the levy would be seen as a significant climbdown. According to one of the bank’s top investors, it would stop the domicile review “in its tracks”.

Yarrow believes HSBC is still open to persuasion.

“I don’t think HSBC is out of the door,” he said. “They are doing what any sensible company would do. In reality there will be movement from the government to ensure we keep the head office . . . It’s very important for the City that HSBC stays here.”

Yarrow expects the decision to come down to economics, but he warned that the City regulators “has to be aware of global competition and has to have an international outlook”. There was a danger, he said, that regulators were too parochial. “You cannot look at these things in an isolated way.”

It is not just the taxes that are driving HSBC to consider leaving Britain. It has also bridled at the ring fence, the main regulatory response to the credit crisis.

A commission in 2011 led by the economist Sir John Vickers came up with the plan, which will separate banks’ retail arms from their investment banking operations. The parent company will have no control over the retail unit, which will have its own independent board.

HSBC’s directors see little point in owning something they cannot control, and are likely to sell the UK retail bank, making the move to Hong Kong much more likely. Some analysts have speculated that Osborne may weaken the plan as a further sop to HSBC.

Vickers, warden of All Souls, Oxford, told The Sunday Times last week that this would be a mistake.

“Ring-fencing is a key part of the solution to what the chancellor calls the British dilemma — how to be a successful global financial centre while protecting the taxpayer from risk,” he said.

City sources said the rules will have a range of unintended consequences. Under Vickers’ plan, banks will have to raise their capital cushions again. This could inhibit lending and increase borrowing costs.

Ring-fenced banks will also have to shoulder extra costs if they need to replicate services offered by their former parent, such as foreign-exchange trading. In 2011, Osborne told MPs it was the job of Vickers and the banking commission to ensure “never again is a bank too big to fail”.

Gulliver said last week that HSBC would not want to end up as a passive “asset manager” in the British operation, with no control over its management, capital or ability to pay a dividend to the parent.

But Vickers believes it is necessary for banks continue to prove this kind of segregation. “The ring fence is a done deal, and rightly so,” he said. “I have no sympathy for the notion that because the economy has recovered we can ease off on reforming banking. To use the chancellor’s phrase, only by fixing the roof when the sun is shining can we prepare properly for the next crisis.”

FACED with the prospect of a City exodus, Osborne is desperate to champion Britain to banking bosses.

London’s attractions are obvious. HSBC and others benefit from an ideal time zone, an unquestioned rule of law and powerful regulators.

If HSBC decides to retreat to Hong Kong, it would have to reapply for nearly all its banking licences. This could prove problematic in New York where it is on probation with the US regulator over money laundering. There would also be questions as to whether a bank as large and complex as HSBC could be regulated by Hong Kong authorities.

This argument, however, was dismissed by Gulliver last week. “They [the Hong Kong Monetary Authority] are generating about 80% of the profit of the group already. They are quite capable of regulating the group,” he said.

Gulliver also assured his staff that a change of home would take two years to complete and would affect only about 250 jobs. Gulliver is on the defensive. He has clearly been bruised by the attention of western governments, media and regulators compared with the easier ride the Hong Kong permanent resident receives in the former colony. “I love the dynamism and the can-do atmosphere of Hong Kong,” Gulliver told the Financial Times in 2011. “You can reinvent yourself here with the only limitation your own intelligence and drive. You can’t do that in the UK. It is difficult to break through [from] where you were born,” said Gulliver, who went to grammar school in Plymouth before reading law at Oxford.

With a return to Hong Kong, the career HSBC banker could win kudos with shareholders by handing out the £750m earmarked for the bank levy. Gulliver could reward staff without regard to the Financial Conduct Authority’s tough regime for executives. And Hong Kong is waiting with open arms. The Chinese territory’s regulator said it would take a “positive attitude” if HSBC considered relocating there.

After a jubilant start for the new government, Osborne is facing a nervous six months. HSBC will announce the decision on its headquarters at the end of the year — at a time when the government is seeking to sell off the taxpayer stakes in Lloyds and Royal Bank of Scotland.

Concessions will be needed to keep HSBC and others sweet. Despite Osborne’s hints, fears are growing in the City that it may be too little, too late.

Rothschild’s RBS fudge

George Osborne is finally ready to offload the government’s 79% stake in Royal Bank of Scotland — seven years after the bank was rescued. So what was the hold-up?

Former RBS chief Stephen Hester plotted to return the shares to the private sector last year, but the timing was seen as too aggressive.

After overseeing a restructuring of the bank, his mission to maintain RBS’s investment arm did not sit well with the government, which wanted a more plain vanilla Lloyds-style operation. Ross McEwan, a banking veteran from New Zealand, was brought in to stabilise the colossus.

McEwan: steadying the ship

McEwan: steadying the ship

RBS was rescued in 2008 with a £45.5bn injection of taxpayer cash.

The share price has been slowly recovering but is still nowhere near the break-even price of 502p. At Friday’s closing price of 357.4p, the taxpayer would have to swallow a £13bn loss.

The government’s new adviser, Rothschild, is preparing a bit of a fudge. A review said that despite the price gap, taxpayers could expect to make £14bn if the sale of assets and fees were taken into account.

Institutional investors are to get the first bite, but a “Tell Sid” offer to the public is also part of the plan.

 

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