Evaluation of Brexit - Financial Centre - Literature review Example

Evaluation of Brexit: Financial Centre Name Course Name and Code Date Introduction The aim of the paper is to discuss financial centre. The first part of the paper discusses what constitutes a financial centre. Some of the information discussed includes infrastructure, human capital, business environment and legislations. The second part discusses the effectiveness of London as a financial centre and reasons associated with the continuous success as a financial centre. The variables discussed include the human capital, presence in EU, immigration, and political and economic stability. The last part discusses the consequences of London as a financial centre if UK leaves the EU. The discussions revolve around the alternative market, redefining the current policies and strategies, and seeking alternative economic activity. What Constitutes a Financial Centre? Cainey (2015) highlights human capital has an integral in understanding financial centre. Bourse Consult (2013) presents a list of factors that defines a financial centre. According to Bourse Consult (2013), critical mass (labour force), connectivity, people, regulation and law, financial market infrastructure and the business environment are important for an effective financial centre. The business environment determines whether it is viable from the views of investors while whether qualified employees are available to provide labour to the companies and organisations. Cainey (2015) states that attracting the human capital is one thing but engaging the human capital to accomplish obligations is another thing. The efficiency of the human capital depends on the learning institutions, regulatory and legal requirements, and cultural diversity. Securities Industry Association (2006) discusses some factors that define a financial centre. Some of the factors include fair and sound tax regime, stable economic and political environment, low cost of doing business, skilled workforce, free flow of currency, and quality infrastructure. The infrastructure and the political-economic environment are crucial in determining the effectiveness of doing business (Pratt, 2009). A stable city with clear guidelines when it comes to policies and regulations is important in the analysing appropriateness of the location (Chinn and Frankel 2008; Terlikowski 2013). The tax regime and fundamentals surrounding taxation such as conflict resolutions and legal system define the attractiveness of the city. Cultural diversity and language requirements importance cannot be ignored; effective communication whether face to face or through different channels of communication. The communication can be used during business negotiations or advertising (Oliver 2013). A diverse city with diversity regarding culture and encourages cultural inclusivity improves the attractiveness (Ottaviano et al 2014). The cultural environment and business environment should be complemented with the nature of the regulatory regime, legal framework, fairness and transparency (Springford and Whyte 2014). Ensuring these fundamentals existed and incorporated in the management of the businesses and community contributes to the region attracting more businesses, which contributes been a financial centre. According to Securities Industry Association (2006), international standards are important in promoting financial stability, cooperation, which translates to an improvement of markets and reduction of systemic risk. A financial centre should aim to meet internal norms that incorporate macroeconomic policy and data transparency. Others are a market and institutional infrastructure, and financial supervision and regulatory. Some of the factors to improve the efficiency of the market include data dissemination, fiscal policy transparency and monetary transparency (Roberts 2008). When it comes to market and institutional infrastructure, factors such as payment and settlement, auditing, accounting, corporate governance and insolvency are important. In terms of financial supervision and regulatory, some of the factors considered include insurance supervision, securities regulatory and banking supervision. In provision or creation of environment, which supports these different processes, the financial capability of the region is acknowledged, and can be inferred as a financial centre. Current Role of London as a Global Financial Centre In understanding the role of London as a global financial centre, different variables and factors are analysed: Financial sector development – According to the City of London (2015), there are more than 251 foreign banks based in London, 588 overseas companies that are listed on London Stock Exchange, 96% of EU emission trading is done in London, $19 billion of Islamic finance and leading Islamic financial institutions across Europe and leads in the Western countries. London is home to the London Metal Exchange that deals with more than 80% of the non-ferrous business. EU uses London to access the global market. For example, Slovakia Debt Management office utilised the UK banks to issue bond while London also provides innovation finance such as crowdfunding, peer-to-peer lending, venture capital and private equity. Infrastructure development determines the effectiveness of any financial centre. The interconnection of different transportation networks improves the communication and movement of people, and services or products offered. Sullivan (2015) presents the quality of the network, office space, the cost of living and associated structures makes London an important financial centre. Business environment – According to Dawson (2015), the business environment is the most crucial component in terms of competitiveness because the legislations and legal frameworks support competitive environment. The businesses operate based on principles of competition and structures exist to address any complaints; the taxation is also favourable (McKee and Galsworthy, 2016). The business individuals present the Scottish referendum and the general election as some of the problems, which would have caused complications but the accomplishment of these requirements, means that the business environment is stable. However, the concerns are on the Brexit and the impact of Brexit to the wider business requirements. Human capital - Bernstein and Beeferman (2015) highlights the importance of human capital in determining the effectiveness of financial centres. The human capital factors incorporate business education quality, labour market flexibility, skilled workforce, quality of life and workforce skill set (Financial Services Development Council 2015). These factors are common in London because of numerous learning institutions and the urge of many people to work in London. The reputational and general business operation – London has competitive positioning strategy because it may be argued it is the entry point to Europe and other world economies (Wallace 2015). London attracts people from different backgrounds meaning cultural diversity is encouraged and championed (Lai 2012; Tarran 2016). London markets itself through sports and other brand awareness strategies, which results in attracting more people. Innovation is also integral to London because numerous businesses and technological companies are located in London or around London (Zyen 2007). Due to these numerous factors, the reputation and attractiveness of London improve the business activities, which translates to been a financial centre. Consequences of Brexit for London’s Role as a provider of Financial Services According to Centre for European Reform (2014), the EU does not have quotas and tariffs on internal trade, which reduces the cost of doing businesses. However, Brexit will result in losing these benefits and doing business in London would be expensive for companies having the headquarters in London or operates largely in London. In addition, the foreign direct exchange is currently high in London and movement out of EU would mean investors will seek alternative regions with preferential foreign direct investments (Karanikolos et al 2013). EU is a large market and losing the large market share results in a lower trade, which will affect other sectors because of the multiplier effect. The Economist (2016) presents that the presence of Britain in EU makes the British economy more dynamic because of cultural diversity and the different type of businesses. The migration rules and regulatory regime requirements may change, which affects the dynamism of Britain and by extent, London. Giles (2016) estimates that the country will suffer because of the medium-term economic problem: a study based on 100 economists who were requested ion their views on Brexit. Other economists are afraid of the transaction because the short term effects may affect the long-term expectations of the economy. Centre for Economic Performance (2015) analysis, the consequences of leaving EU and highlights, increased the cost of doing business because of change of regulations, slower productivity resulting in lower trade, the UK will have to adjust regulation on the economy, immigration and foreign direct investments. London will also benefit in the proposed free trade agreements with Japan and the Transatlantic Trade and Investment Partnership. Centre for Economic Performance (2015) highlights the budgetary allocation to the EU would be saving, which would be transferred to the local economy. However, the benefits obtained from the free trade negotiations will not be beneficial to the UK because it has left (Leung and Yim 2009; Dörry 2015). Therefore, London will suffer because the foreign direct investments and the benefits from free trade will affect the financial standings of London (Oliver 2014). According to Woodford Investment Management (2016), London financial position may continue to prosper because of intrinsic advantages. The intrinsic advantages are a critical mass of expertise, skilled labour, openness to immigrants, convenient time zone, the English language, and the legal system will continuous drive the financial system (Luo 2007). Woodford Investment Management (2016) discusses the consequences of export to EU since it will suffer but the United Kingdom negotiations with non-EU countries can cover the shortfall. The Common Commercial Policy that determines the operations in the EU, which limits negotiations, will not exist, meaning UK will seek newer markets (Engelen 2007; Weiler 2015). For example, the financial services will improve if London offers financial services and exports to Hong Kong and China. Germany is another example of a country that has continued to improve financial services even it is in the EU. For instance, German benefits from Swiss-China deal meaning London as a financial centre will continue operating effectively but requires minor adjustments and changes. The financial and economic benefits of Brexit are debatable because of the uncertainty over the endpoint and the wider impact on the business. The expected referendum on the topic is June 2016 but the actual withdrawal from the EU is not documented (Irwin 2015). It means businesses will continue facing the uncertainty of not knowing the consequences of Brexit, and impact to the business, and impact to other sectors, such as political and social. Conclusion A financial centre has some crucial components that support the financial requirements and financial systems of the economy. The financial system incorporates numerous variables such as human resource and technology in fulfilling the requirements of finance. The market and infrastructural development are also crucial including the regulations and legislations that support the operational requirements. London is a metropolitan and cosmopolitan region in which different cultures and ideologies flourish. The infrastructure, human capital, people, market and communication channels are effective, attracting more investors including the retail outlets and regional headquarters. London is the entrance to EU because most businesses target London before proceeding to the other capitals of EU. London also encourages immigration, effective communication through infrastructural developments, and healthy legislations and enforcement of the legislations. The decision to exit from EU is a major issue that may affect London as a financial centre differently. Based on available data, London is the centre of numerous banks and investment companies, meaning these firms would be affected if UK leaves the EU. Other problems will be related to the tariffs, quotas, legislations, and decisions to be embraced after the exit. In addition, current challenges would include a decrease in productivity but these different problems can be solved through engaging other economies to replace the EU countries. For example, engagement with China and Hong Kong ensures London retains its status of the financial centre. References Bernstein, A. and Beeferman, L. (2015) The materiality of human capital to corporate financial performance. Harvard Business School, April 2015 [Online]. Available at: http://www.law.harvard.edu/programs/lwp/pensions/publications/FINAL%20Human%20Capital%20Materiality%20April%2023%202015.pdf [Accessed: 25 April 2016]. Bourse Consult. (2013) From local to global Building a modern financial centre [Online]. Available at: http://bourse-consult.com/wp-content/uploads/2013/05/Local-to-global-building-a-modern-financial-centre.pdf [Accessed: 25 April 2016]. Cainey, A. 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