Countries should try to deepen their capital markets – rather than trying to “magic a financial centre out of thin air”, founder and managing director of New Financial, William Wright, has warned.

Mr Wright was the keynote speaker at a recent seminar on the outlook for European financial centres organised by Bruegel, the Finance Ministry and the Malta Financial Services Authority in conjunction with the Malta-EU presidency 2017.

New Financial is a capital markets think tank and forum, and Mr Wright presented an in-depth analysis of the activity in various countries – which showed the extraordinary share currently handled by the UK.

Unlike commonly available research which is supplied by the countries themselves, New Financial looked at the depth of activity relative to that country’s GDP, and looked at various activities, from a country being a financial centre to having robust capital markets.

The results showed that these activities accounted for 11 per cent of all UK tax receipts, with a quarter of the EU’s stockmarket value listed in the UK. He also explained that two of every three equity trades take place in the UK.

Although he did not comment on Brexit, the implication of opportunities for other member states was clear. Mr Wright did, however, make a compelling argument for spreading the capital markets activity more equally across the member states: Malta’s capital markets could grow by four per cent of GDP, with a 38 per cent increase in the value of pensions and insurance assets.

Another speaker, Professor of International Commercial Law at Copenhagen Business School Georg Ringe, continued the argument in favour of better capital markets, stressing that money was much easier to move than manufacturing, and that competition was strong because of “easily comparable products”.

Prof. Ringe admitted that financial institutions were threatening to exploit jurisdictional discrepancies, putting regulators under pressure to ease their approach. However, he said, studies showed that not all of them were going for low tax and lax rules – the so-called ‘race to the bottom’ – as many actually preferred independent and robust regulation.

“The ideal remains to allow regulators to compete, which will yield optimum results.  What we really have is a ‘race to the top’,” he said.

We simply cannot reach the EU growth targets unless things change

“Poor regulation means higher risk and risk is a threat to both financial stability and to the global public good.”

The issue of regulation was also brought up during the panel debate with Malta Stock Exchange chairman Joe Portelli convinced that US President Donal Trump would usher in “serious deregulation” which would put pressure on the EU regulators.

“I am a supporter of regulation but it is clear that the steps taken after the financial crisis need to be revisited by Brussels. We need to ask whether we are now in a state of over-regulation,” he said.

KPMG’s banking expert, Juanita Bencini, voiced her opinion quite bluntly – so much so that the panel moderator appeared taken aback at her choice of terminology: “The banks in some member states – such as France – are pushing back at the European Central Bank and objecting loudly to the level of intrusiveness. I agree that the EU will have to change to react to any steps Trump would take.

“We have allowed politicians to create the monster that is the ECB and now we need to accept that the reaction to the financial crisis has now gone too far. We simply cannot reach the EU growth targets unless things change,” she said.

Mr Wright expressed scepticism that things would change, however.

“It is not clear how much deregulation we will see. But I certainly do not see any appetite in the EU for any level of deregulation,” he said.

The topic of Brexit was tackled by the chairman of the MFSA, Joe Bannister, who said Malta’s government policy was to stay below the radar and not appear to be trying to take jobs from the UK. However, he said that the MFSA had received numerous requests for information from insurance companies intrigued by Malta’s innovative protected cell company structures.

In fact, he added, almost 100 companies had attended an information briefing held at the Guildhall in London some weeks ago.

Although he steered clear of referring to Lloyds of London  (which has since ruled out Malta), he did say that several other companies had already “signed up” to move to Malta.

Capital markets by numbers

Depth of capital market relative to GDP: (EU27 = 100)
Luxembourg: 600
UK: 169
Malta: 40

But…
Luxembourg ranks only 10th by scale of capital markets,
and 2nd (after UK) as a financial centre.

UK share of EU27 capital markets 2012-2015
Top ranking – Pensions assets: 43%
Lowest ranking – Investment funds: 12%

UK share of foreign exchange trading in EU: 78%

UK share of pensions and insurance assets: 30%

UK share of investment funds by domicile: 13%
Luxembourg share of investment funds by domicile: 30%

Source: New Financial