Six things a Labour government would mean for the City of London

It's unlikely but not impossible. Tomorrow, the U.K. could have a Labour government led by Jeremy Corbyn and John McDonnell. 

If you work in banking, this should give you pause for thought. Last month, a long report from Independent thinktank Policy Exchange said that a Corbyn-McDonnell government would represent a substantial shift in the status quo. And not just in terms of higher taxation. 

The report's authors point out that McDonnell has long advocated the wholesale transformation of the financial services sector above all else. Labour's 2017 manifesto said its intention was to, “stop our financial system being rigged for the few, turning the power of finance to work for the public good.” And in April 2019, McDonnell declared that: “Finance is the central nervous system of the economy… it directs investment, deciding which businesses and projects get off the ground and which fail… For too long this vital part of our economy has been solely in the hands of the big banks and the speculators.”

Above all, a Labour government would like to control finance, says the report, pointing out that McDonnell called for the government to “take control of all the major banks,” after the financial crisis of 2008. Moreover, the electorate may support it in this: a recent poll by UnHerd found that 80% of people in the UK want further cuts to banking bonuses. 

Based on Policy Exchange's analysis, this is what the City of London could expect from a Labour win:

1. Less work

The report emphasises the danger that the UK's standing as a safe place to invest could be damaged by McDonnell's plan to nationalise energy, water, rail and the Post Office as soon as possible, with Parliament deciding the level at which current investors will be compensated. Quoting a briefing by law firm Clifford Chance, it notes that the only other government to have carried out nationalization policies at below-market prices was in Venezuela.

The knock to investor confidence could be compounded by another policy, announced at the 2018 Labour conference, to compel all companies employing over 250 people to transfer 10% of their shares into a shared investment fund collectively government by employees. Dividends would be paid out each year, capped at £500 per person, with the rest taken in tax. 

The upshot would likely be that large companies would be less interested in listing or being located in the UK, and that UK equities could fall. There would be less work for equity capital markets bankers and for equities traders as a result (although distressed debt traders might be expected to thrive).

2. New jobs in a National Investment Bank 

If you lose your job with an existing bank, you could look for a new one at Labour's National Investment Bank -except it's an investment bank in name only.

As the centrepiece of Labour's industrial strategy, the National Investment bank and regional development banks (probably born out of RBS) would be tasked with £250bn of lending to small and medium-sized enterprises (SMEs) with a focus on supporting inclusive growth in local communities. 

Indications from the existing policy paper are that the National Investment Bank, “would initially issue an equity tranche of £20bn, which would be purchased by the UK Government. Over ten years, the National Investment Bank would conduct ten annual bond issues, which would expand the National Investment Bank balance sheet to approximately £250 billion by the tenth year.” 

Lending by the bank wouldn't be based on established sources of collateral but on data analytics designed to reflect how risky each loan could be. The National Investment Bank would need a lot of data analysts, therefore.

3. Fewer jobs in high frequency trading 

Some of those data analysts might come from quant funds and high frequency trading firms. Labour also proposes a new “Financial Transactions Tax”, extended to bond and derivative transactions. The tax would be levied at a rate of 0.2% for banks, hedge funds and financial institutions and at a rate of 0.5% for non-finance institutions like high frequency trading firms. 

4. Higher taxes and fewer jobs paying £500k+

Based on existing information, Labour wants to raise £6.4bn per year by making the 45% income tax rate kick-in at £80k instead of £150k and by introducing a new 50% marginal rate for anyone earning over £123k. 

There would also be an “Excessive Pay Levy”, which would introduce an additional levy of 2.5% on personal earnings above £330k a year, and 5% above on earnings above £500k.

The report notes that the top 1% of UK income tax payers already pay 27.7% of income tax (up from 24% in 2007-2009) and that this is projected to rise to 27.9% this year, although the share of income going to the top 1% is falling. 

5. More complex regulations for M&A bankers 

Under a Labour government, M&A would have a social dimension. The takeover code would be amended so that, “every takeover proposal has a clear plan in place to protect workers and pensioners.”

6. More jobs at the Bank of England 

Lastly, McDonnell aspires to implement a new policy tool called, “credit guidance” using the Bank of England.

This would aim to disincentivise private lenders from lending to some sectors while incentivising them to lend to others. In essence, the reports authors say it envisages the Bank adjusting the way in which the amount of regulatory capital that a given bank needs to hold is assessed, so that exposure to investments deemed productive and desirable, such as SMEs requires less capital than exposure to undesirable investments (eg. land and property). The Bank of England would likely need many more staff to achieve this.

This article was originally posted on November 4th 2019

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