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The rivalry between London and New York as dual contenders for the title of leading global financial center dates back to the late 19th century. Both cities have overcome serious setbacks from economic slumps to terrorist bombs, and in the post-Sarbanes-Oxley era their competition has intensified.

The latest edition of the Global Financial Centers Index, issued by the city of London in March, reports that a survey of financial professionals awarded London top ranking with 795 points out of a maximum of 1,000 and the Big Apple a close second on 786. A distant third, with less than 700, was Hong Kong.

At the same time, the authors warned that this leadership was threatened not only by London but other cities with strengthening credentials in the financial sector, such as Dubai, Hong Kong and Tokyo.

"If we do nothing, within ten years, while we will remain a leading regional financial center, we will no longer be the financial capital of the world," the study concluded.

How justified are these fears? The former president and chief executive of New York City Partnership, Ronald K Shelp, outlined his own thoughts in a briefing held this past spring by the London-based International Underwriting Association.

Shelp, who stopped off in London during a European promotional tour for his biography of Maurice "Hank" Greenberg, agrees that the Big Apple's prominence is at risk.

"The United States is at a distinct competitive disadvantage because of its propensity for litigation, and the complex nature of our legal system is getting worse," he stated. "For much of its history, it has served America well, but that's no longer the case."

PLUSES AND MINUSES

London's position in the early 21st century has also been strengthened by the move to a single regulator for the finance sector. The Financial Services Authority makes it easier to conduct business in the U.K. The FSA operates a "principles based" regime, compared with the complex rules and compliance-based regulatory structure in the United States that adversely affects the cost of doing business and increases the opportunities for litigation.

These advantages have helped London to increase its financial service workforce in recent years, while that of New York has dropped slightly--possibly due in part to America's restrictions since Sept. 11, 2001, on non-U.S. citizens wishing to move to the country.

But there are signs that Gordon Brown's government, increasingly out of favor with voters, might also be raising the barriers for foreign workers planning to enter the U.K., just as the pound's steady retreat against the euro is making London less appealing for Europeans seeking to advance their careers.

There are other factors that even up the balance between the two cities. New York offers a significantly lower cost of living than London, and the Big Apple's more reasonable prices for real estate are a major draw for international business.

The British corporate tax rate of 28 percent has become steadily less attractive in recent years. Pharmaceuticals group Shire, which is relocating its tax domicile to Dublin where the rate is only 12 percent, heads a growing number of British blue chips threatening to move elsewhere.

London could also suffer the effects of an economic downturn in the U.K., whose overheated property market is also now cooling rapidly. The Bank of England has also not followed the U.S. Fed in slashing interest rates, despite fears of recession on both sides of the Atlantic. There has instead been a little light pruning--three 0.25 percent cuts since December to the current 5 percent could be all that the Bank of England concedes for the moment.

A concerted effort by New York to get its act together on regulation and the legal system could enable it to re-establish an undisputed lead, said Mr Shelp. But should New York and London be squabbling over which city has the edge? China, India and the Gulf region are waiting in the wings to supplant them both.

At the moment, Dubai's political and economic framework is insufficiently developed for it to mount a serious challenge. Mumbai is hampered by continued state control of the financial sector, while concerns over political stability and potentially overvalued stock markets hold back China.

But these obstacles could prove only temporary. The recent displacement of Citigroup by the Industrial and Commercial Bank of China is a pointer to a very different financial world league table.

Red-hot economic growth in many of the emerging markets means that a "bigger pie" can provide generous slices for these new players, suggested Shelp. But if London and New York want to retain their prominence in the new global order, it would be better achieved by working together instead of fighting.

GRAHAM BUCK is a London-based writer covering European risk management issues.

August 1, 2008

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