Peter Jones: Looking beyond the gloom reveals an exciting future

Published on Thursday 21 May 2009 21:34

NO WEEK goes by now without dismal news of jobs being cut by the two big banks at the heart of Scotland's financial industry – Royal Bank of Scotland and what is now Lloyds Banking Group.

But I entirely agree with what First Minister Alex Salmond said yesterday at Holyrood: "We should not give the impression that the whole of the Scottish financial sector is shedding jobs."

Quite right. Scotland's financial services industry has not collapsed. Nor will it disappear like the traditional industries have almost done. It has taken a blow, but it will recover, perhaps in a slightly reshaped form, but it will survive. Moreover, all of us need it to prosper again, not just in terms of jobs in the industry, but also because of the way it underpins the whole economy.

Let's for once drop our habit of concentrating on Scotland's money tree and instead step back and look at the global financial forest. It is all looking a bit battered. Fallen branches litter the ground everywhere.

The point is underlined by a look at the most recent edition of the Global Financial Centres Index, produced by the Z/Yen Group, a research consultancy, for the City of London. It surveys 62 financial centres, rating them not according to size of banks or billions under management, but according to five factors: people; business environment; market access; infrastructure and general competitiveness.

The latest report says "There is no 'safe port' in the current financial storm. Ratings of all financial centres have dropped, reflecting overall negativity about the current and future state of the economy."

Despite this, the big two centres – London and New York – still lead this index. Edinburgh is 20th, down two places – an unsurprising demotion given that Scotland's two biggest banks have gone from making billions to losing hundreds of millions and have either been part- nationalised or taken over.

Glasgow has also slipped, three places down to 31st. But looking down the list of 62 centres, I can't find another small country with more than one financial centre, let alone two in the top half of the index. It rather suggests that if Edinburgh and Glasgow were combined, then Scotland would show up as having one of the world's top financial sectors.

Indeed both cities are way out in front of Madrid, much commented on approvingly of late because of the relative stability of its banks. The Spanish capital is, however rated at a lowly 47th. Even Canada's two main financial centres – Montreal and Vancouver – where, thanks to financial conservatism and tough regulation, the banks have been largely unscathed, helping the cities to move up five places, still come in below Edinburgh in 25th and 26th places.

Nevertheless, we don't want either Edinburgh or Glasgow to slip further down the table. Superficially, the signs don't look good. About 96,000 Scots work in financial services, of which about 50,000 are in banks, 80 per cent of them in Lloyds and RBS.

The cost-cutting projections of the two banks suggest that they will have to lose about 5,000 of these jobs, reducing their combined workforces to about 36,000 over the next three years. That is bad news, particularly when you consider that jobs in this sector are about twice as productive in terms of their overall contribution to the economy than other jobs.

But the balancing good news is that, in the past year or so, Barclays Wealth management, Tesco Personal Finance, E-Sure, and BNP Paribas, a French bank, have all set up shop in Scotland. There are, therefore, areas of job growth, which means overall employment might just increase.

And in terms of decision-making ability, Archie Kane who is Scotland's member of the Lloyds main board, has been suggesting that there might be more such headquarters' capacity after the takeover, given that a lot of the former HBOS's decisions were effectively taken outside Scotland.

Scottish Widows is remaining firmly here, he says, and will become the lead brand for Lloyd's Bristol-based Clerical Medical business. Five of the seven directors for Lloyds insurance business, which includes general insurance, are based in Edinburgh.

Importantly, the insurance part of the sector, which also includes the big firms of Standard Life and Aegon, seems to be doing pretty well. And the fund managers, including big firms such as Martin Currie and Aberdeen Asset Management, also seem to be surviving despite being in perhaps the toughest part of the financial business.

Plus there is the fact that the silver lining to the job-cutting clouds over banking is that it will make the banks more efficient and better able to compete for business. The potential lack of competition within Scotland is troubling, but winning trade from outwith Scotland's borders is the real key to recovery.

The banks might look in bad shape now, but they could be in exactly the right shape in a couple of years. Scottish finance still has an exciting future.