6. Financial Sector
Capital Markets and Portfolio Investment
The City of London houses one of the largest and most comprehensive financial centers globally. London offers all forms of financial services: commercial banking, investment banking, insurance, venture capital, private equity, stock and currency brokers, fund managers, commodity dealers, accounting and legal services, as well as electronic clearing and settlement systems and bank payments systems. London is highly regarded by investors because of its solid regulatory, legal, and tax environments, a supportive market infrastructure, and a dynamic, highly skilled workforce.
The UK government is generally hospitable to foreign portfolio investment. Government policies are intended to facilitate the free flow of capital and to support the flow of resources in product and services markets. Foreign investors are able to obtain credit in local markets at normal market terms, and a wide range of credit instruments are available. The principles underlying legal, regulatory, and accounting systems are transparent, and are consistent with international standards. In all cases, regulations have been published and are applied on a non-discriminatory basis by the Bank of England’s Prudential Regulation Authority (PRA).
The London Stock Exchange is one of the most active equity markets in the world. London’s markets have the advantage of bridging the gap between the day’s trading in the Asian markets and the opening of the U.S. market. This bridge effect is also evidenced by the fact that many Russian and Central European companies have used London stock exchanges to tap global capital markets.
The Alternative Investment Market (AIM), established in 1995 as a sub-market of the London Stock Exchange, is specifically designed for smaller, rapidly expanding companies. The AIM has a more flexible regulatory system than the main market and has no minimum market capitalization requirements. Since its launch, the AIM has raised more than £68 billion ($95 billion) for more than 3,000 companies.
Money and Banking System
The UK banking sector is the largest in Europe and represents the continent’s deepest capital pool. More than 150 financial services firms from the EU are based in the UK. The financial and related professional services industry contributed approximately 10 percent of UK economic output in 2020, employed approximately 2.3 million people, and contributed the most to UK tax receipts of any sector. The long-term impact of Brexit on the financial services industry is uncertain at this time. Some firms have already moved limited numbers of jobs outside the UK in order to service EU-based clients, but the UK is anticipated to remain a top financial hub.
The Bank of England serves as the central bank of the UK. According to its guidelines, foreign banking institutions are legally permitted to establish operations in the UK as subsidiaries or branches. Responsibilities for the prudential supervision of a foreign branch are split between the parent’s home state supervisors and the Prudential Regulation Authority (PRA). The PRA, however, expects the whole firm to meet the PRA’s threshold conditions. The PRA expects new foreign branches to focus on wholesale and corporate banking and to do so at a level that is not critical to the UK economy. The Financial Conduct Authority (FCA) is the conduct regulator for all banks operating in the United Kingdom. For foreign branches the FCA’s Threshold Conditions and conduct of business rules apply, including areas such as anti-money laundering. Eligible deposits placed in foreign branches may be covered by the UK deposit guarantee program and therefore foreign branches may be subject to regulations concerning UK depositor protection.
There are no legal restrictions that prohibit foreign residents from opening a business bank account; setting up a business bank account as a non-resident is in principle straightforward. In practice, however, most banks will not accept applications from overseas due to fraud concerns and the additional administration costs. To open a personal bank account, an individual must at minimum present an internationally recognized proof of identification and prove residency in the UK. This can present a problem for incoming FDI and American expatriates. Unless the business or the individual can prove UK residency, they will have limited banking options.
Foreign Exchange and Remittances
The pound sterling is a free-floating currency with no restrictions on its transfer or conversion. Exchange controls restricting the transfer of funds associated with an investment into or out of the UK are not exercised.
Sovereign Wealth Funds
The United Kingdom does not maintain a national wealth fund. Although there have at time been calls to turn The Crown Estate – created in 1760 by Parliament as a means of funding the British monarchy – into a wealth fund, there are no current plans to do so. Moreover, with assets of just under $20 billion, The Crown Estate would be small in relation to other national funds.