Buses cross Waterloo Bridge with the City of London financial district in the background, on March 5.Toby Melville/Reuters
Labour’s landslide election win shows few signs of unsettling London’s financial heartland after the party’s lengthy pro-business overtures, though many in finance remain wary they could be targeted to prop up Britain’s stretched public finances further down the line.
Under leader Keir Starmer, the Labour Party has assiduously courted the City of London, as the financial district in known, mindful that his plans for boosting economic growth will need a big dose of private capital.
“To realize Labour’s bold ambition to make Britain a clean-energy superpower, private-sector finance must play a central role,” Chris Hayward, policy chairman at the City of London Corporation, which administers the capital’s financial district, said on Friday.
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The city, like hundreds of constituencies across Britain, switched from Conservative to Labour in Thursday’s election, in stark contrast to the last election in 2019, when Mr. Starmer’s predecessor Jeremy Corbyn set out a radical manifesto to increase public investment by raising taxes on companies and top earners, resulting in Labour’s worst result since the 1930s.
“The most important change is that there has been a big shift in mindset by Labour towards the city in the past few years,” William Wright, managing director of think-tank New Financial told Reuters.
“That is reflected in a strong sense of continuity in the reforms to capital markets and pensions under way,” Mr. Wright said.
Labour, whose Rachel Reeves, a former economist at the Bank of England, is set to become Britain’s finance minister, has backed the Conservative government’s post-Brexit Edinburgh Reforms aimed at protecting the city’s global competitiveness.
The party has also promised a review of the pensions and savings industry, which could help Britain’s capital markets as well as boost the financial resilience of the population.
But there is also speculation about changes to how capital gains and wealth are taxed, as well as Ms. Reeves’s plans to change the way private equity is taxed, which could hit hard.
Michael Moore, chief executive of BVCA, a private-equity industry body, said Labour was, however, showing willingness to back up its “pro-business mood music with engagement on substance.”
Ms. Reeves had vowed to end a “loophole” that allows a portion of private-equity earnings to be taxed as capital gains, rather than at the higher income-tax rate, but last month signalled to the Financial Times that favourable tax treatment would continue in instances where fund managers put their own capital at risk.
JP Morgan analysts said in a note on Friday that the incoming government was largely priced in for banking stocks such as NatWest and Barclays and would be broadly neutral for the sector.
However, the risk of an increase in capital gains tax meant Labour’s victory was “slightly negative” for other listed financial companies such as Hargreaves Lansdown, Abrdn and Schroders.
The pound and British shares and government bonds rose on Friday after Labour’s win.
“The U.K. financial services sector can rest easy in the fact that radical change is unlikely to be on the horizon,” said Monique Melis, managing director at consultants Kroll.
Many of Britain’s top financiers have taken the prospect of a left-leaning Labour government in their stride after the hit from Brexit, and the impact on the U.K. government bond market in September of 2022 to plans from then-prime-minister Liz Truss – who lost her seat on Thursday – for unfunded tax cuts.
“The industry has had positive and constructive conversations with Labour since 2019,” said Miles Celic, chief executive of TheCityUK, which represents the British financial sector globally.
Fixing the damage to investor confidence and leakage of financial services activities to the EU caused by Brexit – arguably the most enduring legacy of the Conservative Party’s 14 years in power – will be tough for Labour to fix.
France’s central bank said last year transactions between French-based financial-services firms and the rest of the world hit a record €10.4-billion in 2022 – double the volume seen at the time of the 2016 Brexit vote.
According to figures published by CityUK in January, Britain had a 16-per-cent share of cross-border bank lending in 2016 but this fell to 14 per cent by end the second quarter of 2023.
Meanwhile, Amsterdam has overtaken London to become Europe’s top share-trading venue since euro-denominated share trading by EU investors had to stop in Britain on Dec. 31, 2020.
Mr. Starmer has repeatedly made clear that rejoining the single market, essential for the city to regain direct access to the EU, is a red line he won’t cross.
Many market participants just want to see financial-sector reforms already agreed properly implemented under Labour, to protect the industry’s massive contribution to state coffers.
A study by PwC for the City of London Corporation and TheCityUK published in May estimated the total tax contribution of the financial and related professional services industry was £110.2-billion ($192.5-billion) in 2023.
This is equivalent to 12.3 per cent of total U.K. tax receipts, more than the British government’s education budget, or more than half the health budget.
Imminent changes to Britain’s rules on stock-market listings have been designed to bring in more big-ticket initial public offerings, which could potentially include China-founded fast-fashion retailer Shein, and other similar deals that bring handsome paydays for those involved.
The Financial Conduct Authority is set to publish its listings revamp after the election, which could spur a flurry of corporate activity from end-July.
Britain’s economic backdrop remains fragile. U.K. public debt is high, nearly equivalent to GDP, with prospects of tepid growth, leaving analysts to conclude that taxes will inevitably rise to shore up health and other services, making the financial sector a potential target.
“It’s pretty simple really, business wants certainty,” said Naresh Aggarwal, associate policy & technical director at the Association of Corporate Treasurers.
M&G Investments said in a note to clients that a Labour government was unlikely to fundamentally alter the direction of the British equity market where valuations are depressed compared with Wall Street.
But New Financial’s Mr. Wright cautioned that Labour may be more radical in government than it has been in opposition, a view echoed by Samuel Gregg of the American Institute for Economic Research.
“The city should recognize Labour is a more left-leaning outfit these days than it was in Tony Blair’s heyday,” said Mr. Gregg, speaking of the New Labour stronghold of the early 2000s.
“That cannot help but make life more uncertain for the city under a Labour government with a huge majority.”