Legal Village

London must not rest on its laurels

Posted 13/02/2007 by Sunil Gadhia

From a London perspective, the McKinsey report published recently and commissioned last month by New York mayor Michael Bloomberg and senator Charles Schumer makes for very encouraging reading.

New York, it says, is in danger of losing its position of the world's leading financial centre permanently as its world market share in initial public offerings, hedge fund management, derivatives and debt finance declines.

The main beneficiary of this trend has been London - and while the extent of  London's gain may have been overstated to an extent by Bloomberg and Schumer's desire to galvanise national legislators into action it is clear that London presently finds itself in a very healthy position.

While much of the public comment on New York's woes – including press reporting in this country – has focused on the effects of the Sarbanes-Oxley Act, what the McKinsey report highlights is the role that our legal and regulatory systems have played in attracting premium financial services transactions to London.

The heavy-handed rules-based approach of the Securities & Exchange Commission and the perceived litigation risk Stateside is proving to be a serious disincentive for companies to do business in the US. By contrast, the McKinsey report describes the UK’s legal system as “predictable and affordable” and its principles-based regulator, the Financial Services Authority, as “user-friendly”.

For UK lawyers, these developments are very welcome but, in the rush to make the UK's legal and regulatory environment as business-friendly as possible, a careful balance must be struck. Yes, a legal system needs to be efficient, predictable and non-punitive. But it also needs to be effective at holding people and institutions to account when things go wrong.

In the UK, at present, this is not always the case, as the examples of some recent large-scale collapses demonstrate. Creating the optimum regulatory and legal system is not a race to the bottom – having a robust and efficient system is, in the long run, more attractive to international investors than the barest minimum standards.

And whilst McKinsey might conclude that our legal system is affordable, many disagree. On a business trip to India recently I heard far too frequently that litigating and arbitrating in London is prohibitively expensive and, instead, Singapore is preferred by many.

We should all celebrate the fact that London is doing so well as a financial centre at the moment. But if it is to stay this way, then we need to concentrate on where we can improve as well as where we are getting it right.