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London mayor warns of regulation risk

Boris Johnson has said that a recent survey of British business leaders underscores the threat posed to London’s financial services and fund industry should stricter regulations and higher taxes force more firms and executives out of the city.

London Mayor Boris Johnson, reacting to a new study examining the negative impacts of proposed EU regulations and increased UK taxes, said last week at a meeting of his International Business Advisory Council that the city’s position as a leading financial centre is at risk.

The study, produced for the mayor’s office by consultants Booz and Co., interviewed over 50 business leaders in London, many of whom expressed concern about the potential damage to London’s financial services industry by the European Commission’s proposed “Directive on Alternative Investment Fund Managers”. Other recent studies have claimed that stricter EU oversight would increase compliance costs by billions of dollars, cut off investor access to certain funds and force stringent disclosure requirements that would put European funds at a competitive disadvantage to US and Asian funds.

The study also said that recent regulatory reforms in the UK – including raising the tax rate on capital gains paid by private equity executives – and plans to raise top personal tax rates to 51 percent are reducing London’s competitiveness and causing more companies and individuals to leave the city. Dozens of hedge funds have already moved to Switzerland since the new tax was announced, while other managers may be looking to follow the lead of Terra Firma’s Guy Hands in escaping to jurisdictions like Guernsey and Jersey.

The report reinforces a message that Johnson has been highlighting over the past few months, including during a recent meeting in Brussels with Charlie McCreevy, the EU commissioner who authored the alternative investment fund directive which could be passed by the European Parliament next year. One of the key recommendations of the London study is for the setting up of a London Competitiveness Unit which would strengthen the mayor’s lobbying capabilities.

“The proposed national and international regulation that the city faces is a reaction to the financial services crisis but we must ensure that we don’t kill the goose that lays the golden egg,” Johnson said following the release of the report on Friday. “I will continue to set the benchmark globally as well as lobby whoever it takes to remove the obstacles that are putting London’s reputation at risk.”

Meanwhile, Johnson’s Conservative Party said earlier this month that if it takes power in next year’s elections as expected, it will implement a national insurance tax holiday for new start ups. While such promises may help with business leaders who have strongly criticised UK reforms such as increasing taxes on non-domiciled residents, a report last month in the Times of London said many UK-based private equity firms are concerned that the EU proposals will still face little resistance even from a Conservative Party government.