HSBC opts to retain head office in London

Britain’s biggest bank, HSBC, has confirmed it will remain headquartered in London.

Gresham’s Mark Johnson: HSBC’s decision is ‘probably the rational thing to do’

A collective sigh of relief will have been felt throughout the City of London and the British government as the country’s biggest bank, HSBC, confirmed it would remain headquartered in London.

It was the right decision to make, says Mark Johnson, former Macquarie Group deputy chairman and senior adviser at Gresham investment house.

“Staying where they are is probably the rational thing to do,” Mr Johnson said.

“They probably thought that the atmosphere in the UK has ­become a little more benign.”

The bank’s review was launched in April last year, with Hong Kong seen as the obvious alternative destination for the bank’s headquarters had it chosen to leave the City. But recent developments in Hong Kong are likely to have troubled the board.

Mr Johnson, who is chairman of the government’s Australian Financial Centre Task Force, said for a bank the size of HSBC, ­depositors, customers and regulators would have been concerned with Hong Kong’s ability to stand up in a crisis without it being overtly guaranteed by China.

“That overt guarantee is not in place because Hong Kong has a status of ‘one country, two systems’ and I think the slightly unsettled events in Hong Kong, the political events around those publishers and that kind of thing, has meant that concern has come a little more into the foreground.”

As the bank deals with pressures such as increasing operating costs amid a more stringent ­regulatory environment and recent volatility in financial markets, the distraction of shifting domicile seems unjustified.

“Business is really tough for those big global banks at the moment. They’re being challenged from all over with regulatory costs, which are not necessarily harmonised across markets.

“They’ve got problems of low growth, or negative growth in Brazil, for example, and a lot of the Asian economies are experiencing slow growth.

“So they’ve got all those issues to deal with, let alone the distrust of banks generally that has come out in the past 10 days or so. From that point of view, if I were a shareholder, I would think it’s a good thing (that they will stay in Britain),” Mr Johnson said.

The bank’s review was launched as it battled misconduct investigations and bore the brunt of the financial pain brought by a banking levy that targets UK-based banks’ global balance sheets. The levy cost HSBC £700 million ($1.42bn) in 2014, more than any other bank.

Three months after HSBC launched its review, Britain’s chancellor, George Osborne, said he would gradually cut the bank levy in half, in a move seen by many as an attempt to persuade HSBC to remain domiciled in the country. To offset the reduced levy, Mr Osborne announced an 8 per cent tax on annual banking profits, in addition to the corporate tax lenders already face.

The change sees British-­focused banks harder hit, while those with large international ­operations, such as HSBC, end up paying less of the load.

Mr Osborne also ousted the chief executive of the Financial Conduct Authority, Martin Wheatley, over the increasing fines being issued to banks.

The authority issued a record £1.5bn in fines in 2014, but the government has made it clear it wants to move on from punishing lenders with savage fines. Indeed, the value of fines imposed in 2015 was 40 per cent lower than in 2014, with a marked decrease in the ­second half of the year, following Mr Wheatley’s departure. Greg ­Medcraft, head of the Australian Securities & Investments Commission, was in the running for the FCA job, but missed out as Mr ­Osborne last month chose ­Andrew Bailey, deputy governor of the Bank of England.

The prospect of Britain leaving the European Union, is one factor that brings uncertainty to HSBC and others in the financial sector in the country. If Britain stays in the EU, they’ll know what the rules are. But if it left, it was likely there would be new measures in Europe for regulating financial institutions, Mr Johnson said.

“London is clearly a great ­financial centre and there is no competitor to it in Europe. If ­Britain leaves the EU, you would expect the French and Germans ... to promote Paris and Frankfurt as alternatives,” he said.