Competition in the Service Sector

UK Experience – How the UK's financial services sector became successful

Sir David WrightVice Chairman, Barclays Capital

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Competition in the Service Sector: UK Experience

Underlying Principles

Freedom for innovation

Flexibility

Light touch regulation

Welcome to foreigners

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Competition in the Service Sector: UK ExperienceHistory: London's growth reflects long business history

Barclays: Founded in April 1690 by John Freame

Partnership in 1733 with James Barclay Family banks run by Puritan – Non conformist Entrepreneurs, interconnected

by marriage Boosted by financial needs of Industrial Revolution customers originally

wealthy individuals By 1840: taking deposits and lending to shopkeepers and businesses

Barclay and Co set up as Joint Stock Bank in 1896, controlling 1/4 of deposits in English market

By 1939, 1/5 (2500) of all bank branches in England

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Competition in the Service Sector: UK Experience: London EmergesLondon Market 1815 – 1914 London as top-dog, attracting talented foreign financials eg

Rothschilds 1914 – 1960 Two World Wars and US Dominance 1960 – 1987 London's rebirth largely because growth of Euromarkets,

US$ dominated offshore Dealings Driven out of US by restrictive controls in New York

—Short-term Eurodollar money market

—Long-term Eurobond capital market

Both attracted to London by light regulatory touch of Bank of England International Euromarket focused City UK-oriented City focused on domestic securities market

But 1987 changes all that

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Competition in the Service Sector: UK Experience: Why a Big Bang? National mood: middle of Thatcherism – privatisation, trade

union reform, pressures for change. No hiding places e.g. women allowed on London trading floors

Pressures for wider share ownership from privatisation: resentment of old, closed world of stock market. Office of Fair Trading challenge to restructure practices in 1984

Attraction of electronic trading methods: existed in international eurodollar market

End of discount house monopoly on issuing government securities

Law of unforeseen consequences: Big Bang unleashed forces in unexpected areas

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Competition in the Service Sector: UK Experience: Big Bang The crucial change, 27 October 1986 Reforms included:

— Reform of stock market to combine functions of stockbrokers and stock jobbers

— Introduction of the Stock Exchange Automated Quotation system replacing the trading floor with a screen based quotation system

— Abolition of restrictions on ownership of UK stockbrokers Focus on stock market, but effects more wide-ranging Rationalisation of ownerships of financial services companies both

through merger, integration and absorption by others Especially, banks become owners of securities companies London's international and domestic markets merged into one

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UK Financial History (1945 – 2003)

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Competition in the Service Sector: UK Experience

Underlying Principles – Visible in History

Freedom for innovation

Flexibility

Light touch regulation

Welcome to foreigners

: Big Bang

: Merger of banks and Securities companies

: Attracts Eurodollar market

: Takeover by US and foreign companies

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Competition in the Service Sector: UK Experience: Main AdvantagesHistoric History of business openness

since 17th Century coffee ships Strong trading culture since

18th Century English language Quality of life Flexible immigration Central position between US

and Asian time zones Tradition of innovation All companies treated as UK

companies No criticism of foreign capital

Actual Critical mass of firms in one

location Availability of multi-national

labour Availability of linguistic skills,

300+ languages spoken Flexible residence

authorisation for non-citizens Support services global

leaders: accountancy, legal and actuarial skills, IT, innovative marketing

Beneficial tax regime, personal and corporate

Logistic and transport centreRegulation: Principles based not Rules based

Current debate over London/New York and SarBOx

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Competition in the Service Sector: UK Experience: Timing Post 1987 Big Bang, global economic circumstances ideal for growth International bond market boomed International banking grew Derivatives origination and trading expanded Professional services (legal and accountancy) grew though

corporate finance and securities issuance Equities boomed 1995 – 2000 Foreign exchange trading expanded Corporate finance activity expanded through global M&A activity Euro trading furnished a new market

All developments on which London was able to capitalise

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Competition in the Service Sector: UK ExperienceSurvey 2 – 3 years ago of London Services London is world leader with:-

— 20% global cross-border bank lending— 32% global market for foreign exchange— 43% global OTC derivatives— 80% European Hedge Fund assets— 33% Global FX trading— 2nd largest centre for exchange traded derivatives— 60% issuance of euro-denominated eurobonds— 70% secondary trading in international bonds— 65% global foreign equity turnover— 90% of euro denominated short-term interest rate controls— 95% global base metals traded by LME

Euro: in effect London is "in" EMU

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Competition in the Service Sector: UK ExperienceBreadth and Depth: 8.5% UK GDP in Financial Services Associated professional services as additional 3.6% GDP Banking industry: 383 authorised banks (255 foreign)

Assets – £6.2 trillion (1/2 held by foreign banks) Investment banking: Fee income $53 billion (2005)

51% from US; 31% from Europe; 18% from Asia1/2 European investment banking conducted through

London Insurance: UK insurance industry No 3 in world, largest in

EuropeUK largest source of insurance funds and pensions in

Europe Employment: 1 million employed in financial services

240,000 in City and 78,000 in Canary Wharf Business and Professional Services: London Base for largest law firms in Europe

2,900 Accountancy firms in LondonBig 4 have major London presenceLondon is home to 5 top advertising agenciesPlus Management Consultancy, Market Research, Computer Services, Equipment Renting

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Competition in the Service Sector: UK Experience

Underlying Principles

Freedom for innovation

Flexibility

Light touch regulation

Welcome to foreigners

: Derivatives origination

: Growth of Hedge Funds

: Principles not rules based

: 225 foreign banks

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Competition in the Service Sector: UK Experience

Citi refocuses on London as core for its global businessThe bank, which had previously based product heads in the US, is moving senior personnel to London

"While previously none of the heads and co-heads of the business were based outside the US, we now have six out of 13 product heads based in London"

"This is a reflection of the fact that we think there are major opportunities in Europe and it is easier to run a global business from London with the time zone advantage"

"There have been a lot of things written about the emergence of London as a financial centre and I guess this is another good example of the trend"

February 2007

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Global Retail & Commercial Banking

Barclays Capital overviewBarclays Group profile Barclays is an international financial services group engaged primarily in banking, investment banking and asset management One of the most established financial services companies

— Barclays has been involved in banking for over 300 years1 and operates in over 60 countries with over 123,000 employees

One of the highest credit rated financial services companies— Barclays is highly capitalised with a balance sheet of over £996 billion2 and ratings of AA from Standard & Poor’s, Aa1 from Moody’s and AA+ from

Fitch

Profit (pre tax) – underpins healthy business performance— Full year 2006 £7.136 billion

— Full year 2005 £5.280 billion

— Full year 2004 £4.603 billion

— Full year 2003 £3.845 billion

— Full year 2002 £3.205 billion

— Full year 2001 £3.425 billion

— Full year 2000 £3.392 billion

Notes: 1 Original banking business established 1690. 2 February 2007.

SL003

Investment Banking & Investment Management

BarclaysCapital

BarclaysGlobal

Investors

Barclays Wealth

Barclaycard

International Retail

& Commerci

al Banking

UK Banking

Barclays PLC

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Competition in the Service Sector: UK ExperienceConclusions: Four underlying principles provide basic causes of success Additionally

— Timing

— Ownership

— Political non-interference

— Ripple effects: jobs, business creation

— Trading tradition

— Living environment

— Logistics/transport centre Non-financial causes as important as financial