City celebrates unexpected Tory win, frets over EU referendum

As the surprise exit poll results came in shortly after 10pm on Thursday night, the mood in the Cavalry and Guards Club on Piccadilly turned from funereal to one of incredulous celebration.

Earlier in the evening, diners at the Mayfair gentlemen’s club had wallowed in gallows humour as they declared that the election result could mark a fin d’epoque for the wealthy in London.

They picked the finest bottles of wine from the club’s extensive cellar as they joked that this could be the last time they dined together, before higher taxes and a hostile Labour government led by Ed Miliband forced them to disperse abroad.

This stiff upper lip turned to genuine joy as it transpired that the fortunes of the Conservative party had exceeded both the opinion polls and the party’s wildest dreams.

“This could turn into the biggest celebration ever,” said one Tory supporter, who hailed the “shy Tories” who had come out of the woodwork to vote. “We can cancel the removal vans. Non-doms watching the exit polls are unpacking their bags,” said his friend.

The decisiveness of the result pleased the City. Hedge funds in particular had feared a Labour government that had promised higher income tax, a tax on expensive homes and the abolition of non-dom tax status, which allows holders to avoid UK tax on worldwide earnings held abroad.

Manny Roman, CEO of Man Group, the UK’s largest hedge fund, said the “clear outcome” was positive for the UK economy and hailed expectations of a “more business-friendly environment”.

However, the delight at the Conservative victory was tempered by a realisation that a referendum on British membership of the European Union is looming. For the City of London, Britain’s relationship with Europe is now at the top of the political agenda and banks are already fretting about the resulting uncertainty.

Mark Boleat, chairman of the policy and resources committee of the City of London, noted that Europe had not featured in the election debate. “The big issue for the City now is the European position,” he said. “A referendum is certain. The wish of business is let’s get on with it, ideally fairly quickly.”

Mr Boleat said “there is still a lot of hard work to be done” by the City to put forward the case for EU membership. “At the very least, EU membership is not damaging,” he added. “In some sectors, such as car manufacturing and financial services, it’s really important. None of the alternatives to EU membership look particularly palatable.”

The Tory party’s promise of an EU referendum was already discouraging banks from investing in the UK, said Anthony Browne, chief executive of the British Bankers’ Association. “Some members have told me that their investment decisions have been affected by the referendum question. Businesses don’t like that kind of uncertainty.”

However, with Labour’s threat to break up UK retail banks and tax bankers’ bonuses lifted, investors in that sector breathed an immediate sigh of relief, with shares in Lloyds Banking Group and Royal Bank of Scotland surging 5.75 per cent and 6 per cent respectively on Friday.

A Conservative government would provide a degree of continuity, bank analysts said, while avoiding some of the onerous tax proposals and restructuring plans mooted by other parties.

I think it is important that the government thinks about the competitiveness of the banking industry,” said the BBA’s Mr Browne. “I know a lot of banks that have moved operations out of London already and made decisions not to invest here because of the bank levy.”

He gave the example of smaller banks opting not to expand their UK operations to avoid crossing the threshold of having at least £20bn of liabilities above which they would be subject to the bank levy.

Chris Cummings, chief executive of lobby group TheCityUK, called for regulation of the financial sector to be loosened following the Conservatives’ outright win.

“Part of the competitive agenda has got to be about deregulation,” he said. “In financial services, there’s a recognition that the regulatory pendulum has swung too far one way and it is time for it to come back to the centre.”

With bank bashing a part of the election campaign on all sides, financiers urged Mr Cameron to end the aggressive rhetoric in the wake of his victory. Veteran investment banker Ken Costa said: “The key deliverables for the government are: a robust defence of our banking system with a red line commitment to stop the electorally popular bank bashing [and] a red line determination to ensure that the City of London is not weakened as it now is by excessive regulation and political interference. The drift to New York and other capital markets has gone far enough.”

The outright Conservative win paves the way for the government to accelerate the sale of its remaining 21 per cent stake in Lloyds and begin offloading its 80 per cent holding in RBS.

George Osborne, the chancellor, had said before the election that an RBS disposal was “certainly something I would want to get moving on in the summer”.

A senior figure at RBS said the government could launch a share sale in the fourth quarter, after the bank completed a settlement with US regulators for manipulating foreign exchange markets and mis-selling subprime mortgage securities.

“Osborne has long seen us as a running sore and wants rid of us — the feeling is mutual in many ways,” said the person.

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