Edinburgh Reforms likely marginal in impact, neither majorly boosting competitiveness or watering-down rules
Depending on your point of view, Jeremy Hunt’s proposed reform of financial regulations represents a potentially significant boost to the competitiveness of the UK’s financial services sector or a potentially dangerous watering-down of rules put in place to prevent a re-run of the financial crisis.
The truth, as ever, is that it is probably somewhere in between.
The first thing to say is that it is absolutely vital for the sector to remain competitive. Financial services is something the UK does well – it is one of the country’s great strengths.
As the Treasury pointed out this morning, it employs some 2.3 million people – the majority outside London – and the sector generates 13% of the UK’s overall tax revenues, enough to pay for the police service and all of the country’s state schools.
And there is little disputing that the UK’s competitive edge has been blunted during the last decade.
Part of that, though, is not due to post-crisis regulations but because of Brexit. Some activities that were once carried out in the Square Mile, Canary Wharf and elsewhere in the UK are now carried out in other parts of continental Europe instead.
That has hurt the City. Amsterdam, for example, has overtaken London as Europe’s biggest centre in terms of volumes of shares traded.
The move away from EU regulations
The government takes the view, though, that Brexit has provided an opportunity to make the UK’s financial services sector more competitive, in that the UK can now move away from some EU regulations.
A good example here is the EU-wide cap on banker bonuses – something that numerous City chieftains say has blunted the UK’s ability to attract international talent from competing locations such as New York, Singapore and Tokyo.
Amsterdam, the Netherlands
The big US investment banks that dominate the City, such as JP Morgan, Goldman Sachs, Bank of America, Citi and Morgan Stanley, have on occasion struggled to relocate some of their better-paid people to London because of the cap. So, although it may look politically risky to do so during a cost of living crisis, it is a sensible move that is highly likely to generate more taxes for the Treasury.
Similarly uncontentious is a planned relaxation of the so-called ‘Solvency II’ rules, another EU-wide set of regulations, which determine how much capital insurance companies must keep on their balance sheets. The insurance industry has long argued that this forces companies to keep a lot of capital tied up unproductively.
Relaxing the rules will enable the industry to put billions of pounds worth of capital to more productive use, for example, in green infrastructure projects or social housing. Few people dispute this is anything other than a good idea.
Another reform likely to be universally welcomed by the industry is the sweeping away of the so-called PRIIPS (packaged retail and insurance-based investment products) rules. Investment companies have long argued that these inhibit the ability of fund managers and life companies to communicate effectively with their customers and even restrict customer choice.
Mixed responses
The fund management industry is also likely to welcome a divergence away from EU rules on how VAT is applied to the services it provides. This could see lighter taxation of asset management services in the UK than in the EU and would certainly make the sector more competitive.
There will also be widespread interest in a proposed consultation over whether the Financial Conduct Authority should be given regulatory oversight of bringing environmental, social and governance ratings providers. This is an area of investment of growing importance and yet the way ESG funds are rated is, at present, pretty incoherent.
Bringing the activity into the FCA’s purview could, potentially, give the UK leadership in a very important and increasingly lucrative activity.
So far, so good.
More contentious are plans to water down ‘ring fencing’ regulations put in place after the financial crisis.
These required banks with retail deposits of more than £25bn to ring fence them from their supposedly riskier investment banking operations – dubbed by the government of the day as so-called ‘casino banking’ operations.
The rules were seen at the time by many in the industry as being somewhat misguided on the basis that many of the UK lenders brought down by the financial crisis – HBOS, Northern Rock, Bradford & Bingley and Alliance & Leicester – had barely any investment banking operations.
Implementing them has been hugely expensive and lenders have argued that the rules risked “ossifying” the sector.
There is no doubt that, at the margins, they have also blunted consumer choice. Goldman Sachs, for example, famously had to close its highly successful savings business, Marcus, to new customers after it attracted deposits close to £25bn. So lifting the level at which retail deposits must be ring-fenced to £35billion will be welcomed in that quarter.
Challenger banks such as Santander UK, Virgin Money and TSB, all of which have little investment banking activities, are among those lenders seen as benefiting.
Protecting citizens from “banking Armageddon”
Yet the move will attract criticism from those who argue the rules were put in place for a reason and that watering them down will risk another crisis.
They include Sir Paul Tucker, former deputy governor of the Bank of England, who told the Financial Times earlier this year: “Ringfencing helps protect citizens from banking Armageddon.”
It is also worth noting that watering down the ring fencing rules does not appear something that the banks themselves has been calling for particularly strongly. It is not, after all, as if they will be able to recoup the considerable sums they have already spent putting ringfences in place.
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Equally contentious are proposals to give regulators such as the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority (PRA) a secondary objective of ensuring the UK’s financial services sector remains competitive alongside their primary objective of maintaining financial stability.
Sir John Vickers, who chaired the independent commission on banking that was set up after the financial crisis, wrote in the FT this week that the objective was either “pointless or dangerous”.
Senior industry figures have also raised an eyebrow over the move. Sir Howard Davies, chairman of NatWest, said earlier this year that he was “not keen” on the idea.
Pushback
More broadly, there may also be some scepticism over anything that sees the UK’s financial regulation move away from that of the EU.
The City was largely opposed to Brexit and, after it happened, the one thing it wanted more than anything else was a retention of the so-called ‘passport’ – enabling firms based in the UK to do business in the rest of the EU without having to go to financial regulators in each individual member state.
That was not delivered and has created in a great deal more bureaucracy for City firms as well as causing the relocation of some jobs from the UK to continental Europe.
The next best thing for the City would be so-called ‘equivalence’ – which would mean the EU and the UK’s financial regulations being broadly equivalent to the other side’s. The EU already has an existing arrangement with many other countries, such as the United States and Canada, and such a set-up with the UK would make it much easier for firms based here to do business in the bloc.
But critics of Mr Hunt‘s reforms argue that further movement away from the EU’s rules, as the chancellor envisages, would make it harder to secure the prize of an equivalence agreement.
Mr Hunt is almost certainly over-egging things when he likens these reforms to the ‘Big Bang’ changes made by Margaret Thatcher‘s government in 1986.
Big Bang was a genuine revolution in financial services that exposed the City to a blast of competition that, in short order, made the UK a global powerhouse in finance and which generated billions of pounds worth of wealth for the country.
The Edinburgh Reforms are likely to be far more marginal in their impact.
However, for those working in or running the financial services sector, the sentiment behind them will be welcomed.
Despite its importance in supporting millions of well-paid jobs, the sector has been more or less ignored by Conservative and Labour governments ever since the financial crisis.
Households on the energy price cap will see a 7% reduction in their average annual payments from 1 July, the industry regulator has announced while urging households to seek out the “better deals out there”.
The default cap – which is reviewed every three months – will see a typical household using gas and electricity and paying by Direct Debit stump up an average annual £1,720, Ofgem said.
That is down from the current April-June figure of £1,849 and reflects a reduction in wholesale gas prices.
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The lower cap, however, will be £152 higher than the same three-month period last year.
It does not affect the millions of households to have taken a time-limited fixed deal.
Nevertheless, it represents some relief for families grappling with the cost of living aftershock that saw many essential bills rise by well above the rate of inflation last month.
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Cost of living impacts families
Ofgem also confirmed further bill savings through a £19 average cut, from July, in standing charges for households paying by both direct debit and prepayment, following an operating cost and debt allowances review.
The price cap does not limit total bills because householders still pay for the amount of energy they consume.
The watchdog’s announcements were made just days after fresh forecasts suggested that bills linked to the cap could come down further from both October and January, given recent wholesale market price trends.
Industry data specialist Cornwall Insight estimated on Friday that the price cap was currently on course to rise only slightly in October – by less than £1 a month.
Wholesale gas costs last winter had been relatively stable until a cold snap hit much of Europe in January and early February, driving up demand at a time of weaker stocks.
Other risk factors ahead include extended EU gas storage rules and global conflicts, not least the continuing Russia-Ukraine war that sparked the 2022 energy price spike and cost of living crisis in the first place.
Tim Jarvis, director general of markets at Ofgem, said: “A fall in the price cap will be welcome news for consumers, and reflects a reduction in the international price of wholesale gas. However, we’re acutely aware that prices remain high, and some continue to struggle with the cost of energy.
“The first thing I want to remind people is that you don’t have to pay the price cap – there are better deals out there, so it’s important to shop around, and talk to your existing supplier about the best deal they can offer you. And changing your payment method to direct debit or smart pay as you go can save you up to £136.”
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Ofgem said that a minority of homes, 35%, were on a fixed rate deal.
Price comparison sites lined up after the price cap announcement to urge households still on the default tariff to investigate a switch.
Tom Lyon, director at Compare the Market said: “If anyone is worried about potentially higher energy bills later this year, they could consider locking in a fixed rate deal now.
“Fixed rate deals also protect you from price hikes if the oil and gas markets are volatile. Beyond your energy bills, it’s important to search and compare other household bills, such as your car insurance, credit cards, or broadband, to see if you can make savings.”
A £500m deal to end the two-year ownership impasse at the Daily Telegraph has been agreed “in principle”, it has been announced.
A consortium led by US firm Redbird Capital was set to take control of Telegraph Media Group (TMG), with state-backed Abu Dhabi investment vehicle IMI among the investors.
The pair’s original joint venture, known as RedBird IMI, had originally agreed to buy the Telegraph titles in 2023.
But prospects for a deal were held up by the previous Conservative government’s subsequent ban on foreign state ownership of UK newspapers.
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The row centred on the involvement of IMI’s owner Sheikh Mansour bin Zayed Al Nahyan, who is the owner of Manchester City FC but also the vice president of the United Arab Emirates.
The ban was based on fears around editorial independence.
However, the rules were relaxed earlier this month by the current government, which said a foreign state-controlled holding of up to 15% was acceptable.
It is understood that UK-based media investors are among the proposed owners within the consortium.
Sky News reported on Monday that the Daily Mail’s owner had been in talks over involvement.
Daily Mail owner Lord Rothermere
The Telegraph newspaper itself reported that regulatory hurdles remained – a factor that could yet scupper completion of the deal.
Anna Jones, TMG chief executive, said: “Telegraph Media Group is an award-winning news media organisation, with exceptional journalism at its heart, supported by leading commercial expertise, a commitment to innovation and a laser focus on data to drive strategy.
“RedBird Capital Partners have exciting growth plans that build on our success – and will unlock our full potential across the breadth of our business.”
RedBird, whose other UK interests include a 10% stake in the US group behind Liverpool FC, said its growth strategy would include “capital investment in digital operations, subscriptions and journalism”.
Its statement continued: “RedBird will build on the strong financial foundations established by the current management team and will work with them to grow the brand internationally, with a focus on the United States where RedBird has a strong strategic presence across news, media and sports.
“Together, RedBird and TMG senior leadership will work to develop new content verticals in areas such as travel and events to maximise the commercial opportunities from a growing international and mass affluent subscriber base.”
Redbird founder Gerry Cardinale added: “This transaction marks the start of a new era for The Telegraph as we look to grow the brand in the UK and internationally, invest in its technology and expand its subscriber base.
“We believe that the UK is a great place to invest, and this acquisition is an important part of RedBird’s growing portfolio of media and entertainment companies in the UK.”
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