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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.

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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.

A woman crosses a canal in Amsterdam, the Netherlands on Saturday, Dec. 18, 2021.  Dutch government ministers are meeting Saturday to discuss advice from a panel of experts who are reportedly are advising a toughening of the partial lockdown that is already in place to combat COVID-19. (AP Photo/Peter Dejong)
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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.

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Rachel Reeves is celebrating the Bank of England’s interest cut – but behind the scenes she has little to cheer

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Rachel Reeves is celebrating the Bank of England's interest cut – but behind the scenes she has little to cheer

The economy is stagnating and job losses are mounting. Now is the time to cut interest rates again.

That was the view of the Bank of England’s nine-member rate setting committee on Thursday.

Well, at least five of them.

The other four presented us with a different view: Inflation is above target and climbing – this is no time to cut interest rates.

Who is right? All of them and none of them.

Central bankers have been backed into a corner by the current economic climate and navigating a path out is challenging.

The difficulty in charting that route was on display as the Bank struggled to decide on the best course of monetary policy.

The committee had to take it to a re-vote for the first time in the Bank’s history.

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Bank of England is ‘a bit muddled’

On one side, central bankers – including Andrew Bailey – were swayed by the data on the economy. Growth is “subdued”, they said, and job losses are mounting.

This should weigh on wage increases, which are already moderating, and in turn inflation.

One member, Alan Taylor, was so worried about the economy he initially suggested a larger half a percentage point cut.

On the other side, their colleagues were alarmed by inflation.

The Bank upgraded its inflation forecasts, with the headline index expected to hit 4% in September.

In a blow to the chancellor, the September figure is used to uprate a number of benefits and pensions. The Bank lifted it from a previous forecast of 3.75%.

In explaining the increase, the Bank blamed higher utility bills and food prices.

Food price inflation could hit 5.5% this year, an increase driven by poor harvests, some expensive packaging regulations as well as higher employment costs arising from the Autumn Budget.

Rachel Reeves on Thursday. Pic: PA
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Rachel Reeves on Thursday. Pic: PA

When pressed by Sky News on the main contributor to that increase – poor harvests or government policy – the governor said: “It’s about 50-50.”

The Bank doesn’t like to get political but nothing about this is flattering for the chancellor.

The Bank said food retailers, including supermarkets, were passing on higher national insurance and living wage costs – the ones announced in the Autumn Budget – to customers.

Economists at the Bank pointed out that food retailers employ a large proportion of low wage workers and are more vulnerable to the lowering of the national insurance threshold because they have a larger proportion of part-time workers.

The danger doesn’t end there.

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Of all the types of inflation, food price inflation is among the most dangerous.

Households spend 11% of their disposable income, meaning higher food price inflation can play an outsized role in our perception of how high overall inflation in the economy is.

When that happens, workers are more likely to push for pay rises, a dangerous loop that can lead to higher inflation.

So while the chancellor is publicly celebrating the Bank’s fifth interest rate cut in a year, behind the scenes she will have very little to cheer.

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Bank of England issues inflation warning but cuts interest rate to 4%

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Bank of England issues inflation warning but cuts interest rate to 4%

The Bank of England has cut the interest rate for the fifth time in a year to 4% but warned that climbing food prices will cause inflation to jump higher in 2025.

In a tight decision that saw members of the rate-setting committee vote twice to break a deadlock, the Bank cut the rate to the lowest level in more than two-and-a-half years. Households on a variable mortgage of about £140,000 will save about £30 a month.

Andrew Bailey, governor of the Bank of England, said: “We’ve cut interest rates today, but it was a finely balanced decision. Interest rates are still on a downward path, but any future cuts will need to be made gradually and carefully.”

Money latest: What interest rate cut means for savers and borrowers

The Monetary Policy Committee (MPC), the nine-member panel that sets the base interest rate, voted in favour of lowering borrowing costs by 0.25 percentage points.

However, rate-setters failed to reach a unanimous decision, with four members of the committee voting to keep it on hold and another four voting for a 0.25 percentage point cut.

Alan Taylor, an external member of the committee, initially called for a larger 0.5 percentage point cut but after a second vote reduced that to 0.25% to break the deadlock. Had they failed to reach a decision, Mr Bailey, the governor, would have had the decisive vote.

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It is the first time the committee has gone to a second vote and highlights the difficulty policymakers face in navigating the current economic climate, in which economic growth is stagnating, with at least one rate-setter fearing a recession, but inflation remains persistent.

Although the central bank voted to cut borrowing costs, it also raised its inflation forecasts on the back of higher food prices.

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‘We’ve got to get the balance right on tax’

The bank predicted that the headline rate of inflation would hit 4% in September, up from a previous estimate of 3.75%.

The September inflation rate is used to uprate a range of benefits, including pensions.

The increase was driven by food, where the inflation rate could hit 5.5% this year. About a tenth of household spending is devoted to food shopping, which means it can have an outsized impact on inflation.

The Bank said this risked creating “second round effects”, whereby a sense of higher inflation forces people to push for pay rises, which could push inflation even higher.

Economists at the Bank blamed poor harvests, weather conditions, and changes to packaging regulations but also, in a blow to the chancellor, higher labour costs.

It pointed out that a higher proportion of workers in the food retail sector are paid the national living wage, which Rachel Reeves increased by 6.7% in April.

Economists at the Bank also blamed higher employment taxes announced in the autumn budget. “Furthermore, overall labour costs of supermarkets are likely to have been disproportionately affected by the lower threshold at which employers start paying NICs… these material increases in labour costs are likely to have pushed up food prices.”

There is also evidence that employers’ national insurance increases are causing businesses to curtail hiring, the Bank said. It comes as unemployment in the UK rose unexpectedly to a fresh four-year high of 4.7% in May. Separate data shows the number of employees on payroll has contracted for the fifth month in a row,

The Bank said the unemployment rate could hit 5% next year and warned of “subdued” economic growth, with one member – Alan Taylor – warning of an “increased risk of recession” in the coming years.

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Trump announces yet more tariffs and praises ‘significant step’ from Apple

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Trump announces yet more tariffs and praises 'significant step' from Apple

Donald Trump has announced 100% tariffs on computer chips and semiconductors made outside the US.

The move threatens to increase the cost of electronics made outside the US, which covers everything from TVs and video game consoles to kitchen appliances and cars.

The announcement came as Apple chief executive Tim Cook said his company would invest an extra $100bn (£74.9bn) in US manufacturing.

Soon, all smartwatch and iPhone glass around the world will be made in Kentucky, according to Mr Cook, speaking from the Oval Office.

“This is a significant step toward the ultimate goal of ensuring that iPhones sold in the United States of America are also made in America,” said Mr Trump.

“Today’s announcement is one of the largest commitments in what has become among the greatest investment booms in our nation’s history.”

Mr Cook also presented the president with a one-of-a-kind trophy made by Apple in the US.

Trump seen through the trophy given to him by Tim Cook. Pic: AP
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Trump seen through the trophy given to him by Tim Cook. Pic: AP

Trump’s tariffs hit India hard

Mr Trump has previously criticised Mr Cook and Apple after the company attempted to avoid his tariffs by shifting iPhone production from China to India.

The president said he had a “little problem” with Apple and said he’d told Mr Cook: “I don’t want you building in India.”

India itself felt Mr Trump’s wrath on Wednesday, as he issued an executive order hitting the country with an additional 25% tariff for its continued purchasing of Russian oil.

Indian imports into the US will face a 50% tariff from 27 August as a result of the move, as the president seeks to increase the pressure on Russia to end the war in Ukraine.

Mr Trump told reporters at the White House he “could” also hit China with more tariffs.

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‘Good chance’ Trump will meet Putin soon

Apple’s ‘olive branch’

Apple, meanwhile, plans to hire 20,000 people in the US to support its extra manufacturing in the country, which will total $600bn (around £449bn) worth of investment over four years.

The “vast majority” of those jobs will be focused on a new end-to-end US silicon production line, research and development, software development, and artificial intelligence, according to the company.

Apple’s investment in the US caused the company’s stock price to hike by nearly 6% in Wednesday’s midday trading.

The rise may reflect relief by investors that Mr Cook “is extending an olive branch” to Mr Trump, said Nancy Tengler, chief executive of money manager Laffer Tengler Investments, which owns Apple stock.

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