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.
Donald Trump has threatened to impose a 50% tariff on the EU, starting from next month, after saying that trade talks with Brussels were “going nowhere”.
Mr Trump made the comments on his Truth Social platform.
It marks a fresh escalation in his trade row with the European Union, which he has previously accused of being created to rip off the US.
While the US has done deals with the UK and China to reduce their peak exposure to his trade war, the president’s EU threat, which would cover all EU imports to the US, would risk retaliatory measures from Brussels if carried through.
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Mr Trump said of talks between his administration and the EU: “Our discussions with them are going nowhere! “Therefore, I am recommending a straight 50% tariff on the European Union, starting on June 1, 2025. There is no tariff if the product is built or manufactured in the United States.”
The European Commission was yet to respond to the remarks. Officials signalled there would be no comment until after a call between top US-EU trade figures due later on Friday.
Financial markets, however, were quick to take a view. European stock markets were sharply down across the board.
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The FTSE 100 in London was more than 1.2% lower shortly after the Truth Social post appeared, while Germany’s DAX and the French CAC 40 were in the red to the tune of more than 2%.
US stock markets fell at the open on Wall Street. The tech-focused Nasdaq was down more than 1%.
The potential for damage to the global economy saw Brent crude oil sink by more than 1% to $63 a barrel.
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‘US is losing’ trade war
The dollar took a hit too, as the news only intensified existing market worries this week about the sustainability of US government debt levels.
The pound was trading at levels last seen in February 2022.
Mr Trump said earlier that Apple will be forced to pay 25% tariffs on its iPhones unless it moves all its manufacturing to the US.
Apple shares dropped more than 2% in premarket trading after the warning, also posted on Truth Social.
“I have long ago informed Tim Cook of Apple that I expect their iPhones that will be sold in the United States of America will be manufactured and built in the United States, not India, or any place else,” wrote the president.
“If that is not the case, a tariff of at least 25% must be paid by Apple to the US.”
Production of Apple’s flagship phone happens primarily in China and India, which has been an issue brought up repeatedly by Mr Trump.
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On Thursday, the Financial Times reported Apple was planning to expand its India supply chain through a key contractor.
Taiwanese company Foxconn is planning to build a new factory in the Indian state of Tamil Nadu, according to the paper, to help supply Apple.
Sky News has contacted Apple for comment.
Business
Trump’s latest phone negotiation tactic on tariffs likely to heighten EU retaliation threat
President Trump’s Friday flurry of pronouncements marks the return of negotiation by smartphone and may trigger another period of profound uncertainty for international trade and financial markets.
The threat of 50% tariffs against the European Union, issued hours before his trade representative met their European counterparts, is a show of presidential muscle surely designed to strongarm those on the other side of the table.
It is an escalation likely to heighten the threat of retaliation from Europe, and with a few keystrokes ends the brief period of calm that had returned to global trade and markets in recent days.
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A red hat in Washington DC to support President Trump. Pic: AP
Talks in Switzerland between US and Chinese delegations a fortnight ago took the sting out of Sino-American hostility, negotiating three-figure tariffs that amounted to a mutual trade embargo down to manageable levels.
Financial markets had regained most of the losses sparked on ‘Liberation Day’ in April, when Donald Trump declared total trade war, and there was optimism that for all his bluster, there might be meaningful room for constructive compromise.
The UK even secured a deal of sorts, securing a reduction in auto tariffs in exchange for a reciprocal opening of agricultural markets.
There will be no such deal for the EU in a hurry. A 50% tariff on all exports to the US is not only higher than the original threatened blanket tariff of 20% and double Mr Trump’s proposed 25% on European cars, it’s higher even than China.
European stocks predictably ended the week in decline, with car manufacturers including BMW, Volkswagen and Stellantis all down.
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It remains to be seen whether this threat will stick.
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Mr Trump has repeatedly blinked first in the trade war he started, backing down on global reciprocal tariffs when bond markets rebelled before caving in Geneva to reach an accommodation with China.
His grievances with Europe appear to have an extra edge however, and the consequences of the uncertainty he’s sparked will be far-reaching.
If this was the only thing he had announced on ‘Liberation Day’ it would still have been huge.
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