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.
Click to subscribe to The Ian King Business Podcast wherever you get your podcasts
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.
The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.
A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).
Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.
It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.
A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.
This was borne out by other figures released by the ONS on Friday.
Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.
Overall, there was a “large rise in goods imports and a fall in goods exports”.
A ‘disappointing’ but mixed picture
It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.
“I am determined to kickstart economic growth and deliver on that promise”, she added.
But the picture was not all bad.
Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.
It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.
Read more:
Trump plans to hit Canada with 35% tariff – warning of blanket hike for other countries
Woman and three teenagers arrested over M&S, Co-op and Harrods cyber attacks
The expansion in March means the economy still grew when the three months are looked at together.
While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.
Such a cut would bring down the rate to 4% and make borrowing cheaper.
Please use Chrome browser for a more accessible video player
Is Britain going bankrupt?
Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.
“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.
Why did the economy shrink?
The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.
The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.
It made up for a “very weak” month for retailers, the ONS said.
Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.
However, the picture emerging a year since the election of the Labour government is not hugely comforting.
This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.
Output shrank in May by 0.1%. That followed a 0.3% drop in April.
Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.
Hangover from artificial growth
However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.
Read more:
Trump to hit Canada with 35% tariff
Woman and three teens arrested over cyber attacks
In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.
Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.
Signs of recovery
Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.
“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.
Meanwhile, the services sector eked out growth of 0.1%.
A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.
Struggles ahead
It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.
The economy remains fragile, and there are risks and traps lurking around the corner.
Please use Chrome browser for a more accessible video player
Is Britain going bankrupt?
Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.
Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.
-
Sports3 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports1 year agoStory injured on diving stop, exits Red Sox game
-
Sports2 years agoGame 1 of WS least-watched in recorded history
-
Sports2 years agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Sports4 years ago
Team Europe easily wins 4th straight Laver Cup
-
Sports2 years agoButton battles heat exhaustion in NASCAR debut
-
Environment2 years agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Environment2 years agoGame-changing Lectric XPedition launched as affordable electric cargo bike