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.
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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.
Image: 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 SantanderUK, 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.
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 andLabourgovernments ever since the financial crisis.
Donald Trump has revealed a list of more nations set to face delayed ‘liberation day’ tariffs from 1 August.
He has threatened tariffs of 30% on Algeria, 25% on Brunei, 30% on Iraq, 30% on Libya, 25% on Moldova and 20% on the Philippines. Sri Lanka was later told it faced a 30% duty.
Letters setting out the planned rates – and warning against retaliation – are being sent to the leaders of each country.
They were the latest to be informed of the president‘s plans after Japan and South Korea were among the first 14 nations to be told of the rates they must pay on their general exports to the US from 1 August.
The duties are on top of sectoral tariffs, covering areas such as steel and cars, already in place.
Mr Trump further warned, on Tuesday, that a 50% tariff rate on all copper imports to the US was looming.
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He has also threatened a 200% rate on pharmaceuticals and is also expected to take aim at all imports of semiconductors too.
The European Union, America’s largest trading partner in combined trade, services and investment, is expected to get a letter within the next 48 hours unless further progress is made in continuing talks.
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Who will be positively impacted by the UK-US trade deal?
The bloc, which Mr Trump has previously claimed was created to “screw” the US, has been in negotiations with US officials for weeks and working to agree a UK-style truce by the end of the month.
The EU has retaliatory tariffs ready to deploy from 14 July but it is widely expected to delay them until such time that any heightened US duties are imposed.
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Trump to visit UK ‘in weeks’
It remains hopeful of a deal in the coming days but European Commission president Ursula von der Leyen told the European Parliament: “We stick to our principles, we defend our interests, we continue to work in good faith, and we get ready for all scenarios.”
While the UK’s so-called deal with Mr Trump is now in force, it remains unclear whether steelmakers will have to pay a 50% tariff rate, deployed by the US against the rest of the world, as some final details on an exemption are yet to be worked out.
The value of its shares has risen by 409,825% since its market debut in 1999.
Its status has been cemented thanks to the rush for AI technology – suffering several wobbles along the way – but nothing significant when you refer to the percentage rise of the past 26 years.
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The most recent pressures have come from the emergence of the low-cost chatbot DeepSeek and concerns for global AI demand as a result of Donald Trump’s trade war hitting growth.
Financial markets have been taking a more risk-on approach to the trade war since the delays to “liberation day” tariffs in April.
It’s explained by a market trend that’s become known as the TACO trade: Trump always chickens out.
Image: The milestone is reported by Sky’s US partner CNBC, seen on screens at the New York Stock Exchange. Pic: Reuters
It has helped US stock markets post new record highs in recent days.
The wave of optimism is down to the fact that the president is yet to follow through with the worst of his threatened tariffs on trading partners.
Corporations are also yet to report big hits to their earnings – a fact that is also propping up demand for shares.
If Mr Trump does go all-out in his trade war, as he has now threatened from 1 August, then that $4trn market value for Nvidia – and wider stock markets – could be short-lived, at least in the short term.
But market analysts believe Nvidia’s value has further to go.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said of its meteoric rise: “Once known for powering video games, NVIDIA has transformed into a foundational player in AI infrastructure.
“Its high-performance chips now drive everything from natural language processing to robotics, making them essential to training and deploying advanced AI models.
“Beyond hardware, its full-stack ecosystem – including software platforms and developer tools – helps companies scale AI quickly and efficiently. This end-to-end approach has positioned Nvidia as a cornerstone in a market where speed, scalability, and efficiency are critical.”
He added: “The key question is where it goes from here, and while it might seem strange for a company that’s just passed the $4trn mark, Nvidia still looks attractive.
“Growth is expected to slow, and it’s likely to lose some market share as competition and custom solutions ramp up. But trading at a relatively modest 32 times expected earnings, and over 50% top-line growth forecast this year, there’s still an attractive opportunity ahead.
“For investors, it remains a compelling way to gain exposure to the AI boom – not just as a participant, but as one of its architects.”
The future of the UK economy is weaker and more uncertain due to President Trump’s tariffs and conflict in the Middle East, the Bank of England has said.
“The outlook for UK growth over the coming year is a little weaker and more uncertain,” the central bank said in its biannual health check of the UK’s financial system.
Economic and financial risks have increased since the last report was published in November, as global unpredictability continued after the announcement of country-specific tariffs on 2 April, the Bank’s Financial Stability Report said.
These risks and uncertainty, as well as geopolitical tensions, like the wars in Ukraine and the Middle East, are “particularly relevant” to UK financial stability as an open economy with a large financial sector, it said.
Pressures on government borrowing costs are “still elevated” amid significant doubts over the global economic outlook.
Had a 90-day pause on tariffs not been announced, conditions could have worsened, the report added.
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The chance of prices rising overall has also grown as tensions between Iran and Israel and the US threaten to push up energy prices.
Possible higher inflation in turn raises the prospect of more expensive borrowing from higher interest rates to bring down those price rises. This compounds the pressure on state borrowing costs.
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Trump’s tariffs: What you need to know
Mortgages
Borrowing costs for about 40% of mortgage holders are set to become costlier over the next three years as households refix to more expensive deals, affecting 3.6 million households, the Bank said.
Many homes have not refixed their mortgage since interest rates began to rise in 2021, meaning the full impact of higher rates has yet to filter through.
Those looking to get on the property ladder got a boost as the Bank said lenders could issue more loans deemed to be risky, meaning people could be able to borrow more.
Financial institutions can now have 15% of their new mortgages deemed risky every year, up from the current 9.7%.
Riskier mortgages are those with a loan value above 4.5 times the borrower’s income.
Be ‘prepared for shocks’
Despite the global and domestic economy concerns, the outlook for UK household and business resilience remained “strong”, the Bank said.
Investors, however, were warned that there could be “sharp falls in risky asset prices”, which include shares and currencies.
If there are any vulnerabilities in non-bank lenders, it “could amplify such moves, potentially affecting the availability and cost of credit in the UK”.
“It is important that in their risk management, market participants [people involved in investing] are prepared for such shocks.”
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The steep market reaction following the tariff announcements in April “highlights that the interconnectedness of global financial markets can mean stress from one market can move quickly to others,” the report said.
Overall, though, “household and corporate borrowers remain resilient”, the Bank concluded.