After a jarring six months marked by sweeping policy promises, U-turns and four Chancellors of the Exchequer, UK financiers head into 2023 uncertain that the coming year will finally usher in substantive reforms to the City of London.
Current Chancellor Jeremy Hunt promised in this month’s Edinburgh Reforms to “turbocharge growth” for the country’s banks, insurers and asset managers. But his program replaced more ambitious plans for a Big Bang 2, a reference to Margaret Thatcher’s revolutionary 1980s financial deregulation, leaving bankers wondering how radical the government will be this time.
Some fear 2023 will be dominated by a tangle of reviews rather than action, despite the UK’s vote to leave the European Union being seven years ago. Brexit dividends may remain as unclear as they were in the aftermath of the referendum, they fear.
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Those concerns are overly pessimistic, and it is possible to discern an emerging plan for Britain’s financial services after years of wrangling about Brexit, according to Jonathan Hill, the former EU commissioner for financial services who completed a company listings review for the government.
“After three wasted years, we have finally started to get a direction of travel,” Hill said. “It is a bit like a Pointillist painting. Up close it looks like lots of dots, but if you step back you can start to see a clearer picture emerging.”
By next summer, supporters say, the UK could have modern company listings rules, guidelines for the crypto sector and one of the world’s most modern trading hubs. All could be overseen by regulators exercising a keen eye for opportunities to make the UK’s financial services more internationally competitive.
It is time to be bold, according to Rachel Kent, a senior partner at law firm Hogan Lovells and chair of the International Regulatory Strategy Group, which looks at UK regulation. “Now is our chance,” she said. “This is a golden opportunity to get our rules right in the interests of the whole of the UK.”
Even supporters agree the direction under Prime Minister Rishi Sunak isn’t revolutionary, but argue that changes coming through the Financial Services and Markets Bill and the 30-point plan announced in Edinburgh should help make London a more modern financial center, with rules tailored for the UK economy rather than what was a 28-country bloc.
The two programs together offer a mix of legal changes and reviews, with topics ranging from relaxing EU Solvency II insurance capital standards and MiFID II markets regulations, to the securitization market and short-selling. The aim is to stimulate trading in London, and to encourage a multi-billion-pound inflow of pensions money and individuals’ savings into investments.
If the hard work is done during 2023’s tough economic times, the UK could be in a strong position to attract international investment and company listings in 2024, according to Mike Coombes, vice president of corporate affairs at PrimaryBid Ltd., a platform which provides retail investors with access to share sales.
“By the end of next year, we could see a world where there are a significant number of IPOs coming down the line for 2024 that will include a retail offering,” Coombes said. “It could be a scenario where capital markets in the UK are starting to function quite efficiently, particularly if issuers can tap the over £300 billion ($364 billion) currently inactive in cash ISAs.”
That won’t be easy, according to skeptics who point to stiff competition from the US and Asia and a growing regulatory pull from Europe. Banks such as Goldman Sachs Group Inc. are continuing to move senior staff with EU roles inside the bloc, while London recently lost its crown as Europe’s biggest stock market to Paris.
“London used to be the largest financial center of the European Union, and everybody liked it,” Stephane Boujnah, Chief Executive Officer of European exchange Euronext said in an interview with Bloomberg TV. “Today, London is the largest financial center of the United Kingdom.”
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The English capital is still a stronghold for international finance and well-positioned to lead the world in fintech and green finance, according to Nicholas Lyons, a veteran investment banker and insurance executive now serving as Lord Mayor of London, an ambassadorial role.
But there also needs to be a shift in attitude, Lyons believes. Since the financial crisis, “the UK lost its competitive edge,” he told Bloomberg News in New York during a visit to promote London. “We need to reintroduce a celebration of wealth and jobs creators.”
Not everyone agrees. The past few months have been characterized by running battles about the perceived risk of a bonfire of regulations, with critics accusing ministers of undermining regulators’ independence and wanting to dismantle safeguards put in place after 2008 to prevent future banking bailouts.
Among the government’s more controversial proposals are a plan to water down the ring-fence that requires banks to separate capital for their high street lending operations and possibly easing penalties for senior executives when they make mistakes.
The incoming requirement for regulators to consider the financial services sector’s international competitiveness as a secondary objective after stability and consumer protection is particularly problematic, according to John Vickers, warden of All Souls college at Oxford University and a former architect of Britain’s post-financial crisis reforms.
Competitiveness objectives “tend to be vehicles for sectoral vested interests,” Vickers said. “In the case of financial services, sometimes the sector’s interests will be aligned with the rest of the country, and sometimes they will be opposed. The sector should not have privileged treatment relative to the rest of the economy.”
Leaving the EU gives regulators more scope to make rules that were previously overseen by European politicians. A debate about the best form of post-Brexit parliamentary oversight for the UK’s Prudential Regulation Authority and Financial Conduct Authority descended into a row about a “call-in” power, that the government eventually dropped in the face of vocal opposition.
Yet scrutiny is an important part of the setting the future agenda for the City of London, Hill said. “I don’t see how we can address that without looking at the role of the regulators and working out a system where both their independence and accountability are clear,” he said. Hill’s view is shared by others in the House of Lords, who want to ensure the accountability and competition provisions are not watered down further in finance bill before it becomes law next year.
Another outstanding issue is the UK’s relationship with Europe. The City of London was sidelined for years after the Brexit referendum partly because of lingering public anger about the financial crisis and also because it was seen as a bastion of remainer sentiment.
Sunak has denied a report he was exploring a Switzerland-style deal with the EU which would give greater access in return for adopting the bloc’s rules, but many in the City would like to see closer ties to ease the costs and logistics of maintaining large operations in the UK and on the Continent. Meanwhile, the EU still exerts sway as Brussels modernizes its rules to boost its own competitiveness, and the UK also has to contend with international regulations, such as the incoming Basel 3.1 banking capital rules.
A big question for firms is whether Prime Minister Rishi Sunak’s reforms — such as the plan to scrap the EU bankers’ bonus cap — will ever be enacted with the opposition Labour Party polling strongly and a general election required by law by January 2025.
Whatever changes are ultimately enacted, their impact won’t be apparent immediately. The effect of Margaret Thatcher’s Big Bang reforms in turning London into an international finance center took time to crystallize, recalled Nigel Boardman, chairman of banking group Arbuthnot Latham and a former lawyer at Slaughter and May.
“After Big Bang in 1986, I was on various panels that looked at which would be the dominant exchange in Europe,” Boardman said. “There was talk of Frankfurt, Paris and London. It was by no means clear it would be London.”
–With assistance from Craig Gordon, Joe Easton, Francine Lacqua and William Shaw.
Photograph: Commuters cross London Bridge in the City of London with a view of Tower Bridge in the background. Photo credit: Hollie Adams/Bloomberg.
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