Hello. I am the FT’s Chief Business Correspondent and as part of my job I speak to a lot of businesses in the City. This week I will be looking at the government’s proposed changes to financial services regulation.
When UK business secretary Jacob Rees-Mogg was asked last week which one EU rule he would “junk” above all others, he replied without hesitation to a crowd at the Conservative party conference: “Solvency II.”
Promises of reforms to such complicated regulatory frameworks, say City wags, would not have worked quite as well on the side of a bus in the run-up to the 2016 Brexit vote as the promise to increase spending on the NHS.
But the more serious-minded observers worry that Rees-Mogg’s comments set up a wholesale ditching of important rules that govern the complicated plumbing that helps the City function.
Even in the aftermath of a chaotic party conference, it is clear that the Truss government is relying on financial services reform to form the vanguard of its growth agenda.
After several years of being an afterthought for the government that wanted to talk more about ‘levelling up’ regions outside the south east, financial services bosses now find themselves being feted at ministerial meetings on a weekly basis.
City minister Andrew Griffith told MPs on the Treasury select committee this week that the industry “touches every person in the country” in a discussion of the financial services and markets bill that will allow the UK to replace Brussels’s rulemaking for the sector.
This is a sensible acknowledgment of the importance of the industry, which represents the UK’s past, present and economic future. TheCityUK financial lobby group says that the sector employs more than 7 per cent of UK workers, contributing a ‘gross value added’ figure to the economy of £238.4bn in 2020.
Around two-thirds of these people are employed outside London: to use Liz Truss’s analogy, growing this economic ‘pie’ genuinely could help more people take larger slices around the country.
The UK is also the world’s leading net exporter of financial services, with a trade surplus of £80.2bn in 2020. Here is the real win for the UK, not in looking inward to change EU rules for the sake of Brexit but by boosting its appeal to the global financial services industry (including securing a deal over the Northern Ireland protocol).
The Treasury is currently canvassing for ideas to be included in a set of financial services supply side reforms due to be announced later this month as part of the Truss growth plan.
So what does the City want? Certainly not a regulatory revolution. Bosses can see what has happened to the markets after the fiscal reforms last month — and are hoping the government will restrain itself from any more overly aggressive reforms that could cause further economic damage. Many are still aghast at being labelled the fat cat beneficiaries of the — now reversed — cut to the top rate of tax and changes to banker bonuses.
But they want to see ambition — and in particular they use Brexit as an opportunity to take a hard look at all the rules that govern the City to make sure they are fit for modern digital markets.
The UK needs to make it cheaper and quicker to raise money through both primary and secondary listings, including reforms to the prospectus regime. Similarly, changes to Mifid II would help to encourage more analysts to cover smaller companies.
Reforms to Solvency II are also needed — if only because the EU is already making its own changes that would leave the UK at risk of falling behind. Insurers would welcome the ability to invest more in infrastructure and growth companies.
But Solvency II, the reform of which is now held up as the panacea of post-Brexit financial services growth, serves neatly as an example of regulations once championed by the UK, and drawn up with the help of British regulators, but now dismissed as Brussels interference.
And if the past few weeks have shown anything, it is the need for regulators to keep a careful eye on the pensions industry, while the increase in gilt yields has actually decreased the relative attractiveness of illiquid assets such as infrastructure.
Many bosses are appalled by the idea that the whole suite of insurance and banking rules can simply be “junked”, if only because companies have spent a lot of time and money creating structures and teams to work within them.
Even the branding being used by ministers of a “big bang 2.0” does not sit well with those who remember the first one. Simon Gleeson, a financial services expert at Clifford Chance, says that the market reforms of 1986 were aimed at removing several specific areas, like the rules surrounding broking. They were then replaced by stacks of new rules to impose guardrails on the behaviour of the financial services industry. The effect was not deregulation, he says, but better regulation.
And better regulation is where the Brexit ‘wins’ can be found. In reality the work that needs to be done will be in the weeds, creating British versions of laws such as Solvency II that will cover much of the same areas, but also allow for the UK’s common law approach to underpin a more flexible and streamlined set of rules.
The UK needs to be seen as the host of a global market, setting minimum standards and rules for the next wave of innovation in finance.
This can potentially be better achieved outside the EU, which is also busy reforming its financial services framework but often with an idea of protecting markets rather than opening them up to the world.
Financial services rules need to be “simplified and clarified” under British law, according to Barney Reynolds, partner at Shearman & Sterling, who says that this now “needs to be done quickly and by people who understand the system”.
As a result, companies should be able to adapt more quickly to changing markets, he says. “We will end up with a better system and a more dynamic City.”
The real wins for the City will be in the creation of future rules that will make the UK the place to do business in new areas such as digital assets, fintech and green finance, according to Miles Celic, head of TheCityUK, alongside the everyday work of equities and debt trading. The government should be careful of looking in the rear view mirror too much, he adds.
The rule changes also need to rely on investors making use of them — be it pension funds buying riskier, or illiquid assets, or UK funds taking advantage of listing reforms to invest in companies that might now be more attracted to the London market.
To a degree, this requires a longer term cultural change — and that needs to come from the top. The most common complaint in the City is not about EU red tape, but about how long it takes to get simple things approved by the regulators or intra-company transfers.
Basic organisational requests that should take weeks, instead take months, and make the UK look slow and poorly run to firms based overseas. Faster and more flexible regulators are needed, which the new financial services bill will address by giving the Financial Conduct Authority and the Prudential Regulation Authority new secondary objectives to advance international competitiveness and medium to long-term growth.
Crucially, the industry has had enough headline-grabbing drama from Whitehall — companies want stability and better regulation that reflects the need to maintain international competitiveness.
Burning rules for the sake of the size of the red tape bonfire being promised by Rees-Mogg will only lead to confusion, stalled investment and longer term market turmoil.
Brexit in numbers
The government this week introduced the electronic trade documents bill to parliament in an attempt to end the need for paper-based trading documents such as bills of lading and bills of exchange. The goal is to make it cheaper and easier for British firms to buy and sell internationally.
For the UK’s struggling small businesses, every little helps. A survey of more than 2,200 UK SME exporters by the British Chambers of Commerce revealed a worrying decline in growth following five consecutive quarters of flat activity.
The percentage of SME exporters reporting increased export sales dropped to close to a fifth, from 35 per cent in the second quarter, while more than a quarter of SME exporters saw decreased sales. More SME exporters expect to see a decrease than increase in profitability in the next 12 months.
Head of trade policy at the British Chambers of Commerce William Bain said: “The UK government has an ambitious agenda to promote exports and we look forward to working with the new DIT [Department for International Trade] ministerial team to help get Britain selling again. But with the trade deficit still standing at over £20bn, it must first increase business confidence and capacity to sell overseas.”
And, finally, three unmissable Brexit stories
Since the “mini” Budget Britain’s economic credibility on the international stage has noticeably plummeted, writes Chris Giles, who is in Washington for this week’s meetings of the IMF and World Bank. “I have been asked with fascination, horror and pity how the UK could have descended so fast,” he says.
Meanwhile, Robert Shrimsley looks at how the Truss government can restore its shattered credibility and concludes “the reboot is imperilled by a vicious circle of five M’s — money, markets, mortgages, majority and mandate.
And the global head of fixed income research at HSBC, Steven Major, suggests four steps the Bank of England could take to repair the broken gilt market where borrowing costs have risen to the highest level since the financial crisis.
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