UK announces overhaul of financial sector to boost growth

A Canada Square in the heart of the Canary Wharf financial district standing between the Citibank building and the HSBC building on October 14, 2022 in London, UK.

Mike Kemp | In pictures | Getty Images

On Friday, the UK government announced sweeping reforms to financial regulation that it said would overhaul EU laws that “hold back growth”.

The package of 30 measures includes easing a rule requiring banks to separate their retail operations from their investment arms. The measure, first introduced after the 2008 Financial Crisis, will not apply to retail banks.

The government has also confirmed it will review rules on the accountability of senior financial managers – another post-2008 regulation. The Chief Executives Regime, introduced in 2016, means that individuals in regulated firms can face penalties for bad behaviour, workplace culture or decision-making.

The changes announced in the so-called “Edinburgh Reforms” package also include a review of rules on short sales, how companies are listed on the stock exchange, insurers’ balance sheets and Real Estate Investment Trusts.

Chancellor of the Exchequer Jeremy Hunt has said he wants to secure the UK’s status as “one of the world’s most open, dynamic and competitive financial services centres”.

“The Edinburgh reforms use our Brexit freedoms to ensure a flexible and local regulatory regime that works in the interests of British people and our businesses,” he said.

“And we will go further – reforming burdensome EU laws that stifle growth in other industries such as digital technology and life sciences.”

The government is billing the reforms as a way to take advantage of the freedoms offered by Brexit, saying hundreds of pages of EU laws governing financial services will be changed or scrapped.

Many argue that Britain’s exit from the EU has harmed the country’s financial competitiveness, with Reuters reporting that London has lost billions of euros in daily stock and derivatives trading on EU exchanges since leaving the bloc. Financial services would be among the sectors most affected by Brexit, researchers at the London School of Economics said earlier this year.

Trying to boost Britain’s sluggish economic growth has also become a government priority, with the country predicted to be on the brink of a long recession.

The previously announced removal of the cap on UK bankers’ bonuses was one of several policies left over from the chaotic “mini budget” announced by Hunt’s predecessor, Kwasi Kwarteng.

Kwarteng has promised “Big Bang 2”, referring to the deregulation of the London Stock Exchange in the 1980s, which attracted many global banks and investment firms to the UK and rapidly increased the size of the City of London’s financial sector.

Another proposed reform would see regulators’ powers extended to include streamlining The competitiveness of the UK economy, particularly the financial services sector.

However, John Vickers, the former chairman of the Independent Banking Commission, warned in a letter to the Financial Times this week that “special favoring the financial services sector … could be damaging to it, as we all saw 15 years ago. .”

Tulip Siddiq, shadow city minister of the opposition Labor Party, called the proposed reforms a “race to the bottom”.

“Introducing more risk and potentially more financial instability because it’s this Tory government that you can’t control your backbenchers,” he said, referring to ongoing infighting within the ruling Conservative Party.

“Reforms such as Ring Fencing and the Senior Managers Regime have been introduced for good reason. The City does not want any more empty promises of deregulation or poor consolation prizes for being sold down the river in the Tories’ Brexit deal.”

Kay Swinburne, vice-chairman of KPMG UK’s financial services practice, told CNBC in emailed comments that the reforms are “a step towards making regulation more efficient rather than a race to the bottom”.

“While most of these reforms have been followed before, they are a step forward in future proofing the competitiveness and long-term growth of the UK Financial Services industry while seeking to maintain standards.”

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