A proposed reform package to boost U.K. financial sector competitiveness faces critique.
In a significant regulatory shakeup, the British government has announced an extensive financial regulation reform package in an attempt to overhaul “burdensome EU laws.”
The reform package, dubbed the Edinburgh Reforms, consists of 30 measures, such as revisions of landmark regulations introduced after the 2008 crisis. Central to the Edinburgh Reforms are revisions to a law that requires banks to keep their investment banks separate from their consumer arms, the so-called “ringfencing” regime. The recent reforms also modify the Senior Managers and Certification Regime, which holds bank leaders responsible for banks’ poor conduct.
Another significant change prompted by the reform package is the introduction of statutory secondary objectives for the U.K.’s financial regulators. Going forward, the Financial Conduct Authority and the Prudential Regulation Authority would have to consider impacts on growth and international competitiveness as part of their ongoing supervisory and regulatory activities.
British finance minister, Jeremy Hunt, has defended the overhaul—which has left many uneasy—against accusations that the government has forgotten the lessons learned from the 2008 financial crisis. Noting that the “lessons of 2008” must not be unlearned, Hunt argued that banks are in a stronger position now than before the crisis, where the then-Labour Party government spent 137 billion pounds to bail out banks.
Hunt argues that the proposed reform is only possible because of the country’s post-Brexit “regulatory freedoms.” Critics argue, however, that much of the U.K. financial sector’s malaise resulted from Brexit. They note that the U.K.’s departure from the EU caused firms to lose direct access to European financial markets and passporting rights, a set of EU laws that allows companies in one EU country to conduct business in any other EU country freely.
The government hopes its regulatory reform will lead to a “Big Bang 2.0”—a reference to Margaret Thatcher’s deregulation of financial services in 1986, which caused an influx of capital and banks to the U.K. But according to Jonathan Herbst, global head of financial services regulation at international law firm Norton Rose Fulbright, the majority of financial sector regulation in the U.K. reflects “either international commitments or policy developed over many years to reflect the lessons of experience,” rather than dramatic sudden changes.
In the hours after Hunt announced the Edinburgh Reforms, a number of influential business groups welcomed the move. The Confederation of British Industry, described as “Britain’s biggest business lobby group,” argued that the reforms can “help build a more dynamic, competitive and future-focused financial sector.” In a similar tone, the City of London Corporation, the ancient governing body of London’s primary financial district, noted that the reforms would not weaken standards and that the U.K. financial services industry should be “very excited” about the reforms.
On the other side of the political aisle, the Labour party’s financial services spokesperson, Tulip Siddiq, argued that the reforms were a part of a “race to the bottom.” She added that many of the older regulations had been “introduced for a good reason” and that the new reforms could hurt the financial industry by “introducing more risk and potentially more financial instability.”
In addition, the U.K. government’s new plan to overhaul ringfencing rules has caused concern for some experts, including John Vickers, an economics professor at the University of Oxford and architect of the U.K.’s ringfencing regulation. In a letter to the Financial Times, he argues that scaling down or removing the ringfencing regime would be detrimental to growth and cause a repeat of the 2008 crisis.
Ringfencing has been a costly affair for large U.K. banks. HSBC, for example, estimated in 2015 that it would spend 1.5 billion pounds to shield its U.K. retail bank from the rest of its business. The primary revisions to the ringfencing regime include raising the deposit threshold for when banks must ringfence their retail banks from 25 to 35 billion pounds and a proposal to exclude banking groups without large investment banks from the regime. But the revisions still require the largest banks in the U.K. to retain their ringfence, so it appears unlikely that the reforms will spur significant change to the U.K.’s retail banking landscape.
Although the Edinburgh Reforms seek to bring about significant change to the regulation of the financial sector, the government has opted to leave out provisions that would give it powers to override U.K. regulators’ decisions if they did not take advantage of the “opportunities of Brexit.” But some remnants of the proposal, which received broad critique that it would undermine regulators, have survived in the requirement that the Financial Conduct Authority and Prudential Regulation Authority have to consider Britain’s competitiveness and growth in their work.
Ministers in the U.K. government seek to enact the reform package next year.
