UK banking laws face greatest shake-up in more than 30 years
The UK government is set to announce what it describes as one of the biggest overhauls of financial regulation for more than three decades.
It says the package of more than 30 reforms will “cut red tape” and “turbocharge growth”.
Rules that forced banks to legally separate retail banking from riskier investment operations will be reviewed.
Those were introduced after the 2008 financial crisis when some banks faced collapse.
Rules governing how senior finance executives are hired, monitored, and sanctioned will be overhauled. Industry insiders have told the BBC they have proved a brake on attracting top talent to the UK.
The package of changes will be presented as an example of post-Brexit freedom to tailor regulation specifically to the needs and strengths of the UK economy.
However, critics will say it risks forgetting the lessons of the financial crisis.
The plans to ease regulations on financial services are being described as another “Big Bang” – a reference to the deregulation of financial services by Margaret Thatcher’s government in 1986.
The government has already announced it will scrap a cap on bankers’ bonuses and allow insurance companies to invest in long-term assets like housing and windfarms to boost investment and help its leveling up agenda.
Chancellor Jeremy Hunt said the changes would “unlock investment across our economy to deliver jobs and opportunity for the British people”.
“Leaving the EU gives us a golden opportunity to reshape our regulatory regime and unleash the full potential of our formidable financial services sector,” he added.
Mr. Hunt is set to meet bosses of the UK’s largest financial services in Edinburgh on Friday to discuss the reforms.
After the financial crisis of 2008, when the government had to spend billions supporting the UK banking system, a new regime was brought in to increase the personal accountability of senior risk-taking staff.
It allowed for fines, bans, and even custodial sentences, although there have been very few examples of enforcement.
But City insiders say a major disadvantage it imposes is the lengthy process of getting the movement of senior staff to the UK approved by the regulator – making London less attractive to foreign firms.
Chris Hayward, policy chairman at the City of London Corporation, denied that the reforms were a “race to the bottom” on regulation.
“It’s a chance to grow our economy and I think we should be very excited about it,” he said.
After the financial crisis, large banks were forced to separate or “ring-fence” their domestic banking operations – mortgages and loans for example – from their investment banking operations, which expose their cash to market volatility and were deemed riskier.
The cost of having two separate shock-absorbing cushions of spare money was seen by some as placing extra costs on the sector.
Most of the big banks have spent billions on this ring-fencing and are not calling for its reversal.
The reforms of ring-fencing are expected to be aimed at mid-size banks such as Virgin Money and TSB.
There may also be new rules around bundling investments together into tradeable units – a process called securitization.
This process made the 2008 financial crisis worse. No one knew where the bad debts were located so everyone stopped lending to everyone.
The government will also re-announce more freedom for the pensions and insurance industry to invest in longer-term, illiquid assets – those that are hard to sell quickly such as social housing, windfarms, and nuclear – which the government will say helps their leveling up ambitions.
It is worth noting that although this will be billed as Brexit freedom, the EU is undertaking similar reforms.
There will be some nod to developing the UK as a center for crypto assets, but with some caveats given the recent bloodbath after the demise of the cryptocurrency exchange FTX.
Most financial industry leaders say they are crypto-curious but do not feel the need to be first on this. “Let the shipwrecks of others be your seamarks,” said one.
‘Jurassic Park of companies’
London’s position as the pre-eminent European financial center has been dented in recent years.
The UK’s capital city briefly lost its long-time crown of most valuable European stock market to Paris before gains in the pound pushed it narrowly back ahead, while Amsterdam took the title of busiest European share dealing center.
Leading hedge fund manager Sir Paul Marshall of Marshall Wace recently described the London financial markets as a “Jurassic Park” of old-fashioned companies and investors, and it has struggled to attract the world’s fastest-growing companies to list on UK exchanges, often losing out to New York, Shanghai or even Amsterdam.
UK banking laws face greatest shake-up in more than 30 years
Labour politicians have criticized the scrapping of the bonus cap and said the UK should not engage in a regulatory race to the bottom, but the government will insist the reforms strike the right balance between stability and innovation.
Others will say that in loosening regulation we risk forgetting the lessons of the financial crisis when excessive risk-taking ended in billions in bailouts and a decade of stagnating productivity.
