Is the UK gambling on a return to casino capitalism?

On December 9, UK chancellor Jeremy Hunt announced 30 new measures in the Financial Services and Markets Bill to significantly boost the City of London’s attractiveness. The UK Treasury is looking to implement many of these reforms by 2024, particularly those related to supporting a UK consolidated tape. 

Romin Dabir, a partner at law firm Reed Smith, says the reforms will result in significant changes to the UK’s regulatory regime. He singled out measures such as changes to the prospectus regime and ring-fencing rules as being specifically designed to boost the City’s attractiveness. Most of the broad changes have been well flagged over the past couple of years, and there were few surprises. Of greater interest will be the details behind the various measures, which should become clearer over the course of 2023.   

“The government’s homegrown rulebook contains some interesting proposals, but we would like to see more done to invigorate institutional financial technology services that are the lifeblood of the modern sector,” says Matt Barrett, CEO at Adaptive Financial Consulting. “To do this, we need to see greater incentives for firms to do business in the UK and more done to encourage and develop the best talent to work in the sector.”

The Association for Financial Markets in Europe welcomed the reforms, describing them as “proportionate” and “building on the longstanding dialogue” between the authorities and industry.

Reversing gold-plating

Some aspects of the reforms are a relaxation of ‘gold-plating’ of EU and global financial regulations following the 2007-9 global financial crisis (GFC). Yet they were touted by Mr Hunt as taking advantage of Brexit freedoms. Many of the changes to rules, such as ring-fencing investment banking units from the rest of the bank or senior manager rules, were not stipulated by the EU and were UK unilateral initiatives. Also, the government's own policy paper makes clear that some EU rules will be maintained, many without modification. 

Mr Dabir says that at this stage it is difficult to determine how far-reaching the changes will be. He says the industry nonetheless welcomes the phased approach involving consultation with all stakeholders, because they will need time to adapt to what could be significant alterations to the UK’s regulatory framework. 

But one high-profile and well-trailed deviation from the EU is on removing caps on bankers’ bonuses, which brings the UK in line with rival financial centres such as New York. “Lifting the cap is needed even if unpopular and discomfiting,” says Lee Doyle, global co-chair of the bank industry at law firm Ashurst, adding that an energised, incentivised financial centre will bring benefits to the country as a whole. He adds that it will help sustain London as a leading global financial centre able to attract and retain the best talent. The opposition Labour party dismissed the move as a race to the bottom. 

Another well-anticipated but controversial move, privately criticised by regulators, is to give the Financial Conduct Authority and the Prudential Regulation Authority a secondary mandate of maintaining competitiveness of the City of London (Dec GRR: UK seeks to reintroduce regulatory competitiveness mandate). A number of ex-regulators have publicly warned that this could damage the UK’s image for regulatory probity. For example, Lord Adair Turner, who chaired the former Financial Services Authority after the GFC, said giving regulators a competitiveness objective is a mistake. Some fear it is an opening for industry to lobby for changes that boosts its profitability potentially at the expense of financial stability. Mr Dabir says the secondary objective of maintaining international competitiveness coupled with protecting the financial system could be difficult to reconcile and could create regulatory confusion. 

This is accompanied by regulators acquiring greater powers, which were once the domain of the EU. As a result they will also be under greater scrutiny from the UK parliament. “One idea which has been shelved would have given the government the right to require the regulators to make or amend rules in the public interest,” says Peter Bevan, global head at law firm Linklaters’ Financial Regulation Group. “The fact that this has not, in the end, been introduced will be to the relief of the regulators who feared that it could compromise their independence.”

He explains that giving regulators more power will enable them to make rules that are better suited to the needs of the UK’s financial services sector, and they should be able to update its rulebooks more quickly. 

Relaxing ring-fencing 

The proposed ring-fencing measures will have little impact on the largest UK banks. They are good news for smaller banks, but have not been welcomed in all quarters (Dec GRR: UK decides to cut bank profit tax surcharge). 

“Ring-fencing attempts to partially isolate the basic banking services from turbulent global financial markets. It means banks can still engage in investment banking as long as their retail banking operations are ring-fenced,” said the Centre for Banking Research at Bayes Business School in a note. “It is therefore puzzling that this is one of the reforms targeted by the government, given that its repeal will most likely lead to less money flowing into the UK economy in the short term.” The note explained that not only is there no widespread clamour by banks to remove the ring-fencing rules, but that they had led to more investment in mortgages and lower interest rates for borrowers.

However, others believe other regulatory developments have to some extent negated the need for ring-fencing. “With the broad resolution powers that now exist in the regulatory toolkit thanks to the Banking Act, rigorous bank stress-testing and effective resolution powers create an environment where the benefits of loosening ring-fencing rules can now be debated in a way that may have been difficult before,” says Antony Hainsworth, financial services regulatory partner at DLA Piper.

The senior managers and certification regime (SM&CR) is to be reviewed and changes will be consulted upon. In theory, it can land senior bankers with severe, even criminal, penalties for infractions that happen on their watch. In practice, however, it has turned out to be relatively toothless and has not unleashed the flurry of cases that law firms had anticipated. 

Sushil Kuner, principal associate at law firm Gowling WLG, says there is some scepticism around the proposed relaxation of the SM&CR given that it was introduced in response to the GFC along with ring-fencing and banker bonus caps. “Ultimately, changes to the SM&CR are likely to be controversial,” says Reed Smith’s Mr Dabir. He explains that many senior executives complained about the extra paperwork the rules created with few commensurate benefits.

Wholesale markets review

In a statement to Parliament on December 9, Mr Hunt said the prospectus regime will be overhauled so the government can implement recommendations from Lord Hill’s UK listing review. This will help widen public ownership of listed companies and simplify capital raising on UK markets. (March 2021 GRR: Lord Hill proposes radical shake-up of UK’s listing regime to boost competitiveness). He said the government will bring forward relevant reforms identified in the Treasury’s 2021 review of the Securitisation Regulation. It will consult on creating a short-selling regime appropriate for UK markets. Other well publicised rules under review include unbundling research from broker fees covering small listed companies (March GRR: UK’s post-Brexit financial reforms criticised for lacking ambition). 

Following a Treasury consultation on March 1, the UK is also looking at a host of technical tweaks. These include allowing systematic internalisers to execute midway between the best bid and offer below Large in Scale trades, removing double volume caps and the share trading obligation. It is also looking at introducing consolidated tapes for different asset classes, which could involve either or both pre- and post-trade data. The Treasury is also investigating plans to move some markets to T+1 settlement with full recommendations due next year. 

Mr Hunt’s statement also noted that regulators and market participants are working on a new class of wholesale market venue, which would operate on an intermittent trading basis. “This highly innovative approach would be a global first and would act as a bridge between public and private markets, boosting the UK as a destination for all companies to get the investment they need to create jobs and grow,” Mr Hunt said. 

Mr Hainsworth says the suggested changes to short-selling and securitisation rules leave questions over how exactly they will be reformed. He believes that rules forcing banks to retain a share of the securitisation they package and sell on are unlikely to be dropped entirely given memories of the GFC. “There are some interesting proposals but, in terms of the bigger picture, there is no talk here of fundamentally changing the MiFID settlement or the rest of the post-GFC package of measures,” says Jonathan Herbst, global head of financial services regulation at Norton Rose Fulbright. “There is little call in the City for this and most of the current law reflects international commitments.” 

Other key measures include reforming Solvency 2 insurance company capital rules to make it easier for them to invest in infrastructure projects. Meanwhile, the UK Treasury will shortly consult over introducing a central bank digital currency.

There were a slew of measures aimed at consumers, such as around investment disclosure requirements around complex products and lending. The idea is to enable them to access more financial products. “We are starting to see the UK approach to investor disclosures not so much diverge from the legacy European model, but veer off in a different direction,” says Mr Hainsworth, commenting on the proposed dropping of the not especially popular Packaged Retail and Insurance-based Investment Products Regulation.  

Not so big bang

Industry sources do not view the changes as being anywhere near as transformative as the ‘Big Bang’ reforms unleashed in 1986 nor even those implemented post-GFC. Both fundamentally altered the face of the City of London and dramatically changed its business practices. Even Mr Hunt acknowledged that the reforms are more modest than those launched in 1986. 

“It is important for people not to overplay this,” says Mr Herbst. “There is no sense of any move back to a pre-GFC world. Most of the UK regulatory regime reflects either international commitments or policy developed over many years to reflect the lessons of experience. So, the talk of a Big Bang 2 may well be overdone.” As such, most regulatory experts do not expect the City of London to degenerate into the type of reckless risk-taking that prevailed in parts of the industry in the run-up to the GFC. 

This article first appeared in Global Risk Regulator, a sister publication of The Banker and service by the Financial Times.