A fresh start

Early September is a time for fresh starts, as workers go back to the office after the summer holidays and children return to school.

It is fitting then that 6 September marks Liz Truss’s first day as the UK’s Prime Minister and 7 September is the Second Reading of the Financial Services and Markets Bill in the House of Commons.

Although the new Bill may have received less attention than the new PM, it remains vitally important. Liz Truss has an in-tray full of problems but the hope is that the Bill lies in a pile marked ‘delivery’.

State of the Sector

Earlier in the summer, the City of London Corporation worked with HM Treasury to produce State of the Sector, a robust, evidence-based assessment of the competitiveness of UK financial services. A world first, it will be repeated annually to ratchet up competitiveness year on year. 

The report uses metrics to compare the UK’s competitiveness with other major economies. It details action the Government is taking to promote growth and competitiveness and identifies opportunities for improvement based on industry feedback. It covers issues such as openness, a proportionate regulatory system, sustainability, innovation and skills.

The Bill is the first major opportunity to make improvements across these issues. It aims to enhance the UK’s position as a global leader in financial services. It also seeks to ensure the sector continues to deliver for individuals and businesses across the country – crucial for a sector that supports 2.3 million jobs, two thirds of which are outside London.

Seizing the opportunity

The Bill is long (320 pages) and covers a wide variety of issues, from a new framework for stablecoins to protecting cash. Fundamentally, it is about putting in place a new regulatory framework that reflects the UK’s new position outside the EU.

A significant amount of rule-making power is shifting from the European Commission, Council, Parliament and Supervisory Authorities to the UK regulators. The Bill amends the regulatory framework to account for that extra power, including enhancing the accountability and scrutiny of the regulators. It also establishes a system to delete EU directives and make new UK regulations.

The reforms offer a once-in-a-generation opportunity to ensure the regulatory framework in the UK stays agile, coherent and competitive. Seizing this opportunity requires expert and professional regulators with adequate resourcing and efficient supervisory processes.

Competitiveness and growth

The Bill will introduce a secondary competitiveness and growth objective for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). It describes the secondary objective as:

“facilitating, subject to aligning with relevant international standards,

(a) the international competitiveness of the economy of the United Kingdom (including in particular the financial services sector), and

(b) its growth in the medium to long term.”

Why is this change important? As the State of the Sector report shows, the UK’s strengths in financial services cannot be taken for granted. Regulatory decisions can have a significant impact on the sector and the UK economy, so it makes sense for the regulators to take this impact into account.

One live issue that demonstrates this is the debate on reform of Solvency II, the prudential regime for insurers.

The Government’s consultation on Solvency II states: “The reforms could result in a material release of possibly as much as 10% or even 15% of the capital currently held by life insurers and unlock tens of billions of pounds for long-term productive investments, including infrastructure.” 

The PRA prioritises prudential soundness, as that is what its objectives direct it to do. Strictly speaking, it has no reason to favour the investment of tens of billions of pounds in long-term investments such as green energy.

The secondary objective would make it clear that trade-offs, such as firms using capital as a safety buffer OR for investment, exist and require the regulators to manage them. As the objective is secondary, economic growth and international competitiveness will remain subordinate to the goals of promoting competition, preserving stability and protecting consumers.

This should not be seen as a race to the bottom but quite the opposite – high standards are a competitive advantage for the UK as an international financial centre. Firms and capital are attracted to robust but proportionate regulatory regimes.

The change would also put the UK in line with other jurisdictions. Relevant financial regulators in Australia, Hong Kong, Japan, Malaysia, Singapore and the United States (and the European Supervisory Authorities) have competitiveness or growth as a regulatory objective.

Delivery, delivery, delivery

Although the Bill is a significant piece of legislation, it is only part of a wider suite of reforms to drive growth, support investment and facilitate trade. The State of the Sector report details reforms across many areas. It also sets out action for government and industry that will give the sector the best chance of success.

It is hoped this success will be reflected in future State of the Sector reports, which will put forward more ideas for improvement. This will create a virtuous circle that will ensure the financial services sector delivers for businesses and people across the UK.