London’s failure this year to secure a primary listing for its biggest technology firm, chip designer ARM Ltd., was seen by the Conservative government as a wake-up call. It decided to change rules for stock offerings, private trading venues and other areas to try to give London an edge over rival financial centers. Capital requirements for insurers will be eased, freeing up tens of billions of pounds that could be invested in national infrastructure. Officials will also review rules imposed on lenders after the 2008 global financial crisis that separated their investment and retail banking activities.
In preparation for Brexit, EU statutes were grafted into British law with the aim of amending them at a later date. That process kicked off in July, when Prime Minister Boris Johnson’s administration introduced a parliamentary bill to update the financial industry’s legal framework. The bill is expected to become law in April or May 2023. In December, the government proposed further measures, dubbed the Edinburgh Reforms, that would be subject to review and implemented after the initial bill becomes law. Altogether, the changes fall short of the kind of regulatory bonfire envisioned by leading Brexiteers.
3. Why the more cautious approach?
After Johnson left office in September, his replacement Liz Truss vowed to go faster and further in overhauling Britain’s financial regime to accelerate economic growth. Chancellor of the Exchequer Kwasi Kwarteng told bankers to get ready for “Big Bang 2.0.” Plans were unveiled to scrap EU-era caps on banker bonuses and allow ministers to block or change the decisions of the country’s financial regulators. Truss was ousted after just six weeks in office when her radical tax cutting plans sparked a bond crisis. The upheaval served as a warning of the dangers of shock-and-awe policymaking and left City bosses clamoring for more gradual change. Truss’s replacement Rishi Sunak scrapped the idea of an intervention power over the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority. The regulators had lobbied hard against the measure, saying any erosion of their independence would damage their credibility. Sunak upheld the reform on bonuses and a plan to make the regulators factor Britain’s competitiveness and growth into their decision making.
4. Do financial firms like the reforms?
The switch to a more consensual approach under Sunak followed concerns voiced by senior bankers that sudden, wholesale change to the rules under which they operate could sow more chaos in markets and lumber them with too much compliance work. They’ve welcomed some of the post-Brexit reforms, while lobbying for other changes. Many banks want changes to the crisis-era ring-fencing rules (which were a UK rather than an EU invention). Small lenders would like to cut the amount of loss-absorbing capital they are required to hold, though the government appears lukewarm on the idea. The BOE still plans to stick closely to global standards around the regulation, supervision and risk management of banks, known as Basel III. That’s frustrated some bank bosses, who say it could put them at a disadvantage to their European peers.
The impact of the reforms will help to determine the success of the wider Brexit project. Critics say that, far from making Britain a more agile trading nation, it’s harmed the economy by burdening businesses with extra paperwork. UK financial firms have lost automatic access to the bloc’s markets, and banks have had to rebase some employees and activities inside the EU to preserve business there. Britain’s EU counterparts have been anxious to preserve a regulatory “level playing field,” seeing the UK as too close and important a partner to allow for a complete dislocation of standards around business, taxation and the environment. There’s a risk the financial reforms may provoke the EU to restrict UK access to its markets in areas such as derivatives trading. Another concern is that if the measures go too far, they could undermine the stability and transparency that underpin the City’s appeal for international investors.
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