The government is expected to announce one of the biggest overhauls to financial regulation in more than three decades.
It is expected to ease rules on banks introduced after the 2008 financial crisis, when some banks were on the brink of collapse.
The changes are presented as an example of the post-Brexit freedom to tailor regulation specifically to the needs and strengths of the UK economy.
Critics will say there is a risk of forgetting the lessons of the financial crisis.
The second “Big Bang” is described as plans to relax financial services regulation – a reference to the Margaret Thatcher government’s deregulation of financial services in 1986.
Rules that forced banks to legally separate their retail lending from their riskier investment businesses are under review, as are rules for hiring, monitoring and sanctioning financial executives.
The government has already announced that it will remove a cap on banker bonuses and allow insurance companies to invest in long-term assets such as homes and wind farms in a bid to boost investment and improve its agenda.
After the 2008 financial crisis, when the government had to spend billions to support the UK banking system, a new regime was introduced to increase personal accountability of risk-taking senior staff.
It allows for fines, bans and even imprisonment, although there have been very few instances of enforcement.
But City insiders say a major downside is that the lengthy process of getting senior executives to relocate to the UK approved by the regulator makes London less attractive to foreign firms.
Complex regulations on the payment of commissions and services such as research are also checked.
After the financial crisis, large banks were forced to separate or segregate their domestic banking operations (mortgages, loans, etc.) from their investment banking operations (exposing their own cash to market volatility), which were perceived as riskier.
The cost of two separate shock-absorbing reserve money cushions (capital) was seen by some as an additional cost to the sector. That may be mentioned in the revision, but most big banks have spent billions on this shield and are not demanding it be reversed.
Ring fencing reforms are targeting mid-tier banks like Virgin Money and TSB.
- The cap on banker bonuses will continue to be lifted
There may also be new rules for bundling investments into tradable entities – a process known as securitization. This process was instrumental in exacerbating the 2008 financial crisis as nobody really knew where the bad debts were, so everyone stopped lending to everyone.
The government will also again announce more freedom for the pension and insurance industries to invest in longer-term, illiquid (difficult to sell quickly) assets – eg public housing, wind farms, nuclear energy – which the government says will help their ambitions.
It’s worth noting that while this is billed as Brexit freedom, the EU is enacting similar reforms.
There will be some allusions to the UK’s development as a hub for crypto assets, but with some caveats given the recent bloodbath following the demise of cryptocurrency exchange FTX. Most financial industry executives say they are curious about cryptocurrencies but don’t feel the need to be first. “Let the shipwrecks of others be your navaids,” said one.
London’s position as a pre-eminent European financial center has been damaged in recent years. London briefly lost its long-standing crown of Europe’s most valuable stock market to Paris before gains in the pound pushed it narrowly back up, while Amsterdam took the title of Europe’s busiest stock trading hub.
Leading hedge fund manager Sir Paul Marshall of Marshall Wace recently described London’s financial markets as a “Jurassic Park” of old-fashioned companies and investors struggling to attract the world’s fastest-growing companies to listing on UK stock exchanges, and often lost to New York, Shanghai or even Amsterdam.
Labor politicians have criticized the removal of the bonus cap, saying the UK should not embark on a regulatory race to the bottom, but the government will insist reforms strike the right balance between stability and innovation.
Others will say that by relaxing regulation we risk forgetting the lessons of the financial crisis, when excessive risk-taking ended in billions of dollars in bailouts and a decade of stagnant productivity.
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