UK shreds EU red tape: Banking reforms to boost attractiveness of financial sector

Chancellor heralds Brexit as 'golden opportunity' to reshape regulations

Chancellor Jeremy Hunt is seeking to recapture some of the status that the City of London had in the global financial sector. PA
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British Chancellor Jeremy Hunt has launched major reforms to the UK’s financial sector, with plans to reduce red tape and replace EU regulations.

In what is being billed as the largest shake-up of regulations in the UK's financial sector for 30 years, Mr Hunt said the “Edinburgh Reforms” were possible after the UK was presented with the “golden opportunity” provided by Brexit.

The package includes more than 30 regulatory changes, with plans to “review, repeal and replace” hundreds of pages of EU regulations, from disclosure for financial products to prudential rules governing banks.

Any rules considered to be holding back growth or putting companies off listing in the UK will be reviewed or overhauled, to create a “tailor-made” UK regulatory system.

The moves will loosen banking rules introduced after the 2008 financial crisis, which caused some UK banks to face potential collapse.

During the crisis, the government was forced to spend billions of pounds supporting the banking system.

It led to several new regulations aimed at reducing risk. For example, after 2008 the large banks were forced to ring-fence their domestic operations, such as mortgages and personal loans, from their investment banking activities.

Essentially, the two different sections of a bank had to be able to stand alone and have separate cushions of capital requirements.

Although this reduced risk, it was costly and the UK's big banks spent billions creating the “spare cash” cushions. The relaxing of the regulations on ring-fencing will have more of a beneficial effect on the mid-sized UK banks, such as TSB and Virgin Money.

Another target of the reforms are the rules brought in after 2008 to make senior bank employees much more accountable, with fines, bans and even prison sentences possible for transgressors.

But companies in the financial sector claimed the rules, and the red tape that went with them, made it much more difficult to recruit senior staff in London.

In a bid to recapture some of the status that the City of London had in the global financial sector, the UK government has already removed a cap on bankers' bonuses.

“This country’s financial services sector is the powerhouse of the British economy, driving innovation, growth and prosperity across the country,” Mr Hunt said.

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Mr Hunt's plans have been broadly welcomed in the City of London, which sees them as an opportunity to regain the status as Europe's undisputed leading financial centre.

The City briefly lost its crown as most valuable stock market in Europe to Paris recently, although — thanks to a slight rise in the pound — was able to regain it. Meanwhile, Amsterdam's stock exchange took the top slot as the continent's busiest stock exchange.

Meanwhile, in a further effort to boost the City of London as the pre-eminent destination for financial sector business, the Chancellor has signalled that he will change the law that relates to the remit of the Bank of England's Prudential Regulation Authority.

The PRA regulates Britain's banks and insurance companies and has a duty to promote competitiveness in the financial services sector.

Mr Hunt now wants to widen that to cover the “the international competitiveness of the UK economy — including, in particular, the financial services sector — and its growth in the medium to long term”.

A Bank of England representative said: “We look forward to working with the Treasury, and will continue to maintain a safe and sound financial system which supports the UK's position as a major global financial centre.”

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Some eyebrows have been raised at the sweeping reforms and a few City watchers have warned they could make the UK's financial sector more risky.

But Chris Hayward, the policy chairman at the City of London Corporation, said: “We need the help of good growth and good regulation at the same time — they are two sides of the same coin.”

“It is not a race to the bottom. In my view, it is a chance to actually grow our economy and I think we should be very excited about it.”

Some observers have voiced concerns that the Chancellor's overhaul of banking regulations ignores the lessons learnt from the 2008 financial crisis and that undoing the stricter rules imposed in its wake could potential leave banks exposed to turmoil at some point in the future.

Asked whether the reforms now make the UK's financial sector a riskier place, Mr Hunt said "absolutely not".

"We have to make sure that we do not unlearn the lessons of 2008, but at the same time recognise that banks today have much stronger balance sheets, and we have a much stronger resolution system if things do go wrong. In that context, it is perfectly sensible to make pragmatic changes just as the ones we are announcing today. But we are doing so very, very carefully to make sure that the UK is competitive, exciting, the place to be and the place to invest, but also that we don’t lose the guardrails that were put in place after 2008," he said.

Updated: December 09, 2022, 2:18 PM