Advocates of Britain’s exit from the European Union presented it as an opportunity to sweep aside unnecessary rules and regulations that were holding back economic growth. Key to this is a plan to replicate the “Big Bang,” the wave of deregulation in 1986 that turned the City of London into a global finance hub. The idea is to relax rules originally drawn up for 28 EU nations to make the country’s exchanges, banks, brokers and insurance firms more competitive, allowing them to grab a bigger share of global markets. Mounting evidence that Brexit is doing UK businesses more harm than good has added pressure on the government to make the financial reforms a success.
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 wants to change rules for stock offerings, private trading venues and other areas to give London an edge over rival financial centers. It’s also easing capital requirements for insurers, freeing up tens of billions of pounds that could be invested in national infrastructure. Some of the rules imposed on banks in the aftermath of the 2008 global financial crisis could also be dismantled.
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 former Prime Minister Boris Johnson’s administration introduced a parliamentary bill laying out a new legal framework for banks, insurers and asset managers. The bill is expected to become law in April or May 2023. Meanwhile, financial firms and their lobbyists are seeking to influence the shape of the reforms.
3. What will the final arrangements look like?
It’s not set in stone. Johnson left office in September, and his replacement Liz Truss wanted to go further with the reforms. Her finance minister Kwasi Kwarteng announced plans to scrap EU-era caps on banker bonuses and allow ministers to block or change the decisions of the institutions that oversee the stability of the financial system, including the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority. Her replacement Rishi Sunak upheld the reform on bonuses, but it’s not clear if he will also introduce the intervention power over the FCA and PRA. It was Sunak as chancellor who first came up with the idea as a way to make them more accountable to the government after Brexit. Since then, the regulators have warned that eroding their independence would damage their credibility.
4. Do financial firms like the reforms?
They’ve welcomed some of them, while lobbying for other changes. Banks, for example, want to scale back the ring-fencing of retail and investment banking. Small lenders want to cut the amount of loss-absorbing capital they are required to hold. But the financial community is also wary of a wholesale bonfire of regulations that could open a door to the kind of fast-and-loose practices that triggered the financial crisis.
The impact of the changes 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 that the financial reforms could provoke the EU to restrict UK access to its markets in areas such as derivatives trading. Another risk is that the measures go too far and undermine the stability and transparency that underpin the City’s appeal for international investors.
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