The whole project is political theater, not supply-side revolution. Bankers and investors don’t want the Brexiteer’s bonfire of red tape and mostly never did. They want rules and standards as common as possible with the rest of the world because anything else risks the free flow of capital across borders — and directing those flows is how they make money.
Margaret Thatcher’s original 1980s Big Bang was a wave of deregulation that broke open the cozy world of old City of London practices and partnerships, driving an American takeover that helped to turbocharge dealmaking and trading. Hunt’s speech Friday was decked with today’s management argot of ensuring agile and dynamic rules for a vibrant financial sector – with, of course, a sober nod to the high regulatory standards that make the UK a trusted place to do business. But the details are scant.
The proposals range from things that offer mild potential improvements to efficiency – such as a review of sales taxes on fund management or speeding up trade settlement from the standard two days – to changes that are already in legislation being processed by parliament, for example an objective for regulators to consider Britain’s competitiveness when writing rules. (That really means sticking close to international standards – not turning London into a fantasy Singapore-on-Thames.)
Hunt has some very sensible plans, such as a review of Europeanrules on how investment research is regulated and sold. There has been some harm from this regime: Independent research firms not tied to major banks have struggled rather than thrived; And the stocks of many smaller companies simply don’t get covered anymore, feeding a downwards spiral of waning investor knowledge, trading and liquidity.
There are reforms that Europe is also doing, such as loosening rules around prospectuses for new share listings, or attempting to improve transparency in bond markets with a “consolidated tape,” a single stream of price and trade data. For the tape, Europe will likely run a tender process that could name a single provider quickly, while the UK may lean toward letting different providers fight it out in a market-led approach over years.
The supposedly big changes run up the flagpole in news reports ahead of Friday’s statement were for Britain’s unique ring-fencing rules and its Senior Managers’ Regime, which was meant to ensure executive accountability for errors or wrongdoing. Neither will be radically changed.
Ring-fencing keeps retail deposits quarantined from investment banks. It was enacted after the 2008 crisis to help lessen the chances of future bailouts. Nothing the government has said or leaked so far suggests the rules will be scrapped. Banks that do barely any trading will likely not have to meet the rules in future, and the main beneficiaries are likely to be two Spanish banks, Banco Santander SA and TSB Banking Group Plc, which is owned by Banco de Sabadell SA.
The rules for senior managers, meanwhile, are just like regimes in Singapore, Hong Kong, Australia and Ireland. Any changes will leave Britain with a “fit-and-proper person regime” that would aim to ensure accountability, City Minister Andrew Griffiths told the Financial Times in an interview. The industry doesn’t want to see these standards diluted, but lobby groups like The City UK would simply like regulators to work with it more efficiently, mainly by being faster at approving new executive appointments.
The list of tweaks and marginal efficiency gains goes on — none of which add up to a magical growth serum shot directly into the veins of the economy. Hunt’s big hope for actual growth out of this is more infrastructure investment through previously announced changes to insurance regulations (again, something being pursued in Europe) and through efforts to pool local government pension funds in a way that could help them diversify their investments.
This might increase the amount available to invest in wind farms or housing for example – although the £100 billion ($123 billion) of freed-up funds touted by the insurance industry is a big exaggeration versus the counterfactual of no rules changes, as insurers are already huge investors in this stuff. In truth, the problem with infrastructure investment is as much to do with obstacles like planning restrictions. For insurers, the whole exercise was about a slight improvement in their capital requirements when chasing the higher yields of illiquid assets.
This is no Big Bang: Hunt’s message of a “bold collection of reforms” is for the Conservative Party’s support base not for the finance industry. It’s political action that provokes an equally political reaction raging about a return of light-touch regulation and threats of imminent disaster. Neither the industry nor its regulators want to go there, but most of the public will still be bludgeoned by an unedifying and noisy dustup that on both sides exaggerates what any of these Edinburgh Tweaks mean. That won’t help anyone.
More From Bloomberg Opinion:
• Brexiteers, No One Wants Your Regulatory Bonfire: Paul J. Davies
• Post-Brexit UK Is Becoming a Worst-Case Scenario: Clive Crook
• Rishi Sunak Faces a Most Unhappy Christmas: Martin Ivens
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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