Government unleashes big reforms to the City, but how soon will they make a difference?

By Chris White

Much of the government’s attention before Christmas has been taken up with strikes and public sector pay disputes, which look set to rumble on as more unions look to ballot their members to take action.  Facing down union demands for pay increases to match double-digit inflation will prove challenging, and comes at a time when ministers are trying to find ways to make the UK economy more competitive.  

The UK’s financial services sector makes up a little under 10% of the economy, and recent data has made troubling reading for the government. Data published by Bloomberg shows that initial public offerings (IPOs) in London raised £1.5 billion pounds this year, accounting for only 9% of the European total and marking the worst performance of the London Stock Exchange (LSE) since 2009.  

This comes on top of other warning signs, including the Alternative Investment Market (AIM) seeing just £3m raised through IPOs in the third quarter of 2022, compared to £468m a year earlier.  There is no doubt that the markets are impacted by rising inflation, the cost of living crisis and the possibility of a lengthy UK recession.  However, Euronext Paris briefly dethroning the LSE as the European stock exchange with the largest market capitalisation in November, and Amsterdam overtaking London as the largest share trading venue point to broader structural issues affecting the UK. 

The government recognises that it is absolutely vital for the sector to remain competitive, and it is one of the UK’s greatest strengths, employing 2.3 million people and generating 13% of overall tax revenues.  

Much of the post-Brexit reforms to the financial services sector have been a long time in development, kicked off under Rishi Sunak when he was Chancellor during the pandemic with Lord Hill’s Listing’s Review, but which have gathered pace as the government has recognised that Brexit has provided an opportunity to make the UK’s financial services sector more competitive.  

Sunak’s Mais lecture earlier this year trailed many of the principles that underpin this idea – that when “the economy and our standard of living are not growing fast enough, consent for the system is undermined. If we cannot accelerate growth, people will begin to lose faith in the moral and material case for free markets.” It was clear then that further reforms were coming. 

The package of thirty measures announced on Friday represent the government’s attempt to do a Thatcher style ‘Big Bang’, setting out how the framework for financial services regulation will adapt to support a dynamic, stable and above all, competitive financial services sector.  

Some of the reforms have been in train for some time, and the Financial Services and Markets Bill introduced earlier in the autumn is taking some of these plans forward, for example introducing plans for UK regulators to focus more on competitiveness and growth, and reforming the prospectus and securitisation regimes.  Others, such as plans to reform the division between smaller banks and their investment banking activities, reform of PRIIPS, and consulting whether the Financial Conduct Authority should be given regulatory oversight of environmental, social and governance (ESG) ratings providers, are newer. 

Labour have criticised the reforms as a ‘race to the bottom’, arguing that the priority should be protecting consumers. They have tabled an amendment to the FSM Bill that would give regulators the power to demand that communities have access to ‘essential’ in-person banking services, including opening new accounts, applying for loans and making and receiving payments. 

That may be valid criticism, but the broader reforms do have the potential to drive big changes in the way that markets are regulated in the UK.  However, their development has been lengthy and the reforms themselves will take considerable time before they can have an impact.  

For example, on ring fencing, the Edinburgh Reforms respond to the March 2022 review, led by Keith Skeoch, committing the government to consulting on the outcome of that review with a view to enacting changes later in 2023.  On ESG, we have to await the government’s updated Green Finance Strategy, due to be published at some point next year, while Sir Douglas Flint’s Digitisation Taskforce is not due to issue their final report until 2024.  

There is no doubt that these reforms are needed, and while they may be slow in reaching fruition, they will make significant long-lasting changes to the regulatory regime governing financial services in the UK. However, much of the detail remains to be worked out and presents an opportunity for businesses to help shape that over the coming months.