We all invest money or contribute to a pension in some way and have an interest in how government policy may affect the economy and our money. A recent announcement in the UK by chancellor Jeremy Hunt for planned deregulation plans is something we should all be aware of. But what are they? In this article we summarise the pros and cons of such a possible move – is it a risk or opportunity for growth?
The deregulation plans include a review of the “ring-fencing” regime introduced after the 2008 financial crisis, consulting on a Central Bank Digital Currency, and prolonging tax exemptions for international investment management to crypto-assets.
A dangerous mistake?
The Chancellor of the Exchequer Jeremy Hunt’s new deregulation plans have been called a ‘dangerous mistake’ by Sir John Vickers, a financial expert and one of the chief architects of the banking reforms which took place after the 2008 global financial crisis.
Vickers, who led the independent commission tasked with reviewing the banking industry in the UK after the 2008 crisis, stated that vital elements of the deregulation proposals introduced by Chancellor Jeremy Hunt could harm the financial future of Britain.
Ring-fencing reforms
Vickers stated that he was chiefly concerned by Hunt’s plan to repeal the ring-fencing rules that the then Chancellor George Osborne implemented in 2019 after the financial crash to protect everyday customers from financial harm.
Vickers called these rules the ‘bedrock of how we regulate banks in the UK’ before going on to tell the Guardian: “If they’re saying: ‘Look, we’re ten years on, we could make some adjustments, but it remains part of the bedrock,’ then I would say: ‘Fine’. If, on the other hand, they’re saying: ‘Maybe it’s time to roll back on this,” then I think that would be an extremely dangerous and wrong path for us to follow.”
The rules regarding ring fencing could take years to implement fully and will go to consultation this year. It’s possible that a few smaller banks, such as Santander UK, TSB and Virgin Money, would be exempt from following previous regulations, and larger ones like Lloyds and Natwest will face fewer restrictions on how they fund their banking operations. These reforms will likely allow them to sell more complex products than previously allowed, to customers within their ring fenced bank.
Details of the deregulation
The Chancellor’s deregulation plans, also known as the ‘Edinburgh reforms’, will hold banking bosses accountable and personally responsible for any issues on their watch. The package will include over 30 changes and plans for a central bank digital currency. Changes to the rules on short-selling will also be made, which is where investors bet that the price of an asset will fall.
Also included in these reforms is the introduction of new targets for City regulators that will force these regulators to look at how their rules could increase UK growth, including:
- Unlocking funding for infrastructure projects
- Helping first-time buyers access the housing market
- Boosting venture capital funding for growing companies
Concerns
Vickers, however, who once sat on the Bank of England’s interest rate-setting monetary policy committee, stated it was a mistake to give insurers and banks special treatment by repealing a substantial package of regulations, even if it is in the name of growth.
Vickers said, “We want safe and sound institutions and well-functioning financial markets. What I think would be a great mistake would be to put the financial services sector on some kind of pedestal, warranting some kind of special light-touch regulatory treatment, when we all need that sector to be safe and sound for the competitiveness of the economy as a whole.”
He continued by saying, “So I’m sure there are lots of good competitiveness and productivity reforms, but let us think in a ‘whole economy’ way, not with undue concentration and focus on this sector, important though it is.”
There were more concerns about Hunt’s reforms, this time expressed by Dr Angela Gallo, senior lecturer in finance at Bayes Business School, who urged caution around plans to deregulate this part of the banking industry, stating, “Together with the removal of the bank bonuses and the discussion on call-in power, this political decision seems to have little to do with fixing the financial system or ensuring financial stability.”
He continued, “These were the main arguments behind many of these reforms in the aftermath of the financial crisis, but this seems to have more to do with a wish to deregulate. Deregulation, unless carried out with a clear objective, can be dangerous.”
Jeremy Hunt’s defence
The Chancellor defended his plans from the comments made by Vickers, Gallo and others, instead saying his changes wouldn’t lead to increased risk in Britain’s financial sector.
“This is a very considered and balanced package. I mean, we have to ensure that we don’t unlearn the lessons of 2008. But at the same time, recognise that banks today have much stronger balance sheets, [and] we have a much more developed resolution system if things do go wrong.” Hunt told a Financial Times conference.
“And in that context, it is perfectly sensible to make pragmatic changes such as the ones we’re announcing today. But we’re doing so very, very carefully to make sure that the UK is competitive, exciting, the place to be the place to invest, but also that we don’t lose the guardrails that were put in place after 2008,” the Chancellor added.
Hunt also received support for his reforms from Flora Hamilton, director of financial services at the CBI, who said: “The Chancellor is absolutely right to use his ‘Edinburgh Reforms’ of the financial services sector as an opportunity to drive UK growth, alongside taking sensible precautions to protect consumers, businesses and financial stability.”
What to do next?
We would like to remind our readers to make well considered investing decisions. If you need investment advice you can speak to an advisor by contacting us today. https://www.brite-advisors.com/contact/
