Liz Truss becomes Britain’s prime minister on Tuesday after a campaign in which she promised to “really unshackle” the City of London by making the most of Brexit in the 164-billion-pound ($192 billion) financial sector.
WHAT’S HER PLAN?
A stronger post-Brexit de-regulatory agenda than so far.
Truss wants a more vigorous pruning of financial rules inherited from the European Union which she says “hold the City, and its contribution to the entire country, back”.
Since being largely cut off from the EU following Britain’s departure from the bloc, the City faces competition from Amsterdam and Paris, as well as longstanding rivals like New York and Singapore.
Some British lawmakers want Truss to go harder in exploiting “Brexit freedoms” to write the country’s own rules. Truss says she wants to deliver “critical supply side reform” by changing Solvency II capital requirements for insurers, and the MiFID II rulebook for trading stocks and bonds.
WHAT’S NEW HERE?
Not that much so far in substance.
The financial services and markets bill (FSMB) put before parliament in July already sets out powers for regulators to amend Solvency II and to MiFID II regulatory regimes. The changes envisioned are incremental but welcomed by industry as collectively boosting the City’s competitiveness.
For example, Britain has already planned a big departure from the EU in reshaping MiFID by scrapping curbs on off-exchange or dark trading, and allow investors to trade on any exchange in the world to get the best price.
WHAT CAN WE EXPECT?
Probably a bit more of the same in practice.
Backers of Brexit see reform of Solvency II as a test of government resolve to exploit Brexit ‘freedoms’ to unlock 95 billion pounds from capital buffers for investing in the economy.
The reform is contentious as the Bank of England balks at releasing the higher amount of capital insurers are calling for, saying policyholders need protecting too. read more
The BoE will also face pressure to go easier on banks when applying the final leg of global Basel III capital rules from 2025.
And one lawmaker says Truss may put her weight behind de-regulatory reforms from a report chaired by pro-Brexit lawmaker Iain Duncan Smith, which recommended radically “untangling” financial services from EU rules by easing regulation in commodities and trading, and accelerating plans for a digital pound.
ARE REGULATORS UNDER PRESSURE?
In more ways than one.
Truss will review the role of the Financial Conduct Authority (FCA), the BoE’s Prudential Regulation Authority (PRA) and the Payment Systems Regulator because she believes they have not done enough to promote growth.
This is despite the FSMB already including a new objective for the FCA and PRA to take growth and global competitiveness of the City into account when writing rules.
But the FCA is toughening up consumer protection and has frustrated firms with the time it takes to authorise them at a time when Britain wants to become a hub for crypto assets and green finance.
Some industry officials are pushing back, fearing the watchdog review will end up recreating the Financial Services Authority, whose discredited light touch approach in the run up to the global financial crisis led to its replacement by the FCA and PRA.
Truss may also consider extra powers for the finance ministry to “call in” or override financial regulators.
BoE Governor Andrew Bailey has warned that undermining regulatory independence would harm the City’s standing as a global centre.
Truss has appeared to walk back concerns sparked earlier in her campaign that she would pressure the BoE to combat inflation, saying on Sunday she was a “great believer” in the central bank’s independence.
FULL STEAM AHEAD FOR TEAM TRUSS?
The government faces the huge challenge of Britain’s cost of living crisis and looming recession, after already spending several years and 30 public consultations ahead of the FSMB and other reforms.
There is no consensus in the financial sector for a bonfire of rules, or for reforms which go beyond international norms. “I can’t see anything out there which, even wrapped in a Brexit banner, would get any political traction,” a City lawyer said.
The wholesale scrapping of rules would take lawmakers and regulators years.
Finance officials want other types of action such as cutting levies on bank balance sheets, and making it easier to recruit foreign talent.
One asset management official expects the terms for Truss’ review of watchdogs will seek to avoid setting the government on a public collision course with regulators, whose goodwill is needed for reforms to work.
Truss’ hardline approach to amending Britain’s protocol with the EU on Northern Ireland will also fuel momentum in Brussels to relocate as much euro derivatives clearing from London to the bloc as possible in a knock to the City.
Huge divergence from EU rules would scupper any remaining hope of reopening UK financial market access to the bloc for reinsurers, for example, and make compliance requirements for international banks costlier.