UK banking rules in biggest shake-up in over 3 decades

Rules that forced banks to legally separate retail banking from riskier investment operations will be reviewed.

Those were introduced after the 2008 financial crisis when some banks faced collapse.

The package of changes, the “Edinburgh Reforms” is being presented as an example of post-Brexit freedom to tailor regulation specifically to the needs and strengths of the UK economy.

However, critics say it risks forgetting the lessons of the financial crisis.

Between 2007 and 2009 the then-Labour government spent £137bn of public money to bail out banks.

Overall, taxpayers have lost £36.4bn on those bailouts, according to the latest estimate from independent forecaster the Office for Budget Responsibility.

The plans to ease regulations on financial services are being described as another “Big Bang” – a reference to the deregulation of financial services by Margaret Thatcher’s government in 1986.

The government has already announced it will scrap a cap on bankers’ bonuses and allow insurance companies to invest in long-term assets such as housing and windfarms to boost investment and help its levelling up agenda.

Rules governing how senior finance executives are hired, monitored and sanctioned will be overhauled.

There will also be new rules around bundling investments together into tradeable units – a process called securitisation.

Chancellor Jeremy Hunt said the changes would secure “the UK’s status as one of the most open, dynamic and competitive financial services hubs in the world”.

The reforms “seize on our Brexit freedoms to deliver an agile and home-grown regulatory regime that works in the interest of British people and our businesses”.

However, Labour’s shadow City minister Tulip Siddiq said: “Introducing more risk and potentially more financial instability because you can’t control your backbenchers is this Tory government all over.

“That this comes after the Tories crashed our economy is beyond misguided.”

She said ring-fencing and rules governing senior management “were introduced for good reason”, and that the City had been “sold down the river in the Tories’ Brexit deal”.

“Its competitiveness depends on high standards, not a race to the bottom,” Ms Siddiq added.

However, Chris Hayward, policy chairman at the City of London Corporation, said the reforms would not weaken standards.

“It’s a chance to actually grow our economy and I think we should be very excited about it,” he said.

Mr Hunt will meet bosses of the UK’s largest financial services in Edinburgh on Friday to discuss the reforms.

After the financial crisis of 2008, when the government had to spend billions supporting the UK banking system, a new regime was brought in to increase the personal accountability of senior risk-taking staff.

It allowed for fines, bans and even custodial sentences, although there have been very few examples of enforcement.

But City insiders say a major disadvantage it imposes is the lengthy process of getting the movement of senior staff to the UK approved by the regulator – making London less attractive to foreign firms.

After the financial crisis, large banks were forced to separate or “ring fence” their domestic banking operations – mortgages and loans for example – from their investment banking operations, which expose their own cash to market volatility and were deemed riskier.

The cost of having two separate shock-absorbing cushions of spare money was seen by some as placing extra costs on the sector.

Most of the big banks have spent billions on this ring fencing and are not calling for its reversal.

The government also re-announced more freedom for the pensions and insurance industry to invest in longer term, illiquid assets – those that are hard to sell quickly such as social housing, windfarms, and nuclear – which the government will say helps their levelling up ambitions.

It is worth noting that although this will be billed as a Brexit freedom, the EU is undertaking similar reforms.

There was a nod to developing the UK as a centre for crypto assets, but with some caveats given the recent bloodbath after the demise of the cryptocurrency exchange FTX.

Most financial industry leaders say they are crypto curious but do not feel the need to be first on this. “Let the shipwrecks of others be your seamarks,” said one.

London’s position as the pre-eminent European financial centre has been dented in recent years.

The UK’s capital city briefly lost its long-time crown of most valuable European stock market to Paris before gains in the pound pushed it narrowly back ahead, while Amsterdam took the title of busiest European share dealing centre.

Leading hedge fund manager Sir Paul Marshall of Marshall Wace recently described the London financial markets as a “Jurassic Park” of old-fashioned companies and investors, and it has struggled to attract the world’s fastest growing companies to list on UK exchanges, often losing out to New York, Shanghai or even Amsterdam.

Labour politicians have criticised the scrapping of the bonus cap and said the UK should not engage in a regulatory race to the bottom, but the government will insist the reforms strike the right balance between stability and innovation.

Others will say that in loosening regulation we risk forgetting the lessons of the financial crisis when excessive risk-taking ended in billions in bailouts and a decade of stagnating productivity.