The Conservatives re-embrace the City of London

The City of London has been handed an early Christmas gift by the Treasury. With a promise of “turbocharging” growth and competitiveness, the chancellor, Jeremy Hunt, unveiled a 30-point package of reform, reviews and outright slashing of regulations, many of which were forged in the wake of the financial crisis. His proposals are, by their sheer number and range, wide-ranging. But the package’s symbolism is far greater than the sum of its parts — which is probably the point. Conservative politicians are finally showing some love to the City after a decade when bankers were deemed toxic by successive Tory governments.

Many of the reforms are long-trailed changes promised as part of the City’s post-Brexit “Big Bang 2.0”. That label has been jettisoned; alongside the intended Thatcherite undertones, there was perhaps an unwelcome whiff of explosive Trussonomics about it. Instead the package has the reassuring-sounding moniker of the “Edinburgh Reforms”. There is much to welcome: plans to make it easier and cheaper for companies to list in London are overdue. Overseeing ESG ratings providers could help prevent greenwashing. Encouraging the consolidation of small defined-contribution pension schemes is sensible.

Brexit’s shadow looms large over the reforms, not least because it represents the biggest hit to the City’s competitiveness. The government has been desperate to point to the benefits of leaving the EU. Leaving the bloc allows the UK to craft bespoke rules, even if some in the City are wary of diverging too much. Retail investment rules known as Priips, overly prescriptive elements of the Mifid regime, and the Solvency II insurance rules can be happily cast off, along with the cap on bankers’ bonuses that did little but drive up fixed salaries. The EU is in any case tweaking its own rules, including Solvency II and Mifid II. If the UK did not reform legacy Brussels rules remaining on its statute books, this would leave it with a Brexit forfeit, not a dividend.

But some rules Hunt wants to overhaul were made in Britain, not Brussels. The UK unilaterally went further than the EU — and indeed the US — because of the outsize nature of its financial services sector. Ringfencing rules (only in force since 2019) requiring lenders to separate their retail and investment banking businesses, and an accountability regime that sanctions top brass for failures on their watch were not replicated across the bloc. 

Andrew Bailey, governor of the Bank of England, is right to sound a note of caution about the government’s heady rapprochement with the City. The crisis, rather than stemming from idiosyncratic problems, showed up woeful holes in both regulations and regulatory architecture that needed fixing.

Scrapping the accountability regime would be a mistake, as it has been a powerful stick for supervisors to wield behind closed doors (even if public sanctions using the regime are almost non-existent). Better to concentrate on fixing the bureaucratic logjam around it. As for Hunt’s proposals around reforming ringfencing, for now at least they seem modest. Care must be taken, however, to ensure the UK does not head down a path towards neutralising rules, just as the country and its banking system are about to be severely tested by what is expected to be a prolonged recession.

As memories of the crisis fade, and the focus is on boosting the UK’s lacklustre economy, it is only natural that the regulatory pendulum swings to liberalisation. Some recalibration is welcome. But when it comes to the City, the ghost of crises past will haunt any government that goes too far too fast.