What Britain is aiming for in a post-Brexit city


In the 1980s, the London “Big Bang” revolutionized stock trading and brought it to the forefront of global financial markets. Following Britain’s departure from the European Union in 2020, the government is yearning for a different kind of ‘Big Bang’: scrapping EU rules it sees as holding back innovation and economic growth. A new financial services bill, published in July, is not on the same scale as changes more than three decades ago, although the inspiration is similar. It aims to facilitate stock market listings while easing regulations in areas such as insurance and even crypto assets. It could also include ‘appeal’ powers to make the Bank of England and other regulators more accountable to politicians.

The aim is to improve and simplify the financial rules to suit the UK economy, by changing EU law which has been transferred to the UK law book and has been drafted for what was a bloc of nations from 28 countries. The Financial Services and Markets Bill is over 300 pages long and is the largest package of financial services reforms since those introduced in 2000 by Tony Blair’s Labor government, which created significant protections for consumers .

The bill ranges from reforms to business listings and capital markets rules to measures to help consumers cope with technological change. Parts of the EU’s broad MiFID II rules, designed to protect investors and improve the functioning of financial markets, will be unraveled, such as the trading cap in so-called dark pools, or private venues, in an attempt to attempt to return to stock trading from Amsterdam and consolidate the London business. Going forward, certain types of stablecoins, digital assets designed to hold a stable value, will be regulated as a method of payment. The bill also introduces a secondary objective for financial regulators to promote economic growth, after their primary objective of ensuring the safety of the financial system.

3. What is the schedule?

The legislation will be debated in detail in Parliament from September and considered in committees in both the House of Commons and the House of Lords. It is expected to become law in April or May 2023. Now that City of London businesses and their lobbyists have seen the wording, they will get to work, seeking to influence it with the aim of adding certain proposals and remove others.

4. How does the Conservative Party leadership race affect him?

The bill coincides with the election of the Conservative Party to choose a new leader, who would automatically become prime minister. Liz Truss, the Foreign Secretary, led Rishi Sunak, the former Chancellor of the Exchequer, in early August after winning support from the party’s right wing and Brexiteers. This group is likely to want measures to implement its Brexit vision, including reducing financial bureaucracy and reducing the size of government. There could be calls to focus less on consumer protection and more on freeing up businesses to pursue faster growth.

5. How could a new prime minister change the bill?

Truss is likely to give ministers the power to overrule some decisions by financial regulators if she becomes prime minister, a move that could create further tension with the Bank of England. Truss’ allies say she favors “appeal” powers to allow the government to block or alter the actions of financial regulators, including the central bank’s Prudential Regulation Authority and the Financial Conduct Authority. Its position signifies that whoever wins the leadership race supports the mechanism. Sunak argues that such powers are needed to ensure politicians — not “faceless regulators” — are accountable for regulatory decisions. When Nadhim Zahawi replaced Sunak as Chancellor in July, he backed away from adding the ‘appeal’ power to the bill, but it could still be added as legislation progresses through parliament.

6. Could this harm the independence of the Bank of England?

At the heart of the appellate power debate is the attitude of politicians towards the BOE, which is the UK’s ultimate financial regulator as well as the one that sets interest rates. The central bank is going through a difficult period. The government is increasingly critical of its handling of inflation, which could escalate as cost-of-living issues escalate. Truss, the foreign minister, said she wanted to review the BOE’s mandate and explore how to ensure policymakers achieve their goal of reducing inflation, sparking a debate over central bank independence .

7. What protection does the BOE enjoy?

Many people in the world of economics, government and finance believe that the independence of the BOE is crucial, both in monetary policy and regulation, whose responsibilities include consumer protection, competition and the security of the financial system. Andrew Bailey, the Governor of the BOE, himself warned of the blow that the UK’s reputation could suffer internationally if there were inappropriate permanent attacks on the BOE’s freedom of action. Its proponents also warn that diluting the central bank’s ability to make decisions will lead to an inappropriate rise in the power of politicians in regulatory policy and the influence of their financial donors.

8. Do regulators need to be regulated?

Even for supporters of the BOE, it is recognized that the bill should establish new oversight. Indeed, before Brexit, the PRA – the part of the BOE that oversees the financial system – and the FCA, which focuses on consumer protection, operated under guidelines set by democratically elected people in the European Parliament. Much of the decision-making is shifting to regulators themselves as part of the move from EU rules to UK law. Many parliamentarians, as well as lawyers, economists and industry figures, want checks to be introduced on regulators, who are not democratically elected. Ideas range from oversight by lawmakers from the special Treasury committee aided by experts, to the courts taking an active role, to increased powers for the government.

9. How might power be balanced?

There are deep disagreements about how the new supervisory powers should be framed and how far they should go. Although the government has not yet given itself an ‘appeal’ power in the bill, it did include a right to order regulators to conduct a review of their actions, conducted by a third party who must be acceptable to Treasury. The BOE gained independence in 1997. Under legislation, the government had the power to intervene in monetary policy in an emergency, but fears that this might happen were mitigated due to the risk of resulting market turbulence.

10. What are the likely flash points?

The first battleground between government and regulators is already there. Insurers, and some in government, want a set of capital rules known as Solvency II liberalized to free up billions of pounds that could be funneled into other investments. They could include infrastructure projects ministers want to pursue to improve areas outside London and the South East, which the Tories promised following Brexit. The PRA is ready to come back to certain Solvency II rules. But in one area, known as the equalizing adjustment, a calculation that calibrates how closely a long-lived asset such as an infrastructure investment matches a liability like pension payments, it actually wants regulations are getting stricter.

11. Could this bill have wider implications?

A fight with financial regulators could reverberate more widely in British society. One program to shake things up could concern the British Broadcasting Corporation, the state broadcaster, which is set to face government scrutiny by 2024, with questions about its independence likely to be significant. Its regulator, Ofcom, could also be in the firing line, as could the Competition and Markets Authority, which could become a target for those wanting rapid growth and a lighter touch on consumer protection.

More stories like this are available at bloomberg.com

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