It is a truth universally acknowledged – by the Chancellor, Governor, and Chief Executive of the FCA – that financial services is the engine of the UK economy, one that facilitates critical transactions in the real economy and is essential to seizing the opportunities ahead.
After prolonged uncertainty throughout the Brexit negotiations, last month’s Mansion House speeches and the publication of the Government’s vision paper A new chapter for financial services are a welcome sign that the Government continues to adopt a more positive stance towards this economically vital sector. Appearing to finally shrug off the inertia caused by the standoff with the EU over equivalence, these interventions offer more detail of how the Government intends to proceed. This has long been the ask of the sector – and indeed, of the EU.
In a highly coordinated set of interventions and publications, the cumulative policy momentum is significant. While the Government’s position so far remains a high-level strategy offering little new detail on precise regulatory changes envisaged, the publication of over a dozen consultations spanning several hundred pages (posing over 100 questions on the Wholesale Markets Review alone), signals a clear intent to plug the gaps and deliver against the ambition.
The main themes – open, competitive, sustainable and innovative markets – are not new or controversial. Welcome too are the red lines on not diverging for its own sake, and ongoing adherence to the highest global standards. Predictability and stability of regulation remain guiding forces. Overall then, this is a step rather than a leap forward in thinking, but this caution is understandable given the battlegrounds hoving into view.
There remain some ideological trade-offs that have not yet been confronted, and which are key to shaping what this new chapter will look like in practice.
There is a tension between the UK’s desire to seize the regulatory initiative and the risks of contributing to a confusing and burdensome multiplicity of standards.
Besides domestic pressure to deliver ‘Brexit dividends’ and demonstrate the UK’s new regulatory nimbleness and flexibility, it is not yet clear how the UK intends to fulfil its aspiration to lead the world in financial regulation while preserving its status as the gateway into Europe for many global financial institutions. It will be caught between the desire to be a rule-maker and the pressures to become a rule-taker, particularly in respect of digital and green finance, data and reporting standards.
In these fields, several jurisdictions are jockeying for first mover advantage, with the UK currently in the middle of the pack between the US and EU. This is a delicate balancing act. For the UK to succeed as arbiter it will need to bring the global financial services industry with it. The role for industry in defusing the politics and driving optimal policy, regulatory and operational outcomes has never been more important.
The UK is just one part of a dynamic and rapidly evolving global system.
The UK Government has signalled that it will not wait indefinitely for the EU to grant equivalence. And nor is the EU standing still. Under its strategic autonomy agenda it is looking closely at both clearing and portfolio delegation as well as building its own capital market infrastructure that is less reliant on the newly ‘offshored’ UK. Similarly, the role of the US continues to be essential in shaping global standards and policy. The risks of fragmentation are significant. The UK will need to find a way not only to lead but to work with other jurisdictions in support of open, deep and liquid capital markets.
The outward looking ‘Global Britain’ approach sidesteps the question of how the UK losing its biggest trading surplus might affect its ability to live up to its own aspirations.
The UK Government is understandably looking beyond the EU for future growth. However this sidesteps the question of the potential loss of its trading surplus if the UK fails to settle a workable trading relationship with the EU. Just under half of the UK’s £41.1bn trade surplus in financial services is derived from the EU (2019). It would be complacent to assume this is not still at risk, even if the change is a slow puncture effect rather than an overnight shock. This surplus is not easily substitutable from the rest of the world. In reality, this acts as a very real constraint on regulatory options if the UK does want to maintain broad trading conditions and its positive trade balance.
The focus is currently on bilateral and short-term wins. A strategic, multi-lateral approach could yield more value in the long-run. Work on the Swiss mutual recognition agreement has been characterised as seeking one of the most comprehensive agreements of its kind for financial services. But the exceptionally favourable context with Switzerland may not be easily replicated elsewhere. To effect genuine change – and to take its place at the global table – the UK should advocate for an overhaul of the WTO and a more comprehensive financial services protocol that would potentially prove far more valuable.
The UK Government has been at pains to talk about UK financial services rather than the City. While two-thirds of UK financial and professional services jobs are outside the M25, London is currently the only UK city in the top 20 of the Global Financial Centre Index – and is itself being gained on by key APAC cities. As part of its levelling up agenda – and as demonstrated by the shift from physical geography to virtual and remote working during the pandemic – there is an opportunity for the Government to harness the collective strength of UK financial centres as a cluster. This needs concerted investment in infrastructure and connectivity; skills and education; and the pursuit of opportunities to broaden or deepen specialisms.
The recent publications are not, and were never going to be, a silver bullet to end the sense of drift that has permeated financial services policy for the past few years. They do mark a pivot point and look forward in a positive way, and we recommend financial institutions engage with their summer homework in this spirit. There is a particular opportunity to demonstrate sub-sectoral opportunities that may better cut through the international and geopolitical tensions and play into the domestic political agenda. Thoughtful and evidenced responses to the consultation papers can turn the Government’s synopsis of this new chapter for financial services into the summer’s hit blockbuster.
Sarah Gannaway is a Director at Flint and provides advice on financial services policy and regulation. To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch.