City of London heads have backed the government’s financial services reforms as necessary to keep London competitive outside of the EU, even if the unwinding of safeguards from the last financial crisis increases risk.
However, many of the FT’s City Network — a 50-strong group of senior executives — did not believe that chancellor of the exchequer Jeremy Hunt’s “Edinburgh reforms” were significant enough to yield a second “big bang” for the City of London.
On December 8, Hunt unveiled the biggest set of city reforms for decades, including to post-2008 rules on bank ringfencing, where lenders separate their retail activities from their riskier investment banking arms.
Other areas targeted for reform include the senior managers regime — which puts personal responsibility for corporate problems on the heads — and aspects of EU regulations such as Mifid II, which governs financial markets, and Solvency II rules for insurers.
The document contained more than 30 proposals focused on repealing retained EU law in financial services and replacing it with a new framework tailored to the UK.
Mervyn Davies, the former banker who was a minister during the post-crash period, said that the UK faced increased competition from cities such as New York, Frankfurt and Paris that made reform essential.
He pointed to the balance needed between risk and reward, but said it was time to move on while remembering the lessons of the last financial crisis.
“Some of the regulations we put in place were making us less competitive. We took EU directives and made them tougher. Our institutions need to be competitive or risk becoming irrelevant on a global stage.”
Other City leaders said that risk would inevitably increase with changes to rules that tightly bound how the City operated. But, none worried that this would be at an unmanageable or unacceptable level.
Amanda Blanc, chief executive of Aviva, said that “of course risk goes up when rules are relaxed, and all of us in financial services and beyond should identify and manage those risks all the time.”
“The way to address risk is to understand it, and manage it, not necessarily to try and freeze it with immovable laws,” she added.
She said that the chancellor had drawn up “sensible measures” that would keep London at the forefront of global financial centres. “Managing risk to support growth is what well-regulated markets are for.”
Sir Win Bischoff, chair of JPMorgan Securities, said that the first “Big Bang” in the 1980s, which refers to the deregulation of financial markets under the prime minister Margaret Thatcher, was of a different order of magnitude.
“This is more of an adjustment, a redress of sorts,” he said. “The Edinburgh Reforms will however be useful in arresting the relative and measurable decline of the City over the past five years.”
Anne Richards, chief executive of Fidelity International, agreed it was “less big bang, more sound logic to drive the competitiveness of UK financial services and markets”.
The capital market reforms would “keep us in line with other financial centres”, she added, and singled out the consumer-side proposals around access to online advice and guidance as well as stimulating demand for investment.
The consultation into relaxing the strict rules associated with the senior managers regime was welcomed by several in the City Network.
Bischoff said that its “abolition may psychologically cause counterparties initially to question the loosening of regulation [but] in the fullness of time, and if there are no accidents to point to, its absence will be accepted”.
Miles Celic, chief executive of The CityUK, the industry lobby group, said changes to the senior managers regime “will be an important test case”, adding: “There have been too many instances where it has been cumbersome, bureaucratic and slow. There is an opportunity to streamline the process without undermining the ambitions and purpose behind it.”
Clare Woodman, head of Emea for Morgan Stanley, said that the Edinburgh reforms should increase UK financial market efficiency and competitiveness overall.
But Woodman said that the position of London as a global financial center would also depend on the development of the broader ecosystem such as on tax and skills, as well as the speed of implementation “so the City can begin to benefit from these reforms”.
Ann Cairns, vice chair at Mastercard, said the government was keen to show some benefits from Brexit but warned that the impact could be lessened if consultations dragged on and ended up diluting significant changes.
“Regulation has changed a lot since 2008. It’s made things safer. But it’s become so burdensome that some boards spend virtually their whole time on this topic and minimize the important discussions on business growth.”
But Guy Hands, head of private equity group Terra Firma, warned that the package would not be enough to overturn the overall impact of Brexit on the City, which still lacks an equivalence deal with the EU that would recognize each others’ rules.
“Unfortunately, that horse bolted back in 2016 and the decline of the City of London is inevitable and was completely predictable. While people can disagree about the speed of Britain’s likely financial and social decline, the vote in 2016 [has] Set Britain off in a direction that will be very difficult to reverse. The City of London will be one of its first victims.”
Former BT and KPMG chair Mike Rake agreed with Hands, and pointed out that many of the reforms were portrayed as “Brexit freedoms” that could have been done within the EU.