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What Britain Is Targeting in a Post-Brexit City

Back in the 1980s, London’s “Big Bang” revolutionized stock trading and put the City at the forefront of international financial markets. Following Britain’s departure from the European Union in 2020, the government has aspirations for another kind of “Big Bang”: jettisoning EU financial rules that it sees as holding back innovation and economic growth. A new financial services bill, published in July, isn’t on the same scale as the changes more than three decades ago, though the inspiration is similar. The legislation aims to make stock listings easier while relaxing regulations in areas such as insurance, share trading on private platforms and even crypto assets.

1. Why the bill?

The aim is to improve and simplify finance rules to suit the UK’s economy, modifying EU law that was moved onto the UK statute book and was drawn up for what was a 28-country bloc of nations. The Financial Services and Markets Bill runs to more than 300 pages and is the biggest set of financial services reforms since those introduced in 2000 by Tony Blair’s Labour government, which created significant consumer protections. 

2. What’s included? 

The bill ranges from reforms to company listings and capital markets rules to measures to help consumers cope with technological change. Parts of the EU’s vast MiFID II rules, designed to protect investors and improve the functioning of financial markets, will be unraveled, such as the cap on trading in so-called dark pools, or private venues, to try to tempt share trading back from Amsterdam and shore up London’s existing business. Looking to the future, certain types of stablecoins, digital assets designed to hold a steady value, will be regulated as a form of payment. The bill also introduces a secondary objective for financial regulators to promote economic growth, after their primary aim of ensuring safety of the financial system. 

3. What’s the timetable?

The legislation will be debated in parliament in detail from September and examined in committees in both the House of Commons and Lords. It’s due to become law in April or May 2023. Now that City of London firms and their lobbyists have seen the wording, they will get to work, seeking to influence it with the aim of adding some proposals and removing others.

4. How does the Tory party leadership race affect it?

The bill coincides with the Conservative Party’s election to choose a new leader, who would automatically become prime minister. Liz Truss, the foreign secretary, was leading Rishi Sunak, the former chancellor of the exchequer, in early August, having won support from the right wing of the party and Brexiteers. That group is likely to want measures to implement their vision for Brexit, including cutting financial red tape and reducing the size of the state. There could be calls for less focus on consumer protection and more emphasis on freeing firms to pursue faster growth. A key factor will be who is appointed chancellor in the new government. 

5. How might a new Chancellor change the bill?

Nadhim Zahawi, who replaced Sunak as chancellor in July just two days before Boris Johnson announced his intention to stand down as prime minister, backed away from adding a controversial “call-in” power to the bill which would have allowed the government to block or change the actions of financial regulators. A new chancellor might take a different approach and the “call-in” could still be added alongside other changes as the bill makes its way through Parliament.

6. Could this hit Bank of England independence?

At the heart of the debate about the call-in power is politicians’ attitudes to the Bank of England, which is the UK’s ultimate financial regulatory authority as well as the setter of interest rates. The BOE is having a difficult time. There is rising criticism across government of its handling of inflation, which may escalate as cost-of-living problems intensify. Truss, the foreign secretary, has said she wants to revisit the BOE’s mandate and explore how to ensure policy makers meet their goal to keep inflation down, triggering debate about the central bank’s independence. 

7. What protection does the BOE have? 

There are plenty of people from the world of economics, government and finance who believe the BOE’s independence is crucial, both over monetary policy and regulation, whose remit includes consumer protection, competition and safety of the financial system. Andrew Bailey, the BOE’s governor, himself has warned of the hit the UK’s reputation could take internationally if there are inappropriate permanent infringements on the BOE’s freedom to act. His supporters also warn that diluting the central bank’s ability to make decisions will lead to an inappropriate rise of the power of politicians in regulatory policy, and influence by their financial donors.

8. Do the regulators need regulating?

Even for backers of the BOE, there is recognition that the bill should lay out some new oversight. That’s because before Brexit, the Prudential Regulation Authority -- the part of the BOE which oversees the financial system -- and the Financial Conduct Authority, which focuses on consumer protection, operated according to directions set by people elected democratically to the European Parliament. Much of the decision making passes to the regulators themselves as part of the shift of EU rules to UK law. Many in Parliament, as well as lawyers, economists and industry figures, want some checks to be introduced over regulators, who are not democratically elected. Ideas vary from monitoring by lawmakers on the Treasury Select Committee helped by experts, to the courts taking an active role, to greater powers for the government.

9. How could power be balanced? 

There are deep disagreements over how the new oversight powers should be framed and how far they should go. While the government hasn’t yet given itself a “call-in” power in the bill, it did include a right to order the regulators to carry out a review of their actions, conducted by a third party that has to be acceptable to the Treasury. The BOE was given independence in 1997. As part of the legislation, the government had the power to intervene in monetary policy in emergencies, but fears that might happen have been muted due to the risk of market turmoil that would result. 

10. What are the likely flashpoints? 

The first battleground between the government and regulators is already here. 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 pumped into other investments. They could include infrastructure projects ministers want to pursue to improve regions outside London and the South East, that have been a Conservative promise in the wake of Brexit. The PRA is prepared to roll back some Solvency II rules. But in one area, known as the matching adjustment, a calculation that calibrates how well a long-term asset such as an infrastructure investment matches a liability like paying pensions, it actually wants the regulations to become stricter.

11. Could this bill have broader implications?

A fight with financial regulators could reverberate more widely in British society. An agenda to shake things up could take in the British Broadcasting Corporation, the state broadcaster, which is set to be subject to a government review between now and 2024, with questions about its independence likely to be prominent. Its regulator, Ofcom, could also be in the line of fire, as could the Competition and Markets Authority, which may become a target for those who want a push for fast growth and a lighter touch around consumer protection.

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