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What Britain Is Targeting in a Post-Brexit City

Skyscrapers and buildings on the City of London skyline at dusk in London, U.K., on Thursday, Oct. 21, 2021. U.K. Prime Minister Boris Johnson said the City of London will prosper outside the European Union, noting job losses and disruption to capital flows have been lower than feared. Photographer: Chris Ratcliffe/Bloomberg
Skyscrapers and buildings on the City of London skyline at dusk in London, U.K., on Thursday, Oct. 21, 2021. U.K. Prime Minister Boris Johnson said the City of London will prosper outside the European Union, noting job losses and disruption to capital flows have been lower than feared. Photographer: Chris Ratcliffe/Bloomberg (Bloomberg)

Back in the 1980s, London’s “Big Bang” revolutionized stock trading and put it at the forefront of global financial markets. Following Britain’s departure from the European Union in 2020, the government has aspirations for another kind of “Big Bang”: jettisoning EU rules that it sees as holding back innovation and economic growth. The risk is that the EU decides the measures give the UK’s financial firms an unfair competitive advantage over European rivals and limits their access to continental markets. 

1. What’s the plan?

The government has introduced a Financial Services and Markets Bill that runs to more than 300 pages and represents the biggest set of financial reforms since 2000, when Tony Blair’s Labour administration brought in rules to boost protections for consumers. The idea is to tailor regulations originally drawn up for 28 EU nations to better suit the UK economy. The bill would: 

• Make stock listings easier, giving London’s capital markets a potential edge over those on the continent

• Unravel parts of the EU’s extensive MiFID II rules designed to protect investors, such as a cap on trading in so-called dark pools, or private venues

• Ease regulations governing the insurance industry and crypto assets. Certain types of stablecoins -- crypto tokens designed to hold a steady value -- would be classified as a valid form of payment

• Broaden the remit of regulators to include a goal of stimulating the economy, alongside ensuring the stability of the financial system

2. What else is on the cards?

Since the bill was published in July, Liz Truss has succeeded Boris Johnson as prime minister and replaced the Treasury team that initiated the reforms. Her rise to power was thanks partly to the right wing of her Conservative party, which sees Brexit as an opportunity to cut bureaucracy and reduce the size of the state. Truss wants to go further than Johnson by scrapping EU caps on banker bonuses and adding a “call-in” power to allow ministers to block or change the decisions of financial regulators including the Bank of England’s Prudential Regulation Authority -- which oversees the financial system -- and the Financial Conduct Authority. Her government may also strengthen the bill’s requirement for regulators to consider competitiveness in their deliberations. This could include laying out a process they must follow for making decisions. 

3. What’s the timetable for change?

The legislation has been debated by lawmakers and is due to become law in April or May 2023 after being examined by parliamentary committees. In the meantime, financial firms and their lobbyists are seeking to influence it with the aim of adding some proposals and removing others. 

4. How is the EU likely to respond?

The bloc already dashed the hopes of some British politicians that the UK would get automatic access to EU financial markets after Brexit. To preserve their business with clients on the continent, UK-based banks have had to rebase some employees and activities inside the EU. Much remains to be settled in terms of market access. For example, it’s still not clear what role the UK will continue to play in the EU’s massive financial derivatives market. Critics of Britain’s proposed reforms say they could antagonize the EU and make it less willing to allow London to continue acting as a clearing house for derivatives. The EU has not yet made a definitive move, partly because there is a view that its own markets need time to develop to match the depth and breadth of London’s. 

Read More: How ‘Equivalence’ Holds Key to Post-Brexit Banking

5. How might the reforms affect the BOE?

At the heart of the debate about the call-in power is politicians’ attitudes toward the central bank, which sets interest rates and is the UK’s ultimate financial regulatory authority. The BOE is having a difficult time. There is criticism across government of its handling of inflation. Truss has said she wants to revisit the bank’s mandate and explore how to ensure policy makers meet their goal to keep a lid on prices. This has led to speculation that she could make the BOE more accountable to the government.

6. 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. The institution has the freedom to set monetary policy and regulate on consumer protection, competition and the safety of the financial system. Andrew Bailey, the BOE’s governor, has warned of a hit to the UK’s reputation if the bank’s freedom is curtailed. His supporters warn that diluting the BOE’s ability to make decisions would give politicians and lobbyists inappropriate influence over regulatory policy. However, even backers of the BOE recognize that more clarity is needed on holding financial regulators to account. Before Brexit, the PRA and the FCA -- which focuses on consumer protection -- operated according to directions set by the European Parliament. Many lawmakers and industry figures say someone else is now needed to oversee the regulators, whether it’s Parliament, the courts or the government. 

7. What do the changes mean for insurers? 

Insurance firms wants the UK reforms to include a watering down of capital rules known as Solvency II to free up billions of pounds, which they say they would use for investment. The PRA is prepared to roll back part of Solvency II. But it wants to tighten regulation in another 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. 

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