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It has been a trying few weeks for Britain’s chancellor Rachel Reeves. The UK government reversed over £6bn of her planned savings on welfare payments. A teary appearance in parliament then added to speculation about her job. Now she faces daunting questions over how she will balance the books ahead of the autumn Budget. Reeves did, however, manage to provide a brief but positive distraction on Tuesday night by unveiling a number of promising reforms to boost the UK’s financial sector at the chancellor’s annual Mansion House speech. But be under no illusion: these measures will not be enough to spark investor excitement or near-term economic expansion.
Many of Reeves’ announcements, which she dubbed the Leeds reforms, focused on easing regulations across the financial services industry. Following the financial crisis the rule book swung towards greater oversight of the sector, to limit excessive risk-taking and provide stronger safeguards for consumers. But the chancellor is right that in some cases the precautions went too far by curbing growth and ceding too much power to arm’s length bodies.
For instance, Reeves backed a Bank of England recommendation to ease MREL capital requirements. These thresholds have not kept pace with the growth of the economy, which means they can crimp the expansion of small and mid-sized banks, and lending. Plans to make senior management appointments easier, in part by reducing regulatory review timelines, and a new concierge service to help foreign financial services companies set up faster in the UK will prop up the sector’s international competitiveness.
There were sensible steps to improve Britain’s retail investment culture too, which could help breathe life into the UK’s stock markets. This includes a proposal to allow banks to provide targeted advice to customers who may be missing out on worthwhile investment opportunities. Britain’s individual savings account system gives households access to tax-free saving. However, each year most savers put their funds into cash investments rather than potentially higher returning equities. That is partly a function of low awareness and complexity.
Reeves must still ensure she gets the balance right between cutting red tape and managing risk. This is particularly important for her plans to reform the senior managers regime, the Financial Ombudsman Service — an arbiter of complaints between consumers and the industry — and ringfencing rules that force banks to separate their retail and investment banking activities. Some measures could also backfire. An initiative to enable banks to extend mortgages to individuals on lower incomes, however well meaning, risks pushing UK house prices even higher as housebuilding continues to drag.
For all her efforts, however, Reeves’ Mansion House announcements are unlikely to shift the dial on the UK’s downbeat growth prospects. That is because the country has a long list of maladies other than burdensome rules in its financial sector. In the short term, business and investment activity — in the City of London and beyond — is restrained by ongoing rumours that the chancellor may resort to raising revenues through a higher bank levy or some form of wealth tax in the autumn. Despite remarking on the importance of fiscal stability, she failed to offer any reassurances.
Policies that may have provided a more immediate jolt to the broader investment climate were also absent. Britain’s relatively high “stamp duty reserve tax” on share transactions saps London’s competitiveness and liquidity. It ought to be cut. A reduction to cash Isa limits, which some analysts reckon could boost stock investments, was pushed back for a review. There was also no mention of less onerous visa routes, which the industry wants to attract international talent.
Reeves’ reforms will help to unshackle parts of the financial sector. But ensuring it actually grows — and drives growth more broadly — hinges on tougher and bolder choices ahead.
