Szu Ping Chan Economics Editor Szu Ping Chan Related Topics
18 November 2024 7:00am GMT
UK economy, Banks and Finance, Regulation, Prudential Regulation Authority, City of London, Rachel Reeves
Illustration of Rachel Reeves framed and reflected by City skyscrapers
Rachel Reeves says she believes the City of London is the “crown jewel” of Britain’s economy.
The Chancellor wants finance to do more to help drive growth and says she is willing to remove red tape and regulation that gets in the way.
Speaking at the annual Mansion House dinner on Thursday, Reeves said post-crisis regulation had “resulted in a system which sought to eliminate risk-taking. That has gone too far and, in places, it has had unintended consequences which we must now address.”
The urgency of her mission was underlined by data released hours after the Chancellor delivered her speech, showing economic growth had slumped in the three months since Labour took office and was close to stagnant.
How can Reeves boost the City, which accounts for £12 in every £100 of economic output generated in the UK and employs more than 2.4m people?
- Cut red tape
The Bank of England recently admitted that red tape threatened to turn the City into a “graveyard”.
Sam Woods, chief executive of the Prudential Regulation Authority, which regulates the financial sector, warned that Britain’s bid to make financial institutions safer by creating more rules had inadvertently curbed the willingness to take risks.
As the old saying goes: no risk, no reward. And Britain is reaping precious little reward as it stands.
Reeves has already said she would not reinstate a bonus cap. The Chancellor has also endorsed a plan to relax rules that make senior bankers and executives more accountable for corporate failures, including replacing a system that currently forces firms to prove leaders are “fit and proper” every year.
The Bank of England is taking steps to give senior bankers faster access to their bonuses, in line with other countries. Regulators have admitted that the UK is an “outlier” in making some of the highest-paid bankers wait up to eight years for their bonus payments. Officials conceded the policy is “damaging for competitiveness”.
The UK has already announced that it would follow the US in easing bank buffers – the amount of capital they must set aside in case of a crisis – under the so-called Basel 3.1 capital rules.
Donald Trump has pledged to implement a fresh wave of deregulation when he re-enters the White House next year, suggesting that bank rules are unlikely to tighten further.
- Capitalise on booming services trade
Andrew Bailey’s intervention on Brexit has caused a stir. The Bank of England governor said rebuilding trade ties with Europe should be an imperative if the UK was to raise its anaemic growth rate.
However, Reeves should not overlook the US. America is the UK’s largest trading partner in financial services, accounting for 33.5pc of total exports, with pensions and insurance the big winners in the sector.
By comparison, the EU accounts for 28pc of financial services exports, with Luxembourg, France and Ireland as the top three destinations, according to data compiled by TheCityUK.
Britain is the world’s second-largest exporter of financial services after the US, selling £94.9bn worth of it abroad last year.
For Duncan Edwards, chief executive of BritishAmerican Business, a transatlantic trade group representing more than 400 companies, getting closer to the world’s biggest economy is a no-brainer.
He said: “I do think the UK should and will try to pursue a trade agreement. And I think it is possible to strike one, although the politics of that in the UK are difficult.”
- Don’t use banks as a cash cow
Banks, bankers and financiers pay a lot of tax in the UK. Income tax revenues, corporation tax and various levies and surcharges raised £37.1bn last year, according to official data, an increase of £3.3bn compared with the previous year.
Intense lobbying by the industry ensured Reeves steered clear of finance in her £40bn tax raid, including a climbdown on an assault on private equity bosses.
There is talk that Reeves may yet need to raise more money in a future Budget, with banks seen as a likely target.
However, Edwards at BritishAmerican Business said City businesses could not withstand higher taxes.
He said: “The regulatory environment is challenging and [the cost is] rising with the National Insurance costs, the bank levy and all those things. The UK is the most important place in Europe by miles, but there is a sense that it’s becoming a little bit more expensive to do business in the UK.”
- Attract top talent
While the UK remains a top destination for students and workers, Tim Sarson, head of tax policy at KPMG, said it simply could not compete with the US on salaries.
“There’s still plenty of talent coming to the UK. I think where we’ve struggled in recent years is competing for staff with the US,” he said. “But that’s largely just because of the massive salary differentials.”
While the UK might offer a better work-life balance, Sarson added that the tax system could be friendlier.
Reeves’s crackdown on non-doms has already driven many away. But Sarson said there were opportunities to attract more high rollers in the future by rolling back some of the changes.
“We possibly missed a trick on being a little bit more generous for newcomers to the country.
“We’ve got this four-year window for non-doms. That’s fine if you’re a high-paid employee who is spending a few years here on secondment and then going back home.
“But if you’re wanting to take up a chief executive role or anything from managing director upwards in a bank and you’re going to be heavily relying on bonuses that are deferred – [then] actually, having seven years grace instead of four might be more of an incentive.”
- Get comfortable with risk-taking
Much of the City is still scarred by the experience of the financial crisis, with regulators bearing down on bankers if they take too much risk.
However, as Reeves pointed out in her Mansion House speech, this aversion to risk-taking has gone too far.
Nitesh Palana, director of risk at Thought Machine, a banking tech firm worth more than £2bn, said: “The real problem is society’s attitude to risk and our knee-jerk reaction to adverse events.
“When something unfortunate happens, the natural response – particularly in the West – is to legislate or regulate it from happening again. The constant addition of new rules only adds to the regulatory burden, making rules impossible to monitor and enforce. Therefore, adding new regulations just becomes a political point rather than actual change.”
Bob Wigley, the chairman of UK Finance, the industry lobby group, said it was the most “pro-active and pro-City Chancellor’s speech I think I can remember”.
But actions speak louder than words. Reeves must show she is happy to embrace more risk taking in the City – even if it means more bumps along the road.
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UK economy, Banks and Finance, Regulation, Prudential Regulation Authority, City of London, Rachel Reeves