Clock ticking on UK plan for regulatory reforms

Changes to SMCR and short-selling rules least likely to be completed before next election

The long list of reforms announced by UK chancellor of the exchequer Jeremy Hunt on December 9 was hailed as a second Big Bang – a reference to the overhaul of financial regulation in the 1980s that helped establish London as the powerhouse of European financial markets.

In practice, there is nothing in the proposals quite as dramatic as the efforts 40 years ago to end anti-competitive practices in the City. It’s not easy to get that excited about replacing European Union rules on packaged retail and insurance-based investment products (Priips) or tweaking the securitisation regulation (unless you’re a journalist at Risk.net, of course).

But there’s a more fundamental risk that could turn Big Bang 2.0 into a whimper: time. There are at most two years until the next general election, and recent opinion polls all project a large majority for the opposition Labour party.

Some industry lobbyists are already hedging their bets and engaging with the Labour Party to try to ensure reforms they’d like to see aren’t killed by the new government. The list of planned reforms are at various stages of the legislative process.

The UK Treasury groups reforms into first and second tranches. Work has already begun on the first tranche, in which the government groups together amendments to rules for securitisations, capital requirements for insurers and the UK’s version of European Union market structure rules. Due to the size of these changes, the UK Treasury envisages some of these spilling over into the second tranche.

One initiative within tranche two that can be completed sooner than others is the replacement of Priips. The UK Treasury has released a consultation on revoking the legislation and giving powers to the Financial Conduct Authority to come up with a new regime. Another set of amendments already underway are changes to the requirements that oblige large UK banks to separate retail banking operations from any investment bank owned by the same group. An independent review of the so-called ring-fence concluded in March 2022, giving the UK government a ready-made template to implement once it has completed a consultation to be launched in March 2023.

Other initiatives, however, are further behind. No specific ideas have been proposed by the UK government for revising the short-selling regulation. Instead, the Treasury issued a call for evidence as to the effects of the rules, which will conclude in March 2023. The government will then decide on what provisions should be maintained in the future UK framework and publish a draft of that revision for consultation.

Any changes to the senior manager’s certification regime (SMCR) – which holds senior staff of financial services companies to account for misconduct and management failures – are even further away from completion. The government will begin a “review” in the first quarter of next year.

Of course, any new legislation for the UK alone will be quicker to pass than the lengthy trialogue negotiations between institutions in the EU. But managing so many different amendments in-flight at the same time may stretch the staff of the Treasury itself. The policy statement issued on December 9 says the department hopes to make “significant progress” on both tranches of reforms before the end of 2023.

If that proves too ambitious, however, then the pre-election period (when the pace of legislation tends to slow to a trickle) will be looming fast. And the December 2019 general election was something of a political exception – the vast majority are held in the spring or early summer, which could mean the Treasury has little more than a year to get the job done.

It is unclear what the Labour Party plans for financial services regulation. Their shadow minister for the City has already branded the new proposals as a “race to the bottom”, and a hostile public reaction to the government’s announcement that it would scrap a cap on bankers’ bonuses will not encourage Labour to soften any other rules. The UK financial sector itself is also divided on whether deviating from EU rules (and thereby constraining access to EU markets) is necessarily a worthwhile policy choice.

Big Bang 2.0 may prove even smaller than first anticipated.

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