As the tug of war around UK financial regulation post-Brexit goes on, those in the City calling for looser regulation to maintain London's global competitiveness have found their match in the UK Treasury, reports International Investment sister publication Investment Week.
Former chancellor Rishi Sunak first introduced the future regulatory framework (FRF) review for new post-Brexit financial services regulations in July 2021. One year later, the financial services bill is set to be published on 20 July, having first been announced in the Queen's speech in May.
The Financial Services and Markets Bill will sweep away many of the EU regulations governing the City and allow ministers to "call in" decisions by the Bank of England they do not like, essentially granting them power to intervene over financial services regulation.
Sunak set out his approach in a "Brexit manifesto", talking of a "Big Bang 2.0". He said: "We will finish the job of ending the EU system where ultimate power lies with faceless regulators and vest that power in our sovereign parliament."
Bank of England governor Andrew Bailey has expressed his opposition to the ‘call-in' power, while Financial Conduct Authority CEO Nikhil Rathi said in a letter sent on 19 July to chancellor Nadhim Zahawi, that although the regulator supports the Treasury's plan to move away from EU rules, outcomes from the framework must not "undermine its operational independence".
Brexit 'Big Bang' set to spark Bank of England conflict - reports
However, City of London financial services executives have grown increasingly impatient since Brexit with what they perceive to be an overly cautious and slow-moving stance by regulators.
"Since Brexit there has been a lot of discussion about creating opportunities for the UK's financial services sector, but little has changed," said Daniel Pinto, founder and CEO of Stanhope Capital Group.
"Although a cynic might argue that promising a wave of deregulation for the City in the middle of a leadership contest could be more politically than economically motivated, it is nevertheless a positive move for the UK," he added.
Simon Morris, financial services partner at CMS, argued the Treasury "is definitely right to go for a second Big Bang", adding that the bill will ensure that regulators do not take their eyes off the importance of "a thriving market successfully competing with New York and Singapore".
As UK regulators take on a more powerful role after Brexit, TheCityUK CEO Miles Celic said that it is essential to ensure they exercise their new powers transparently and "in the service of broader public policy objectives set by the government and parliament".
"The Treasury is conscious of the need to tread carefully with innovations such as call-in powers. I do not expect they will be using them excessively but having them in the toolkit is useful," he said.
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Today's Financial Services Bill will inevitably attempt to level the playing field for the economy and for competition, but in doing so could put more pressure on regulators and therefore financial services more broadly, said Ben Richmond, founder and CEO at CUBE.
"Financial regulators in the UK are charged with protecting financial stability. Some proposals within the bill expand this remit to ask regulators to promote growth. This will be rough terrain for regulators to tread as these two goals are not always compatible," he said.
The move away from certain EU regulations has been welcomed by UK asset managers such as RC Brown. CEO Alan Beaney said that the financial services bill could potentially lead to some of the more "onerous" MiFID 2 regulations being scrapped or watered down.
"There has been a total lack of benefits from Brexit so far - in fact, nothing has materially changed. As a small investment house, we would very much welcome policies such as transaction reporting and costs and charges being watered down," he said.
However, Beaney explained that although the firm favours policies that help growth and are advantageous to the UK's stock exchanges, these should not come at the expense of high standards and ethics. "A race to the bottom is of little use to investors," he noted.
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Regulation and policy experts have warned that granting ministers review authority over all regulatory decision-making may make the regulatory framework's independence extremely vulnerable to prevailing political winds.
"For any sectors of the asset management industry looking to conduct business with the EU, or other jurisdictions, a persistent sense of instability will exist as necessary regulatory changes could be halted simply to gain political capital," said Andrew Poole, director, UK regulatory advisory at the ACA Group.
"This in turn could affect inflows as investors may shy away from a lack of clarity and continuous uncertainty."
Stripping away independence will result in the regulator being a political tool, creating multiple conflicts of interest and lack of accountability when things go wrong, Poole said, adding that engagement with the financial markets rather than "second guessing the political whims of the day" is required going forward.
