Unpacking a big summer of financial reform announcements

Paul Montague-Smith, senior counsel – public affairs at MRM, looks at the wide-ranging reforms the Government has launched for financial services in recent months and their potential future effects.

August is the one month of the year when, if you’re in Government, you hope you might have the opportunity to take a breath, pause for a moment and perhaps plan for the next political year ahead.

International crises aside, it’s a time when MPs are back in their constituencies judging cake competitions at summer fetes, with no votes to test their loyalty and less scope for plotting and other political shenanigans.

As a minister August is, if you’re lucky, a brief lull in what can seem to be a never-ending onslaught of demands and problems.

If they get the chance, they will have earned their rest. The run up to the parliamentary recess in July was very busy, not least in financial services. At her Mansion House speech, the Chancellor announced her self-styled Leeds Reforms package.

Naming significant Government announcements after where they’re made now seems to be a thing. As expected the package, including a new Financial Services Growth and Competitiveness Strategy, is largely aimed at rebalancing regulation towards growth and competitiveness.

The strategy focuses on five areas: delivering a competitive regulatory environment; harnessing the UK’s global leadership position; embracing innovation and leveraging the UK’s fintech leadership position; building a retail investment culture and modernising capital markets; and ensuring our financial sector has the skills and talent it needs.

To reduce regulation and promote growth the Government plans to ease the Senior Managers and Certification Regime (SMCR), review bank ring‑fencing rules, reduce reporting requirements and introduce more tailored, less burdensome regulation for smaller firms and challenger banks.

Looking to change the ring-fencing rules is a clear example of where the Government’s chase for growth is potentially at odds with established public policy and regulation. The rules – separating banks’ retail and investment banking activities – were introduced after the 2008 financial crisis to help protect consumers and ultimately taxpayers from banks’ own recklessness in chasing growth and profit.

If public policy is a pendulum, it seems the banking sector has convinced the Treasury that the post-crisis reforms swung too far the other way and have been too much of a brake on investment, lending and growth.

It’s true that banks are far better capitalised than they were in the 2000s and so pose much less risk to the taxpayer than they did. But signalling an intent to change rules which were thought essential to help avoid another crisis in the future has caused some concern in the policy community.

It won’t have helped that the announcement came alongside a major new review by the Financial Policy Committee of bank capital requirements, plus an easing of mortgage lending requirements to help first time buyers (key drivers of the last crisis). Perhaps coincidentally, the House of Lords Financial Services Regulation Committee has also launched an inquiry into the growth of private markets, looking at the whether the banking reforms following the 2008 crisis have contributed to their growth and whether this in itself poses risks in terms of financial stability.

One potentially important reform that the Government is looking at is how regulators manage the various “have regard to” requirements in the Financial Services and Markets Act. Underneath the top line core principles that the regulators need to implement are several issues that they are required to consider when developing their rules.

The Government plans to introduce legislation so the regulators don’t have to consider each of these in turn when making day-to-day decisions. Although this was low key as part of the package of announcements, it could end up having a significant impact on how our financial regulators operate and what they can do.

Following the Economic Secretary’s review, the Government also announced proposed changes to the Financial Ombudsman Service, which had been accused of acting as a quasi-regulator, negatively impacting investment and competitiveness. The ability of claims management companies to bring huge numbers of complaints against firms and the FOS – at little or no cost to themselves but bringing down firms and potentially markets in the process – had added to concerns.

Reforms to FOS fees will help with the latter, but the Government is also going to bring forward legislation requiring FOS to find that a firm has acted fairly and reasonably if it has complied with FCA rules in force at the time. An absolute time limit of ten years for bringing complaints to the FOS is also proposed.

Hot on the heels of the Leeds Reforms package, the Government also announced the reviving of the 2006 Pension Commission – which had originally paved the way for auto-enrolment – to look at the crucial issue of pension adequacy. Unless something changes, future pensioners will be worse off than they are today.

Currently around half of working adults aren’t saving anything for their retirement. The Commission will report in 2027. More money will either need to come from employers, staff, the taxpayer (most of whom are employers and staff) or some combination. The Commission’s difficult job is to try and build a consensus that will again lead to lasting change.

With this rush of activity before the summer break, everyone will be hoping August will be relatively quiet. Treasury ministers will be gearing up for the party conference season (vetting any planned announcements with public spending implications) while also laying the groundwork for the autumn Budget, which looks very much like it will be even more difficult for the Chancellor to navigate than the last.