The Conservatives re-embrace the City of London

The Treasury has given the City of London an early Christmas present. Promising to “supercharge” growth and competitiveness, Chancellor Jeremy Hunt unveiled a 30-point package of reforms, reviews and outright scrapping of regulations, many forged in the wake of the financial crisis. His proposals are broad in sheer number and scope. But the symbolism of the package is far greater than the sum of its parts – and that’s probably the point. Conservative politicians are finally showing some love for the city after a decade in which bankers have been labeled toxic by successive Tory governments.

Many of the reforms are lengthy changes promised as part of the city’s post-Brexit ‘Big Bang 2.0’. That label was jettisoned; alongside the intended Thatcher undertones, there was perhaps an unwelcome touch of explosive Trussonomy. Instead, the package bears the reassuring-sounding moniker ‘Edinburgh Reforms’. Much is to be welcomed: Plans to make it easier and cheaper for companies to list in London are overdue. Overseeing ESG rating providers could help prevent greenwashing. It makes sense to encourage the consolidation of small defined contribution pension schemes.

The shadow of Brexit hangs well over the reforms, not least because it is the most damaging to the city’s competitiveness. The government has been desperate to point out the benefits of leaving the EU. Getting off the block allows the UK to craft bespoke rules, although some across the city are wary of diverging too much. The rules on private investment known as priips, overly prescriptive elements of the Mifid regime and Solvency II insurance rules can safely be discarded, as can the cap on bankers’ bonuses, which did little but boost fixed salaries. The EU is in any case fine-tuning its own rules, including Solvency II and Mifid II. If the UK did not reform the old Brussels rules remaining in its statutes, it would result in a Brexit collapse, not a dividend.

But some of the rules Hunt wants to revise were made in Britain, not Brussels. The UK unilaterally went further than the EU – and indeed the US – because of the outsized nature of its financial services sector. Segregation rules (only in effect since 2019) that require lenders to separate their retail and investment banking operations and an accountability system that penalizes top executives for failures under their oversight have not been replicated across the bloc.

Bank of England Governor Andrew Bailey is right to warn of the government’s headlong rush to the City. The crisis did not stem from idiosyncratic problems, but revealed deplorable gaps in both the rules and the regulatory architecture that needed to be addressed.

Getting rid of the accountability system would be a mistake as it was a powerful stick for regulators to wield behind closed doors (even if there are almost no public sanctions applying the system). Better focus on clearing the bureaucratic backlog around it. As for Hunt’s ringfencing reform proposals, they appear modest, at least for the moment. However, care must be taken that the UK does not embark on a quest to neutralize rules while the country and its banking system are being severely tested by an expected prolonged recession.

With memories of the crisis fading and the focus shifting to boosting the ailing UK economy, it is only natural that the regulatory pendulum should swing towards liberalisation. A recalibration is welcome. But when it comes to the city, the ghost of past crises will haunt any government that goes too far too quickly.