January 2023: The Edinburgh Reforms – previously billed as Big Bang 2.0 were announced by Jeremy Hunt, the UK’s Chancellor of the Exchequer on 9 December 2022.

These much-vaunted reforms were initially promoted as the City of London’s new Big Bang. They have already triggered headlines with the Governor of the Bank of England, Andrew Bailey, reported to be concerned that any relaxing of the UK’s financial regulatory regime, made more rigorous following the 2008 financial crisis, risks damaging London’s reputation as a financial hub. “The notion that we’re past the crisis and don’t need the regulation that we had post the financial crisis, I would not go along with that”, Bailey is quoted as observing in a Financial Times front page headline¹.

Clearly, there is a tension between the Government’s aim to rejig regulation in a move to make London more attractive, and the Bank’s concerns about the UK’s international reputation for integrity.

Keith Boyfield : "there is a widespread view that these threats of criminal prosecution were unjustified".

To begin with, it is worth asking whether the changes outlined in the Chancellor’s Edinburgh speech live up to the billing that they will unlock investment and turbocharge growth in towns and cities across Britain and Northern Ireland? What are the odds that this revised regulatory regime will deliver the British Government’s vision of a lean, dynamic and adept financial sector free from what was depicted as the suffocating embrace of the EU’s regulatory regime?

At first sight, much of the Chancellor’s speech keeps one guessing, as he essentially announced a further set of detailed reviews into a wide range of regulations relating to financial services. Few detailed measures were announced in this address, so the jury remains out on whether the package will fulfil expectations. Evidently, there is still considerable scope for lobbying by industry representatives, such as the Association of British Insurers, and, for that matter, by a host of special interest groups and campaign organisations like Finance for our Future.

Regulations for the shredder
The UK Government says it wants to repeal and replace hundreds of pages of burdensome EU retained laws governing financial services. As to how many pages will go through the shredder, we are kept guessing. The Financial Services and Markets Bill (FSM) currently being scrutinised by Parliament will provide the legislative authority for HM Treasury to deliver on its promise to repeal regulation and, where appropriate, replace retained EU law governing the sector. The Government’s approach has been guided by leading figures from across the UK finance industry who, on the whole, favour a gradualist approach. There will be two initial tranches of reform with several more to follow.

The objectives set for the new regulatory regime are to have less costly regulations that will be more responsive to rapidly emerging trends and innovations in the financial services sphere. It is designed to be a bespoke package for the UK finance industry, centred on London. All this sounds perfectly sensible, but dispassionate observers will have a raft of questions as to how this will be achieved?

The Edinburgh Reforms indicate that there will be a slew of legislation introduced in Parliament over the next year and certainly before the next general election to trim back the regulatory rulebook governing the City of London and make it more attractive to international investors seeking to raise capital and manage investment funds, particularly those focused on fashionable new areas such as fintech and renewable energy.

London certainly needs to raise its game. As Jonathan Hill’s Review for HM Treasury² in 2021 identified, London is under increasing pressure from other centres across Europe, such as Amsterdam, which in 2021 overtook London as the biggest share trading centre in Europe, and global finance centres, notably New York, Singapore and rapidly emerging hubs such as Dubai.

Significantly, a number of the recommendations contained in Lord Hill’s review were reflected in the Chancellor’s Edinburgh speech all centering on moves to loosen rules that have tightly governed listings in the UK.

The nitty-gritty
Among the 31 initiatives mentioned by the Chancellor in his Edinburgh address it is worth highlighting a few key proposals. One relates to the new responsibilities of the two main regulators, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). The Chancellor wants to issue new remit letters to both these bodies stressing their duty to promote the UK’s competitiveness and economic growth objectives. On the face of it, this is a measure essentially aimed at reducing red tape, but it has triggered alarm from former regulators, notably the Governor of the Bank of England, Andrew Bailey (who is busy having to defend himself and the Bank from record low public satisfaction ratings on tackling inflationary pressures in the UK economy³). The usual suspects, including former Shadow Chancellor John McDonnell, have also expressed their concern in parliamentary debates over these proposals, which they argue will be at the possible expense of other regulatory objectives.

Another specific proposal inspired by the Hill Review relates to changes in prospectus rules, and how these shape the way in which companies are able to float on the London Stock Exchange (LSE). Clearly, the thinking underpinning these reforms is to make the LSE an easier and more attractive place to raise capital. Significantly, the LSE won a vote of confidence from Microsoft in December, when it acquired a four per cent stake for GBP1.5 billion. This reflects a move to develop new data analysis tools which add real value for investors. It also triggers interest from the regulators as they have a duty to oversee the competitive impact of what is referred to as ‘Big Tech’ handling cloud computing resources to analyse a veritable mountain of data.

A third key proposal relates to the ring-fencing of investment banking. Current regulations place onerous burdens on banks such as Santander, TSB and Virgin Money, which are predominantly retail banks with a relatively small exposure to investment banking. The Chancellor announced in his Edinburgh speech that the Government intends to introduce secondary legislation in Parliament to improve what it sees as the functionality of the ring-fencing regime in response to the Skeoch⁴ independent review on Ring-fencing and Proprietary Trading, which recommended retaining the existing threshold at GBP25 billion. However, lenders without significant investment banks, such as Virgin Money, are henceforth likely to be excluded from this rule.

One other notable proposal is to amend the Mifid II rules relating to the way in which brokers and investment banks can charge for the cost of analysts’ equity research, particularly as it relates to shares outside the FTSE 100. The current rules are seen as too tough and bureaucratic, so the Government has opted to review the rules preventing banks and brokers from publishing analysts’ research after unbundling these research costs from investment and brokerage services. Accordingly, the Chancellor has decided to launch an independent review of investment research and its contribution to UK capital markets competitiveness.

Media attention has focused on the suggested changes to directors’ personal responsibilities for any infractions relating to regulatory rules. Some critics on the political Left claim these reforms will lead to what they see as a return to maverick capitalism, and their worries appear to be reflected by the Bank Governor, who is quoted as saying that the established regime “moved us from a world where the judgement was one of culpability to one of responsibility”. In his opinion, “That has created a helpful dynamic⁵”.

But there is a widespread view that these threats of criminal prosecution were unjustified and their potential severity only served to deter potentially lucrative business from locating in London and other UK financial centres. This element of the Edinburgh Reforms can therefore be seen as a sensible and proportionate dialling back of the overly zealous regulatory regime.

Turning to changes that will happen within the next year, the Chancellor in his Edinburgh speech pointed to the Government’s plans to reform Solvency II with a view to relaxing capital adequacy standards for the insurance sector. The FSM Bill provides the powers to do so and it looks as though this long-cherished goal will be fulfilled, much to the joy of the insurance industry, because it will bolster their profitability.

Further legislation will consequently be introduced through the course of 2023 to repeal and replace the EU’s Solvency II rules governing insurers’ balance sheets. One specific reform mooted is to cut insurers’ risk margin significantly, with a 65% cut for long-term life insurance business. The UK’s new regulatory regime is meant to unlock over GBP100 billion of private investment for productive assets, such as UK infrastructure. Yet, again, the precise way in which this aspiration might be achieved has still to be explained.

To sum up, the Edinburgh reforms do not represent a far-reaching shift in financial regulation. It will not presage a transformation of the City of London into Singapore on Thames, albeit some Tory MPs would wish it do so. The emphasis is on evolution, rather than revolution. Indeed, the Chancellor emphasised the ‘pragmatic’ character of the regulatory reforms when he gave his speech.

The fundamental question underpinning the UK government’s regulatory reforms as they relate to the entire financial services sector is how quickly they can be implemented before the next general election? Progress so far has been characterised by a cautionary approach, like so many of the promised post Brexit reforms, and vocal opposition in the House of Lords and in the media is only likely to hinder speedy completion. On current polling evidence, the Tories will find it difficult to win an outright majority while the bookies are predicting some form of Labour coalition with either the Scot Nationalists or Lib Dems after the next general election. Bankers have never been popular – particularly in this era of low growth, surging inflation and public service cutbacks – so one is hard put to find many optimists in the City of London these days. Nor is there much prospect of any relaxation on bankers’ bonuses, but every indication of the phasing out of non dom tax status under a Labour administration led by Sir Keir Starmer and his Shadow Chancellor, the resolute former Bank of England official Rachel Reeves, who once turned down a job offer at Goldman Sachs because it would have made her ‘a lot richer⁶’.