There is something of a tragedy for the UK in Jeremy Hunt’s “Edinburgh Reforms” of financial services. 15 years after the onset of the global financial crisis, the cross-party hope that the UK economy could become less dependent on the City has been abandoned.
Back in 1997, when asset-backed bond markets closed down and deprived banks of vital cash and when Northern Rock was the first significant bank to collapse, financial services had for decades been a spur of UK growth.
It was, to use the fashionable phrase, by far the UK’s most successful industrial cluster, contributing around one in ten pounds earned in the UK - which according to the Treasury it still does.
But its rapid growth came at a big cost: dangerous risks were taken by banks that would ultimately be paid by taxpayers; inequality worsened; the exchange rate reflected the City’s relative strength and put other exporters at a disadvantage.
After the biggest banks collapsed in 2008, successive governments adopted a twin track remediation approach: they significantly toughened up regulation to reduce the risk of financial crises; they encouraged other industries to flourish.
Neither ambition has quite worked out as they hoped.
The pension funds’ LDI bonds fire sale earlier this autumn shows it is impossible to eliminate the risks of economically damaging financial crises, though they can be mitigated. But more significant is that the underlining growth rate of the UK has fallen since 2008 by more than a third.
We were made a lot poorer by the direct costs of the financial crash itself. We have become relatively poorer since, quite significantly, by the failure to fire up engines of growth to replace the City.
So Hunt has pitched up in Scotland’s financial centre Edinburgh today, to announce he is reverting to the traditional British economic model: he is cutting the burden of regulation on banks, insurers, hedge funds and asset managers, and hoping this time it doesn’t all end in tears.
This bonfire of burdens on the City is being branded by Remainer Hunt and the Treasury as another Brexit liberation day, an incineration of growth-stifling rules made in Brussels - which is to ignore that the UK was a powerful voice shaping the EU playing field and some of what Hunt wants to scrap is home grown.
Here are just a few of the big proposed changes, that augment (if that is the word) the previous chancellor Kwasi Kwarteng’s abolition of the ceiling on bankers’ bonuses.
The regulators will be instructed in their mandates not to regulate such that growth and international competitiveness are impaired. This is not the first time a government has muddied their responsibilities, and will be seen perhaps as a category error.
The protective “ring fence” around retail banks, which guard our savings, will be “reformed”, which implies that their capital and cash will be less separated from the prudential resources of their investment banking siblings.
Changes will be made to the regime for short selling, or bets by hedge funds that the price of shares and other assets are set to fall. EU constraints on how and where insurers can invest will be reduced, in the hope this channels billions to UK infrastructure.
There will also be new, and presumably less onerous, stipulations on the information companies have to provide in prospectuses when selling shares and other securities.
These are just a few of the 30 odd regulatory reforms heralded by Hunt as a programme “to unlock investment and turbocharge growth in towns and cities across the UK”.
Will it work? Corks are popping in London and Edinburgh. But the backdrop is exit from an EU single market since 2019 that has undermined growth for financial services as well as the rest of the economy - and today’s reduction in constraints on the City is not an overnight Big Bang.
Second, it is very hard to see how this does other than widen the income and wealth gap between London and the rest of the UK, and thus go against the levelling up ambition.
Third, it is a tacit recognition by this government that the structural dependence of the UK economy on financial services is too great to abandon, and that somehow we’ll have to spur and spark other world class clusters in the shadow of the City.
And another thing. The next crash is inevitable. What Hunt and the Treasury need to prove as they turn their plans into deeds is they are neither hastening nor magnifying it.
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