Disrupter PM, Kwasi Genius & Agenda of Deregulation - Strange Times in the UK
It’s a very odd time in the United Kingdom. A Conservative MP (Liz Truss) who was largely unknown to the general public is now Prime Minister and Her Majesty Queen Elizabeth II’s passing has ground the nation to a staggering halt (whether people wanted it to or not).
Working in financial regulation has its decisive moments. The years following the great financial crisis in 2008 was certainly one of them, where an onslaught of regulation arrived, to a degree previously unwitnessed. This largely originated from the European Union, tackling almost every aspect of financial activity, endeavouring to prevent reoccurrence of the events of 2008.
Now, 14 years on, a Prime Minister with a reported penchant for de-regulation has been appointed. The first publicised indication of her race to de-regulate is the proposal, under discussion, to eradicate the 2x base salary cap on bonuses for bankers[1]. Removal of this rule, inherited from the European Union, could mean there would be no monetary limit to the bonuses offered. Some view this as potentially inviting risk-taking activities by said bankers, which could once again contribute to a 2008 style crash.
Why then is this being considered? London’s financial centre is not rivalling that of New York’s or Hong Kong’s which is of grave concern to post-Brexit Britain. Newly appointed Chancellor of the Exchequer (the UK’s finance minister), Kwasi Kwarteng, is reported to be championing this proposal to address this lack of competitiveness, but is this the right time given the cost-of-living crisis? Would this action endear him to the public? Already there is public backlash to this proposal.[2]
If you want an insight into the mind of Kwasi Kwarteng, I suggest you view his winning appearance on University Challenge in 1995[3] representing Trinity College, Cambridge where, incidentally, he was reprimanded for swearing, earning him a Sun headline 'Rudiversity Challenge' after the production team accidentally left him saying "oh f***, I've forgotten" in the broadcast[4]. Kwasi is the quintessential high achiever, receiving First Class Honours in both his chosen subjects at Trinity College, Cambridge - Classics and History. This was prior to receiving his PhD in Economic History from Cambridge University in 2000. His performance on University Challenge, aged just 19, and academic record is nothing short of exceptional. Trouble is, that doesn’t exactly earn brownie points with the general public and paradoxically his undeniable mental prowess may be his weakness in failing to relate to the public. I hope to be proven wrong in this regard but time will ultimately tell.
The United Kingdom is not thriving post-Brexit, far from it and it’s right Liz Truss and Kwasi Kwarteng are endeavouring to addressing this position. However, the Truss methodology could be called into question. Inside global firms, systems are in place to meet EU requirements, such as MiFid II (which introduced many rules and reporting requirements surrounding trading activities). Liz Truss reportedly wishes to dismantle MiFID II and the upcoming Solvency II requirements for insurance companies. The reality is any significant deviation from EU rules (even a simplification in some areas) places the UK into a different category with different requirements and logistically, that is not always positive for global firms who benefit from more unified approaches. Take for example the latest European legislation on sustainable finance. The EU has its own form of categorisation of investment funds in regard to how sustainable they claim to be (each fund being categorised as either Article 6, 8 or 9 with accompanying requirements) but the UK is set to bring in its own labelling system and related requirements. A global firm will need to satisfy multiple standards to distribute a product in EU and the UK – and that comes with an associated cost and administrative burden.
Information documents for investment funds are another example of such divergence (EU PRIIPs rules for those in the business) meaning from 2023, non-UK European investment funds wishing to access the UK retail market will need to have an information document to satisfy EU (PRIIPs) rules and UK (UCITS) rules.
To summarise, even if the EU rules are far more onerous than those of the UK, larger companies are unlikely to choose the UK (on its own) as their primary market place over the rest of Europe combined. Financially and practically, it wouldn’t make sense and the wider industry recognises this.
Maintaining strong connections with businesses in the UK (and beyond) and with regulatory experts is of great importance for Liz Truss. This would facilitate greater understanding of the nuances pertaining to her agenda of de-regulation, which may be key to the success of her decisions during her premiership. The financial success of the City of London may even depend upon it.
Another key factor is the government’s relationship with the UK Regulator, the Financial Conduct Authority (FCA) who, unsurprisingly, do like to regulate. In July this year, the UK Government via the Financial Services and Markets Bill has added a new objective for the FCA to take growth and global competitiveness into account when writing rules, but Truss has gone further than this, where, according to Reuters, she will review the role of UK regulators, believing they have not done enough to promote growth.[5]
Liz Truss also has controversial views over the Northern Irish protocol, even threatening to trigger Article 16 which would override aspects of previously agreed international law. However, she would then have to deal with a dissatisfied Joe Biden who has pledged unwavering support to the protocol, in recognition of its purpose to maintain peace and stability on the island of Ireland. The US is a key trading relationship Liz Truss would undoubtedly like to strengthen. Such divisive actions would therefore not be advisable.
An interesting article by Chatham House Director/CEO Bronwen Maddox states Liz Truss is a disrupter which is her greatest strength and “potentially calamitous weakness”.[6] Being a disruptor is positive when empirical evidence to support an alternative approach can be substantiated, and not based on ideologies or visions alone.
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There’s a palpable feeling of uneasiness with Truss’ new government in the UK, caused undoubtedly by the prospect of some forthcoming change in approach, the details of which are yet to be defined or proven. This is also against a backdrop of war in Ukraine and the connected energy and cost-of-living crisis.
All one can hope for is sense, engagement with wider business leaders and a research-based approach to a post-Brexit Britain. No doubt Kwasi will seek a performance as positive his winning team on University Challenge in 1995, even if it will include the occasional swear word.
Written by Caroline Scott, Funds and Distribution Compliance Manager in City of London.
Sources below.
[2] https://www.theguardian.com/politics/2022/sep/15/kwasi-kwarteng-planning-to-scrap-caps-on-bankers-bonuses
[3] https://en-gb.facebook.com/BBCQuestionTime/videos/one-of-tonights-bbcqt-panellists-comes-with-some-pedigree-conservatives-mp-kwasi/1420615914618796/