Edinburgh Reforms tell City to "Choose Life"

Seeking to take advantage of “Brexit freedoms”, Chancellor Jeremy Hunt last week announced the ‘Edinburgh reforms’, a package of measures that would significantly deregulate activity in the City. It marks a significant break with the near 14-year consensus of tighter regulation for the financial sector.

Over the course of 2023, the oft-cited Solvency II rules around insurers’ balance sheets will be amended, in what the government’s statement says “is expected to unlock over ￡100 billion of private investment for productive assets”. Relaxing the amount that insurance companies must keep on their balance sheets, has been welcomed as an overdue piece of deregulation that frees the City to use capital more productively.

The cap on banker bonuses, one of the few policies remaining from the Truss-Kwarteng period, is being touted as a way to attract high-earners from US and Japanese companies to the UK – although there have been doubts raised as to whether this will materialise, and whether it really is a determining factor.

One of the most contentious, and possibly risky pieces of deregulation comes with the watering down of ‘ring fencing’ rules, introduced in the aftermath of the financial crisis. Banks with retail deposits of more than ￡25 billion cannot use these for more riskier investments, but this figure will be raised to ￡

35 billion, allowing more challengers like Santander, Virgin Money and TSB to expand investment banking operations.

But this was not a move particularly sought after by the bank themselves, and was put in place to stop the culture of excess and recklessness that led to the last recession. As Sir Paul Tucker, former deputy governor of the Bank of England told the FT, “ringfencing helps protect citizens from banking Armageddon.”

The entire aim and mission of the proposals (which will not be fully finalised until well into next year) can be summed up through proposals to give regulators like the Financial Conduct Authority (FCA) dual objectives; in addition to the current mission of maintaining financial stability, they will also be tasked with ensuring that the UK financial industry remains competitive.

The trouble may come when a fragmented and already overstretched regulatory system simply cannot do both at the same time, when actions by banks cannot satisfy both needs, and when chasing the latter jeopardises the former.

On top of all of these plans to appeal to deregulation fans, there were announcements of plans to open consultation on national ESG ratings providers. With greenwashing abundant throughout the industry, the possibility of the FCA having regulatory oversight over ratings providers may bring more standardised, easier to understand, more trustworthy ratings.

In addition to plans for the publication of a Green Finance Strategy, the intention is to become a “net zero aligned finance centre” that would “see more investment in sustainable energy supplies”. That is a laudable goal, if slightly in contradiction with the government’s approval for a new coal mine in Cumbria.