Breakingviews – Britain’s zeal for financial reform could backfire

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LONDON (Reuters Breakingviews) – British politicians are once again concerned about the City of London’s competitiveness. After spending the first half of the last decade tightening regulations in response to industry excesses before 2008, and the last five years worrying about the impact of Brexit on fishermen and autoworkers rather than on derivatives traders, ministers and officials have turned their attention to the financial services sector. In their rush to win quick wins, the danger is that they preside over a hasty and counterproductive overhaul of the rules.

Fireworks explode behind Houses of Parliament and Big Ben over the River Thames during New Years celebrations in London on January 1, 2015.

The government is full of proposals. Ten days ago Ron Kalifa, the former managing director of payments firm Worldpay, suggested ways to protect and promote the UK fintech industry. It was followed by former EU commissioner Jonathan Hill, who recommended an overhaul of London stock quotes to attract more tech groups and specialist acquisition companies (SPACs). A review of the Solvency II rules governing insurance is also underway.

Officials insist these changes are far from drastic. Hill points out that his proposals, such as allowing founders of listed companies to retain control through shares with different voting rights, only bring London closer to what is already permitted in financial centers such as New York. and Hong Kong.

Nonetheless, UK Finance Minister Rishi Sunak is clearly pushing the regulatory pendulum in a laissez-faire direction. A revealing section of Hill’s report suggests that the Financial Conduct Authority, in addition to overseeing the markets and protecting investors, should also take into account “the overall attractiveness of the UK as a place to do business” .

It may seem uncontroversial: regulators in other countries have similar remits. Nonetheless, he underlines the magnitude of the change in British thinking. FCA’s predecessor, the Financial Services Authority, had an explicit mandate to keep the UK competitive, reflecting the prevailing political enthusiasm for global financial services. After this “principled” approach to regulating banks failed dramatically during the 2007-08 financial crisis, the Conservative-led coalition dismembered the watchdog. Ministers felt that requiring the regulator to worry about London’s international appeal would undermine its stringency, so they made sure the FCA did not have such an obligation.

The government’s apparent willingness to revisit those rulings created an opening for financial industry lobbyists, who have spent the years following the 2016 Brexit referendum in the wild. Investment banks and the London Stock Exchange have pushed hard for the arrangements recommended by Hill. The Association of British Insurers recently argued that a dilution of Solvency II could free up funds worth £ 95 billion. Former LSE chief executive Xavier Rolet has warned London not to miss the cryptocurrency market. It is probably only a matter of time before someone has the courage to suggest removing the European Union’s cap on bankers’ bonuses.

Nothing underlines the government’s renewed eagerness to please the City better than its membership in the SPACs. When launching his review in November, Hill made no mention of the blank check vehicles that have taken the US capital markets by storm. Yet two of the 15 recommendations in his report released last week are designed to facilitate the emergence of SPAC in London.

UK regulators have little appetite for a broader rules bonfire. On the one hand, many EU financial directives have been either copied from Britain or heavily influenced by British authorities. The Bank of England says it doesn’t expect the Solvency II review to leave insurers with less capital. And Governor Andrew Bailey last month demonstrated the central bank’s determination to keep its standards high for banks by declaring that he would abolish an EU rule that allows lenders to count software investments in their debt ratios. capital.

This noble approach, however, did not help Britain persuade the EU to recognize its regulatory effectiveness. The lack of this designation, known as equivalence, has in recent weeks forced the trading of European equities from London stock exchanges to mainland capitals, notably Amsterdam. Some interest rate swap activity has also left town. And both sides are ready to fight for the London-based clearing industry.

Britain has other reasons to stick to its guns. Mutual recognition by regulators is one of the most important factors when it comes to stimulating financial exchanges. This is why it is important that Britain takes a stable and consistent approach to the rules, says Sam Lowe of the Center for European Reform. A firm commitment to upholding international standards also helps.

But politicians hungry for rare post-Brexit success may be less disciplined. Kalifa’s fintech report includes several references to Greensill, the supply chain finance company that has won over senior politicians, including former Prime Minister David Cameron, and is now on the brink of insolvency. Meanwhile, Sunak last week praised the decision of food delivery group Deliveroo to classify its stock in London as “fantastic.” It remains to be seen whether the former hedge fund manager will approve each new arrival on the stock exchange. The danger, however, is that her enthusiasm for promoting the City of London will eventually take her back to the bad old days.

Breakingviews

Reuters Breakingviews is the world’s leading source for agenda-setting financial information. As the Reuters brand for financial commentary, we dissect big business and economic stories from around the world every day. A global team of around 30 correspondents in New York, London, Hong Kong and other major cities provide real-time expert analysis.

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