Almost a year to the day after Jeremy Hunt announced the “Edinburgh Reforms” that he hoped would stimulate growth in the financial services sector, Rachel Reeves has travelled to Edinburgh, where she will today announce her own review of the UK’s financial services. Labour’s review will be conducted using a new panel of bigwigs from Britain’s biggest institutional investors including Legal and General, Schroders and Abrdn, a number of whom also have experience in the Treasury.
It’s a well-timed intervention. The Treasury Select Committee has this morning released an assessment of the Edinburgh Reforms which finds that “none of the achievements to date will make a substantial difference to the UK economy”, and that despite “big promises”, much of the work that has been done is “preparatory work for potential reforms in the future” or amounts to tinkering that will have “no economic impact”. In case that wasn’t withering enough, the committee’s Conservative chair, Harriett Baldwin, released a statement to accompany the report that called Hunt’s reforms “a damp squib”.
It has long been hoped that a post-Brexit reform of financial services would bring about a second “Big Bang” – as the wholesale reforms to the City of London were called when they were implemented, almost overnight, in October 1986. It’s easy to see why both parties would want this: the Big Bang aggressively modernised the old City into one of the world’s major financial centres. Financial services now provides a million jobs in the UK and accounts for around 12 per cent of the country’s economic output.
The city that actually got a post-Brexit Big Bang was of course Paris: France’s financial services transactions with the rest of the world have doubled since 2016 and thousands of jobs have moved across the Channel. Emmanuel Macron is also planning to bring in his own reformes d’Edinburgh (not really called that, obviously) early next year to make French financial services more competitive. London’s status as a global finance centre is not guaranteed.
But of the 31 measures in Hunt’s plan, those that have been achieved tend towards the trivial (such as tinkering with rules on property investment trusts and crypto assets) or the eccentric (consulting on a digital pound, which even the most ardent proponents don’t see happening until the late 2020s). The really significant reforms, such as giving financial regulators a responsibility to ensure financial markets are faster and more competitive (more risky), or removing the post-2008 “ring-fencing” regime that separates the retail and investment arms of big banks, have understandably been treated with much more caution.
The problem with the original Big Bang (aside from its role in creating the 2008 financial crisis) was that its benefits remained mostly within the Square Mile. Our capital markets didn’t start splurging their newfound liquidity on British companies. Pension funds, which owned almost a third of UK (public) company shares in the early 1990s, now own less than 2 per cent of British stocks. And over the same period, retail investors have been persuaded by policies such as Right to Buy, Help to Buy and tax breaks for landlords to put their money in unproductive bricks-and-mortar assets, not company shares.
The result is UK-listed shares trade at a significant discount to the US. This means British companies find it harder and more expensive to raise the capital they need to grow – and those that do succeed are snapped up by foreign investors, or persuaded to list in the deeper capital markets across the Atlantic. This is part of the reason for Britain’s chronically low business investment, which feeds into low productivity growth and stagnant real wages.
Both parties are right to want to change this, and Reeves appears to be approaching the problem in an electorally astute manner – acknowledge what the Conservatives are right about, and offer to do a better job. But she will be faced by the same question: how much risk are you prepared to introduce to get the growth you want?
[See also: How long can Rishi Sunak survive?]