What Britain aims for in a post-Brexit city

Back in the 1980s, the “Big Bang” in London revolutionized stock trading and put it at the forefront of global financial markets. After Brexit in 2020, the government had aspirations for another kind of “big bang”: abandoning EU rules it sees as hampering innovation and economic growth. The danger is that the EU will decide on measures that give UK financial firms an unfair competitive advantage over European competitors and limit their access to continental markets.

The government introduced the Financial Services and Markets Act, which spans more than 300 pages and represents the largest set of financial reforms since 2000, when Tony Blair’s Department of Labor introduced rules to strengthen protections for consumers. The idea is to tailor the regulations originally established for the 28 EU countries to better fit the UK economy. The bill will:

• Making stock listings easier, giving London’s capital markets a potential advantage over those on the Continent

• Expose parts of the EU’s comprehensive MiFID II rules designed to protect investors, such as capping trading in so-called dark pools, or private places

• Ease of regulations governing the insurance industry and crypto assets. Certain types of stablecoins – crypto tokens designed to hold a fixed value – will be classified as a valid payment method

• Expand the powers of regulators to include the goal of stimulating the economy, as well as ensuring the stability of the financial system

2. What else is on the cards?

Since the bill was published in July, Liz Truss has succeeded Boris Johnson as prime minister and replaced the Treasury team that initiated the reforms. Her rise to power was thanks to the right wing of her conservative party, which sees Brexit as an opportunity to cut bureaucracy and shrink the size of the country. Truss wants to go further than Johnson by scrapping EU restrictions on bankers’ bonuses and adding “summon” power to allow ministers to block or change decisions of financial regulators including the Bank of England’s prudential regulator – which oversees the financial system – and the Financial Conduct Authority. Her government may also strengthen the bill’s requirements for regulators to consider competitiveness in their deliberations. This can include establishing a process they must follow to make decisions.

3. What is the timeline for change?

The legislation has been discussed by lawmakers and it is due to become law in April or May 2023 after it has been scrutinized by parliamentary committees. In the meantime, financial firms and their lobbyists are trying to influence it with the goal of adding some proposals and canceling others.

4. How is the EU likely to respond?

The bloc has already dashed hopes of some British politicians that the UK will gain automatic access to EU financial markets after Brexit. To maintain their business with clients on the continent, UK-based banks have had to reassign some staff and activities within the European Union. There is still a lot to be ironed out in terms of market access. For example, it is still unclear what role the UK will continue to play in the huge EU derivatives market. Critics of the proposed British reforms say they could antagonize the EU and make it less willing to allow London to continue to act as a clearinghouse for derivatives. The EU has yet to take a decisive step, in part because there is a view that its markets need time to evolve to match the depth and breadth of London’s.

Read more: How ‘parity’ plays a major role in post-Brexit banking

5. How might the reforms affect the Bank of England?

At the heart of the recall power debate lie politicians’ attitudes toward the central bank, which sets interest rates and is the UK’s ultimate financial regulatory authority. The Bank of England is going through a difficult time. There is criticism across the government for its handling of inflation. Truss said she wants to reconsider the bank’s mandate and explore how to ensure policymakers achieve their goal of keeping a lid on rates. This has led to speculation that it could make the Bank of England more accountable to the government.

6. What protection does the Bank of England have?

There are many people in the world of economics, government and finance who believe that the independence of the Bank of England is critical. The Corporation is free to set monetary policy, regulate consumer protection, competition and the integrity of the financial system. Andrew Bailey, governor of the Bank of England, has warned that the UK’s reputation would be damaged if the bank’s freedom was curtailed. His supporters warn that weakening the Bank of England’s decision-making power would give politicians and lobbyists undue influence over regulatory policy. However, even BoE supporters recognize that more clarity is needed on the accountability of financial regulators. Before Brexit, both the PRA and the FCA – which focus on consumer protection – were operating according to the directives set by the European Parliament. Many lawmakers and industry figures say there is now a need for someone else to oversee regulators, be it Parliament, the courts or the government.

7. What do the changes mean for insurance companies?

Insurers want UK reforms to include a relaxation of capital rules known as Solvency II to free up billions of pounds, which they say they will use for investment. PRA is willing to withdraw a portion of Solvency II. But it wants to tighten regulation in another area known as matching adjustment, an account that calibrates how long-term assets such as infrastructure investment are matched with a commitment such as a pension payment.

More stories like these are available at bloomberg.com

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