Simple soundbites for post-Brexit dividends do the City little good for our future growth
DO YOU want the City of London to be slow and cautious or quick and nimble? This is how the debate over a potential new round of regulation in the City of London has been framed. However, the situation is clearly more complex than this simple soundbite suggests.
Forming part of ex-chancellor Rishi Sunak’s pitch to become Tory leader, publicly backed by current chancellor Nadhim Zahawi and reported to be backed by Boris Johnson, the proposals have been dubbed “Big Bang 2.0”. This reference to Margaret Thatcher’s successful deregulation of the Square Mile in 1986 is clearly aimed at Conservative Party members, who have the final say in the current leadership election – a victory that will also come with the keys to 10 Downing Street.
It is also aimed at an investment environment which was promised substantial more flexibility in return for voting to leave the European Union. The so-called “Brexit dividends” have been slow to materialise.
Sunak, Zahawi and Johnson are all said to be frustrated with the pace of regulatory change. So far, there has been no “bonfire of EU red tape” as was promised in the Brexit campaign – particularly in relation to Solvency II capital adequacy rules, which tie up funds at insurance companies.
This is the kind of sentence which makes most people’s eyes glaze over, but these rules form an important part of safeguards in place.
The debate over Solvency II is highly politically charged, but there is a simple proposition at its heart. If capital rules for insurance companies are loosened it will release funds that will be available to direct into long-term infrastructure projects. This will allow insurers to invest in projects that deliver a long-term income stream, give the UK an infrastructure that is fit for the 21st century and provide a boost to The City itself.
It has, however, come up against some regulatory resistance. Andrew Bailey, governor of the Bank of England, wants to ensure it does not increase risk and has warned he will oppose any changes that would undermine the stability of financial regulation. He has been especially vocal on proposals to allow ministers to call in regulatory decisions for approval. “The independence of the regulators is important because much of our international standing depends on this,” he argued.
Of course, there is nothing wrong with a “growth-focused” approach to City regulation. However, rules and regulation are not “anti-growth” they are “anti-risk”. Regulators are in place to protect investors from unscrupulous operators but also to maintain the reputational integrity of the City as a good place to do business.
These rules were put in place after the financial crisis, which was a direct result of too little oversight in some jurisdictions. Managing risk is one of the most important aspects of investment – it cannot be treated lightly. If loosening regulations creates new systemic risk, it is all the more important they are watertight. This is clearly what drives Bailey’s opposition to the move. Helping the City to find new areas of growth post-Brexit is a vital task.
As any investor knows, becoming more growth orientated in your investments ups the risks involved. As eager as those in the race for PM might be to prove their prowess to the City, the security of regulations must not be sacrificed at the political altar of speed.