UK General Election 2024: What Would A Labour Win Mean For Financial Services?

The UK is poised at a crossroads as the Labour Party leads the opinion polls ahead of the general election under the banner of "change".

Labour aims to restore economic growth to the UK, and the party has said that it sees the success of the financial services sector as key to the success of the country as a whole. As such, its plan for financial services, "Financing Growth" (January 2024) is permeated by a growth mantra, with proposals promoting growth that is inclusive, sustainable and beneficial for wider society, with an emphasis on long-term stability (see our Insight for more on the manifesto policies of Labour and the Conservatives on growth).

As the parties' campaigns ramp up and the 4 July election date approaches, what would a Labour government mean for the financial services industry, and how much change is it actually proposing?

Labour's policy priorities

The Labour manifesto namechecks new technology, such as open banking and open finance, and a "pro-innovation regulatory framework" as key ingredients to boost innovation and growth in the financial services sector.

Labour would prioritise the following policy areas in government, according to its January 2024 plan:

Each of these policy areas is extremely broad and many of the stated aims build on existing government policy (for example embracing innovations and fintech as the future of financial services). However Labour is keen to emphasise it understands the economic importance of the financial sector and, should it form the next government, would be "committed to work in partnership" with industry to flesh out the finer details of its policy.

What changes are anticipated under a Labour government?

Labour's "Financing Growth" plan includes some broad brush and incremental initiatives that could impact all regulated firms, such as expanding international agreements to boost financial services trade, boosting the UK's position on sustainable finance, embracing innovation and fintech to avoid falling behind, minimising overlaps and gaps in mandates across relevant regulators, and taking a joined-up approach to fraud which brings tech companies and telcos into the fight against fraud. A new Regulatory Innovation Office is proposed to help regulators across different industries update regulation, speed up approval timelines, and co-ordinate issues that span existing boundaries, such as artificial intelligence.

Labour sees the outcomes-focused approach under the Consumer Duty as an opportunity to streamline the regulatory rulebook, which runs to more than 10,000 pages, with a focus on removing "duplicative and excessively procedural rules". Labour will direct the Financial Conduct Authority (FCA) to ask industry to identify rules "which have been made redundant by the Consumer Duty".

At a more granular level, Labour is proposing the following goals and changes:

• Creation of a national financial inclusion strategy.
• Doubling the size of the co-operative and mutual sector, which is seen as more community-orientated than other types of banking institution. This would include strengthening the SME bank referral scheme to support more businesses who are rejected for bank loans to secure financing from alternative sources such as co-operatives, building societies, and community development finance institutions.
• Promptly implementing regulation of buy-now pay-later (BNPL) products, a reform announced by the current Conservative government in February 2021 which has remained static for some time (see this Insight on the draft BNPL legislation for more details).
• Encouraging the increased offering of longer-term fixed rate mortgages, a policy the current government has previously expressed some interest in.
• Supporting "greening" of the housing stock, including expanding the offering of green mortgages and affordable products to meet increased demand for retrofitting work such as insulation, heat pumps, and solar panels.
• Working with banks, and if necessary giving the FCA new powers, to maintain face-to-face banking services as well as seeking to accelerate the roll-out of at least 350 banking hubs which help people with free access to cash and wider banking services. In its manifesto, the Conservative Party highlights its prior announcement of over 100 banking hubs.
• Working to pilot innovative approaches for encouraging savings, such as NEST Insights' workplace savings programme. A Labour government would review the legislative and regulatory barriers to enabling a more widespread roll-out of innovative savings programmes.
• Creating a National Wealth Fund to invest in supply chains, gigafactories, steel industry, carbon capture and green hydrogen. The fund will be capitalised with £7.3 billion over the next parliament and aim to attract triple that amount in private investment.
• Creating a new publicly-owned company, Great British Energy, which will be capitalised with £8.3 billion over the next parliament and will co-invest in clean power projects and technologies.
• Simplifying the Individual Savings Account (ISA) landscape and encouraging more retail ownership of British businesses. Labour has said that, if elected, it would continue with the current government's plans to introduce a "UK ISA", a new £5,000 allowance, in addition to the existing ISA allowance, which would provide a tax-free savings opportunity for people to invest in the UK, while supporting UK companies.
• Securities tokenisation could provide significant benefits; a Labour government would advance work to clarify the law around tokenisation, and working with regulators to establish a regime to oversee the technology.

Carried interest

Labour's manifesto includes a change to the taxation of carried interest, a policy the party has been vocal about previously. Carried interest is a share of profits realised from a private equity or venture capital fund's investments that is paid to individual fund managers (executives), often only if the fund's overall profits are above a specified rate of return, known as a "hurdle rate".

The carried interest typically entitles the executives to 20% of the fund's overall profits, above the hurdle rate, after return of capital to investors in the fund, and it is currently subject to capital gains tax at 28 per cent. The manifesto states that "private equity is the only industry where performance related pay is treated as capital gains. Labour will close this loophole." Labour expects tax revenues from this change of £565m in 2028-29.

What would stay the same under a Labour government?

The Financial Services and Markets Act 2023 reforms currently in flight would be taken forward.

Labour supports many other initiatives which have been ongoing under the current government, including:

• the work by the Joint Regulatory Oversight Committee to lay out the roadmap for the next phase of open banking and ensure appropriate consumer protections are in place, together with work on open finance more broadly;
• the Bank of England's work on a potential central bank digital currency;
• the ring-fencing regime for banks and ongoing work to align this with the resolution regime;
• allowing payment service providers more flexibility to delay suspicious payments;
• reform of the regulatory boundary between financial advice and financial guidance;
• the adoption of reforms to the Solvency II regime for insurers, eventually to be known as Solvency UK; and
• making the UK the "green finance capital of the world" including mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.

Osborne Clarke comment

Labour's plan for the financial services sector appears to be one of evolution, not revolution – it emphasises significant continuity alongside collaboration with industry. The overall lack of bombshells for the sector may come as a relief to firms already afflicted by reform fatigue thanks to the incredible pace of change over recent years.

Carried interest is, however, an area of tension. While the manifesto does not spell out exactly how carried interest will be taxed, the projection of increased revenue indicates a significant tax increase, potentially leaving the UK as an outlier compared with other major asset management hubs. Labour has promised to consult on the proposal and has stated that where fund managers are putting their own capital at risk, it is appropriate they pay capital gains tax. Labour is hoping to avoid an exodus of UK fund managers; however, in light of the manifesto, it is unclear how much room they will have for concessions.

While slimming down the 10,000-page FCA handbook may sound enticing, it is potentially a complex, time and resource-consuming exercise for the FCA, and we would not expect it to happen quickly or in a single exercise. It could also cause complications. Deleting rules as they have been made redundant by the Consumer Duty (envisaged in the Financing Growth plan) could mean that rules still apply but firms will be unable to find them in the handbook, increasing the need for advice to interpret the Duty in light of the previous rules and current market practice, with legal uncertainty and costs attached. When the FCA tested the waters on a proposal to simplify the handbook for asset managers, the target audience did not view this as a priority.

Should it form the next government, Labour says that its financial services policy will evolve through the consultative process, with an emphasis on stability (a word that appears in the manifesto 16 times) and growth (a word that features 49 times). Firms will no doubt want to engage with the consultation processes to shape the future regulatory landscape. In the meantime, the industry will be keeping a close watch as the election campaigns play out and the country goes to the polls on 4 July.

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