The general election in the UK has now been called. There is a general view within the market that if the Labour party comes to power in the upcoming election, it will broadly continue the same regulatory approach as under the current government. This appears to be one of the key messages of both Labour's proposals in its paper on Financing Growth and in its recent public statements. We will have to see whether the manifesto confirms this but we assume that this will be very high level in any event.
This presents an interesting contrast to the US landscape, where a change of administration could mean a major shift in regulatory approach and personnel. There are of course political appointees at the Securities and Exchange Commission and other agencies, and we could be looking at a different landscape on areas such as ESG, consumer regulation and crypto to name a few examples. In the UK, although the CEO and most of the board of the FCA are appointed by the Chancellor, this is not ostensibly 'big P' political and the regulators will continue their agenda irrespective of politics.
With respect to continuity, there are areas where Labour's policy does seem likely to align with current Conservative policy, particularly in relation to the ESG agenda and the competitiveness and innovation objectives, as well as the desire to reinvigorate the UK's capital markets. This is also relevant to the current basic framework for the retail agenda, as Labour plans to continue with the Consumer Duty and other related initiatives. There is a further lack of any suggestion of major structural reform to financial services regulation, such as that seen following the 1997 election with the introduction of the Financial Services Authority. In addition, the independence of the PRA and FCA and the extended delegated powers points to continuity.
However, as is so often the case, the picture becomes more complicated when looking at what is buried in Labour's proposals and, in doing so, it becomes clear there is a lot that could lead to significant change.
Accordingly, four key points should be noted:
1. Comparison to the EU regime
In the last 18 months, we have seen a growing gulf between the EU and the UK's regulatory approaches in certain areas. Some of these are more technical and others more substantive. However, it seems that Labour would be much less likely to have a 'hang up' about following the EU approach where this makes sense for the UK market.
Labour seems realistic in acknowledging that the EU granting 'equivalence' remains unlikely but, if it is elected, we may see less resistance to following the EU model. For example, the current UK proposals in relation to operational resilience and critical infrastructure are somewhat similar to the approach under DORA but many of the technical tests and other details are different, at least in terminology. Whilst the PRA and the FCA are responsible for much of the detail and this particular train has left the station, it seems possible that a shift in tone from HMT on following the EU approach may lead to a change in policy outcome over time to greater conformity with EU proposals. Of course, any hint that even "soft" equivalence may be granted will encourage such a trend.
2. Retail financial services
Whilst the language of retail protection and the Consumer Duty remains the same under Labour's proposals, it is likely that there would be an even stronger emphasis on these. The proposals indicate a desire to give more weight to the agenda of financial inclusion and regional access, along with related concerns for consumers. In some areas, this has a competitive dimension, for example in relation to the considerable enthusiasm for open banking. In other areas, there are indications for added urgency to the agenda for increasing regulation, with particular attention to 'Buy Now Pay Later' and cryptocurrency. Interestingly, in relation to the latter, there seems to be considerable scepticism beyond what we currently see from the FCA and the Treasury.
3. Active intervention in the market
This is perhaps the most significant element of potential change. It constitutes a mix of incentives to encourage regional growth in financial services and links to concerns about the real economy.
In relation to the latter, Labour is proposing to expand the British Business Bank, as well as encouraging investment by pension schemes and other institutional investors into UK assets. This reflects a certain train of thought which the current Chancellor has been sympathetic to as shown by the ISA changes but may presage much more active intervention as part of a broader industrial strategy. Industrial strategy has historically been thought of solely in terms of manufacturing but Labour appears to be thinking of this more broadly in the financial services sector. For example, tax and regulatory incentives might be used to encourage investment in UK assets by pension schemes and others.
4. A lesson from history
A final key point. Overall, it would be a mistake to think that 'no change' is likely with a change of Government. If Labour wins, it may be that we see evolution rather than revolution but change tends to create its own momentum with a shift in the political winds. The Financial Services and Markets Act 2000 illustrates this: it was intended as merely a consolidating piece of legislation, yet we know this is not how things played out. What started as technical tweaks to the existing regime turned into wholesale change.
When a new government comes to power, even with the presence of independent regulators, there is a natural temptation to search for new policy levers to enhance growth for the domestic economy and capital markets, and to avoid the scandals to which our industry has been prone. This temptation can sometimes be overwhelming.
So, depending on the outcome, we may be looking at more change than meets the eye.
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