Rachel Reeves called it “the biggest set of reforms to financial regulation in a decade”, and, in one narrow sense, her Leeds Reforms would qualify for the description. If the ringfencing regime for banks were to be scrapped, we really would be entering a new era – or going back to an old one, since the separation of banks’ retail and investment banking activities was the single biggest regulatory change introduced after the 2008-09 crash to try to prevent another blow-up.
Reeves on Tuesday, however, merely announced a review to look at how reforms to ringfencing could “strike the right balance between growth and stability, including protecting consumer deposits”. One hopes that does not mean outright abolition, which is what banks such as HSBC, Lloyds and NatWest have been urging on the grounds that the rules trap capital and impede growth.
The stout defence of ringfencing from Andrew Bailey, governor of the Bank of England, has always felt more compelling: the regime has made banks safer and removal would increase the cost of loans and mortgages. It would surely be hard for a chancellor to override the Bank on this core question, especially when Barclays – which, in theory, might have most to gain from abolition as it has the largest investment bank – is also in the defence camp.
A fudged outcome would see more activities allowed within the ringfenced entity. It is technical stuff, but also deeply important. Get it wrong and the cautious voices sounding the alarm over a government in search of a sugar-rush of growth via financial deregulation would have a point. Tread carefully, chancellor: ditching ringfencing in its entirety risks unlearning the lessons of the last crisis.
In other respects, however, Reeves’s red tape-slashing, investment-boosting, obstacle-removing reforms can be criticised in the other direction: yes, some changes are sensible tidying-up exercises but others are underwhelming.
Take the showbiz headliner: the advertising campaign to encourage over-cautious savers to push a few quid into the stock market. The goal is admirable in itself for the reasons the Treasury gives: savers are doing themselves long-term financial harm if they do not understand that shares beat cash over most long-term periods.
• Looser mortgage rules, which allow lenders to provide bigger mortgages worth more than 4.5 times borrowers' annual income. The move could help another 36,000 first-time buyers per year, according to the Bank of England
• A permanent government-backed mortgage guarantee scheme, in which taxpayers will pick up the bill when a borrower defaults, in an effort to encourage participating banks to offer more 91-95% mortgages
• A government-backed but industry-funded advertising campaign to encourage consumers to invest their cash savings in shares
• Plans to allow banks to send information about “investment opportunities” to savers that have cash sitting in low interest rate accounts, encouraging them to shift money to stocks and shares
• A fresh review of ringfencing rules which were introduced after the 2008 financial crisis in order to protect consumer cash from a bank’s riskier activities
• A review of warnings attached to investment products to ensure that people are “accurately” judging risk levels
• Plans to “radically streamline” accountability rules for senior bankers and finance bosses
• Reining in the powers of the Financial Ombudsman Service, which settles complaints between consumers and businesses
• Cutting the rate of interest – and therefore total compensation – paid out to consumers wronged by City firms and imposing a 10-year limit for claims
• A new “concierge service” to court international investors and create a one-stop-shop to promote the UK and provide tailored support to help businesses plan where to invest.
But it’s not as if the Treasury itself is doing much more than cheering from the wings. The ad campaign will be funded by the industry, which presumably could have launched the thing itself without government endorsement. At the very least, Reeves could have given the volunteers a hand by abolishing stamp duty on shares for purchases within ISAs. Even that gentle step was conspicuous by its absence.
Tweaking risk-warning messaging may help at the margins. So will better access for retail investors to corporate debt and corporate fund-raising, as announced by the Financial Conduct Authority (FCA). But if Reeves is truly alarmed (as she should be) by the statistic that the UK has the lowest level of retail investment in the G7 group of rich economies, bolder measures are needed. It could take a generation to change saving habits to encourage “informed risk-taking” but the crisis in the London stock market is happening now. Stamp duty remains the drag in the background, and is the real test of the Treasury’s seriousness.
Elsewhere, several reforms look justified: help for “challenger” banks on capital rules; some loosening of rules to help first-time buyers; a trimming of the size of the authorisation regime for bank senior managers in the interest of efficiency; changes to allow the London Stock Exchange to quote dollar- and euro-denominated shares.
A third pot of policies are straightforward lobbying victories for the City. That lot includes the neutering of the financial ombudsman service, but the banks may have had a point about the body acting as a “quasi regulator” within the FCA. The timing of the reform looks terrible while the unresolved car finance affair rumbles on, but the regulatory setup did look basically confused. The onus now falls on the FCA to act sooner to spot looming scandals, which is not a wholly reassuring thought.
But let’s not overstate the significance of the Mansion House speech. Yes, the financial services industry deserves its place as one of the eight growth-driving sectors within the government’s overall industry strategy; it’s too big to ignore. But, despite some of the rhetoric, it’s not as if the City is currently being strangled by regulation in the way that purer industrial sectors are being hampered by high energy costs. So don’t go overboard on ringfencing reform: it is the bit that matters the most.
