The current Conservative government potentially started early in December 2022, with its Edinburgh Reform proposals. “A bold collection of reforms taking forward the government’s vision for an open, sustainable, and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens” according to the Chancellor.

But “12 months on, the lack of progress or economic impact has left them feeling like a damp squib” states the chair of the Treasury Committee. The Committee, in its December 2023 progress report, also felt that many reforms were not real genuine reforms, and that those that were genuine would either not make a substantial difference, or the Committee remained to be convinced they could make a significant difference. These views reflect some of our observations when the reforms were published (ICAEW insights article), when we also noted that it may take a while before the extent of any effects will be known.

On 31 January 2024 the Labour Party published “Financing Growth: Labour's plan for financial services” (“the Plan”). In this note we offer some initial thoughts on these proposals and the challenges to deliver them.

ICAEW recently published its own manifesto, which outlined its recommendations for green finance and financial services reform.

Overview of Labour’s Plan

While expressed in terms of aims, Labour’s narrative somewhat echoes that of the Chancellor: “Labour’s ambition is for the FS sector to be the engine of growth in the UK economy, by providing the policy and regulatory environment it needs to compete on a global level and increase investment in the UK economy; will unashamedly champion our financial services sector as one of the UK’s greatest assets; will not compromise on long-term stability or the wider public interest”.

Labour’s vision for financial services is arranged into six policy areas, which again largely mirror the themes of the Edinburgh Reforms (see also the table at the end of the article):

• deliver inclusive growth of the UK’s financial services sector;
• enhance the international competitiveness of the UK’s financial services sector;
• reinforce consumer protection and financial inclusion;
• lead the world in sustainable finance;
• embrace innovation and fintech as the future of financial services; and
• reinvigorate the UK capital markets.

Underneath the six policy areas are over 30 individual proposals. These include specific actions (eg, a new Regulatory Innovation office to improve regulatory accountability); proposals to review a current policy or approach (eg, whether there are gaps in the mandates of the various regulators); statements of support (eg, for the Bank’s work on a central bank digital currency, or for the work on open banking); or statements of intent (eg, to reinforce the UK’s global leadership in sustainable finance).

The proposals do not reflect any roll back of the government’s proposals, except possibly a commitment to maintain the retail banking ring-fence, albeit not necessarily in the current form depending upon its interaction with the Bank’s Resolution regime. Where there is overlap, they generally look to build upon the current approach. There are however some new areas of focus, such as looking to develop a joined up regulatory framework to combat fraud and that will include tech companies; or plans to remove barriers to infrastructure investment which could benefit freed Solvency II capital.

The Plan is, however, not the end of the story. We can expect Labour’s vision for capital markets later in 2024, while it is still developing its AI strategy. And, if implemented, many of the proposals will need to be considerably fleshed out.

Observations

The Edinburgh Reforms had 31 proposals, or 22 genuine reforming proposals in the view of the Treasury Committee. Labour’s plan certainly rivals the Edinburgh Reforms in terms of number: with over 30 proposals across important topical issues, it is a comprehensive financial services policy.

The UK’s financial services sector is both a significant contributor to the exchequer and employer across the UK. The Plan’s commitment to the sector and the statements therein are therefore welcomed, and we hope it is a real and lasting commitment, rather than virtue signalling ahead of the election.

The recognition of the need for stability in the Plan is also welcome. Change leads to uncertainty as well as potential transition costs, and unnecessary change for the sake of differentiating from a previous government is particularly unwelcome. In this regard there is no apparent planned ripping up of existing policy and the current Edinburgh Reforms, but a desire to build upon and improve – ‘evolution rather than revolution’.

As with the Edinburgh Reforms, not all the proposals may lead to change. A proposal to review existing policy, for instance, is part and parcel of a well-functioning system. Furthermore, with a review of existing policy or approach there is no certainty that there will be any subsequent action that leads to beneficial change, or, if it does, any change may take time to develop and implement – and so any benefit may be somewhat distant.

That said, even if some of the proposals would not represent the potential for genuine change, they may be beneficial if the Plan’s expressed commitment helps maintain the drive to complete existing reforms or brings a renewed impetus to complete them on a more timely basis, or to empower them to be more expansive. For example, to build on the UK-EU Financial Services MoU and explore opportunities to reduce barriers to trade.

For those proposals in the Plan that represent real change, whether they have the potential to be significant remains to be seen. It is unrealistic at this point to expect detailed actions that can be measured in terms of benefit and costs. The proposals are also unsurprisingly all things to all people: so levelling up, economic growth, stability, and consumer protection and inclusion.  

In general, the proposals target sensible possible areas. There are, however, a few proposals, that if pursued, would need to be carefully thought through. For example, giving the Pensions Regulator the power to consolidate schemes that fail to offer sufficient value could merely lead to larger schemes that fail to provide value, or could prejudice members of a good value scheme if that is combined with a poor value scheme. Or developing long-term mortgages could tie borrowers into rates that ultimately are excessive, make it harder to apply the Consumer Duty, or boost property prices absent any change in housing supply measures. For example, prior to the 2007/09 crisis it seems likely that any long-term mortgage rate would have been significantly higher than the very low rates experienced over the subsequent fifteen years - to the detriment of any borrower unable to refinance.

There is a potential risk with the number and range of proposals that the commitment to all of them wanes, in particular in the face of implementation challenges or when competing with other government objectives (what ever happened to audit reform?). Alternatively, the proposals are staggered and so it may take some time before any affects are felt.

If Labour wins the election and implements the Plan, the devil will then be in the detail of the specific proposals and actions, the implementation timeframes, how it prioritises, how the potentially competing issues or conflicting aims are balanced; and not least, the potential shocks to the economy, markets and environment that are outside of the control of the government but require a response.

Finally, “securonomics”, Labour’s term to describe its approach. As an “alternative to financial instability and economic insecurity”, it might be seen as an antidote to “trussonomics”, but we are not sure it will catch on.

Labour’s high-level summary of its six policy areas