Under Margaret Thatcher’s government in the mid 1980s, the City of London underwent a wave of financial deregulation, including the abolition of fixed commission charges and the movement to an entirely electronic system of share trading. 35 years later, in early 2021, a report conducted by Lord Jonathan Hill and commissioned by the UK Chancellor Rishi Sunak, was released calling for a ‘Big Bang 2.0’. Coinciding with the 2020 budget, the report argued for deregulation in a number of sectors within the UK financial services industry; with the aim of maintaining the City’s competitive advantage and softening the blow of reduced access to European markets. Rishi Sunak added that we should focus on “opportunities rather than threats [by the European Union]” in the post-Brexit City of London. Deregulation inherently encompasses the risk of excess deregulation; as evidenced by the 2008 financial crisis, the impacts can be severe. Accordingly, any UK deregulatory proposals must be balanced, supported by data, and ensure the maintenance of sufficient regulatory oversight.
The UK financial services industry is clearly invested in the UK-EU relationship and the agreements made both during and after the Brexit process; the departure from the EU has already cost the UK 6 billion EUR worth of daily trading volumes and an estimated 5000-7000 jobs in the financial sector, as predicted by the governor of the Bank of England, Andrew Bailey. The Mayor of London, Sadiq Khan, has called for greater clarity and for the chancellor to “address the concerns of London’s financial and professional services sector” including impetus to sign an equivalence agreement as soon as possible. In response to this increased pressure, Sunak commissioned the report and has expressed plans to advance with the proposed deregulation.
This deregulation is predicted to come in three forms. Firstly, Sunak wants to reduce European regulation concerning the amount of capital reserves banks and insurance firms must hold, thus freeing up more of the firms’ liquid reserves and increasing activity in London’s financial markets. The second proposal is to make the London Stock Exchange a more attractive place. Throughout 2020 and into 2021, the latest trend gripping the world’s financial markets has been the rise of Special Purpose Acquisition Companies (SPACs). The vast majority of these SPACs, however, have listed on stock exchanges located in New York, generally the NASDAQ or New York Stock Exchange (NYSE). The report’s proposals include deregulation that will make SPAC listings easier within London, potentially helping to capture some of the US’s SPAC market share. Beyond the increased capital and liquidity this could offer to the London Stock Exchange, benefits would also be likely to accrue to the wider UK financial service industry – through increased demand for services from law firms, financial advisors and due diligence providers, for example.
The final proposal includes a number of deregulatory methods to appeal to Fintech companies, with the intention to attract companies to enter UK markets and eventually list within London. The UK is already a leader in the Fintech industry, with companies such as digital bank Monzo (with a 1.2 billion GBP valuation) and payment processor Checkout (valued at over 11 billion GBP), headquartered in the UK. The London Stock Exchange’s March 2021 confirmation that food delivery firm Deliveroo is set to undertake an IPO, rumoured to be targeting a 7 billion GBP valuation, in London evidences the UK’s attractiveness. Further deregulation is hoped to encourage similar transactions.
In an interview with City A.M., the Chancellor, a Brexiteer and Thatcherite, admired the history of the City of London; specifically how it has constantly, and successfully, innovated to maintain its competitive advantage. Rishi Sunak believes the proposed deregulation will be a key factor in the future. He also seeks an active role for the Treasury and businesses within the City in this latest set of innovations. Whether the Chancellor of the Exchequer’s optimism regarding the future of the UK’s financial services industry is valid looks set to be realised over the coming years.
The news of the financial ‘Big Bang 2.0’ has provided a boost in confidence that London will remain the pre-eminent European financial hub. However, the deregulation in the UK at the end of the 20th century and its parallels in the USA under the Clinton administration are often cited as the foundations upon which the financial crisis of 2007/08 was built. Accordingly, regulators must ensure that they balance deregulation designed to induce innovation and boost UK capital markets with sufficient regulatory oversight. If successful, London may be able to maintain its regional dominance and better compete with the likes of New York, Hong Kong and Shanghai. However, as evidenced by deregulation preceding the 2008 crisis, the consequences can be severe and long-lasting if the right balance is not met.
By Andrew Hopkins
Sector Head: James Float