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Chancellor Rachel Reeves will tell City of London regulators to dial up the risk in the UK financial services sector, claiming that rules drawn up after the 2008 financial crash have “gone too far” and are stifling growth.
At the annual Mansion House dinner, Reeves will say she wants financial services to drive growth and will send a clear message to City watchdogs: “The UK has been regulating for risk, but not regulating for growth.”
After facing fierce criticism from UK business in the wake of her £40bn tax-raising Budget, the chancellor will seek to reassure City grandees that she has a growth strategy. Her speech will include a series of financial services reforms, notably in the pensions sector.
In the wake of Donald Trump’s US presidential election victory with a promise to raise tariffs, both Reeves and Bank of England governor Andrew Bailey will speak out strongly in defence of free trade. “Please let’s remember the importance of openness,” Bailey will say.
The chancellor told the Financial Times on Wednesday that talk of the risk of a trade war was “a bit over the top” but added: “We believe in free and open trade. We will continue to make those representations.”
Reeves on Thursday sent “remit” letters to City regulators telling them to focus on growth. She argues that while the UK will continue to uphold high standards, the regulatory system’s efforts to eliminate risk are holding back the economy.
“That has gone too far and, in places, has had unintended consequences which we must now address,” she will say. Trump’s successful election pitch also included a promise of deregulation in the US.
Reeves’ allies insisted UK financial services were in a much stronger position than before the 2008 crash and that the chancellor was “up for more risk taking”.
Reeves has specific concerns about the burdens imposed by the regulatory certification regime for bank staff below senior management level.
Under the regime, banks are required to carry out checks on large numbers of staff in risk-taking positions to ensure they are suitable for their roles and record them in a public register.
The chancellor will say the government will consult on a new system with “a more proportionate approach that reduces costs so that businesses are freed up to focus on growth”.
Lawyers expect the regime to be narrowed to include fewer people with lighter reporting requirements.
Regulators at the Financial Conduct Authority and the BoE’s Prudential Regulation Authority have already responded to political calls to support growth by scaling back several post-2008 rules, scrapping the cap on bankers’ bonuses and watering down the Basel capital requirement rules for the sector.
The FCA on Wednesday announced it would “fundamentally reshape” its plan to “name and shame” more of the companies it investigates after the proposals provoked a big backlash in the City.
Some regulatory experts argue that political pressure on watchdogs to promote growth risks clashing with their primary objective to preserve a safe and stable financial system.
Romin Dabir, a financial regulation partner at law firm Reed Smith, said watchdogs risked being “stuck between a rock and a hard place”.
Dabir added there was a risk that when the next financial scandal hit, politicians would criticise regulators “for being asleep at the wheel”.
Other reforms Reeves will announce in her Mansion House speech, as well as the pension overhaul, include the creation of digital gilts, a modernisation of consumer redress in the financial services sector, and a consultation on a new framework for captive insurance companies, entities created by businesses to underwrite their own risks.
The chancellor will also promise a “financial services growth and competitiveness strategy” next year focused on five key areas: fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets.
Speaking at the same Mansion House dinner, Bailey will call for the UK to resist the tide of protectionism as he underscores the need to raise the country’s economic potential.
“The picture is now clouded by the impact of geopolitical shocks and the broader fragmentation of the world economy,” he will say.
Without directly mentioning Trump, Bailey will emphasise the drag on the UK’s potential growth from the trade barriers with the EU created by Brexit.
“The impact on trade seems to be more in goods than services,” he will say. “But it underlines why we must be alert to and welcome opportunities to rebuild relations while respecting the decision of the British people.”
Additional reporting by Ian Smith in London