The Conservatives are gearing up for a ‘Big Bang 2’ deregulation of the City. At what cost?
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The Government is laying the groundwork for another financial crisis by ploughing ahead with dozens of ‘reforms’ to the financial sector that critics say will fuel a frenzy of speculation and risk-taking.
In December, Chancellor Jeremy Hunt announced a set of reforms to “drive growth and competitiveness in the financial services sector.” Ministers see financial services as one the UK’s five key growth sectors - and say they are seizing the opportunity after Brexit to roll back so-called “EU-era” protections - many less than a decade old - which were introduced to avoid another financial crisis.
Fuelling the regulatory bonfire is the Financial Services and Markets (FSM) Bill, which will force financial regulators to actively promote the interests and “competitiveness” of the sector they were established to oversee.
Regulators like the Financial Conduct Authority and the Prudential Regulation Authority used to have a duty to promote the sector. However, it was scrapped by ex-Conservative chancellor George Osborne after warnings it could trigger another crash.
Ministers will also loosen up rules (known as Solvency II) that currently mean insurers have to be able to prove they have a certain level of cash to back up their investments - to avoid them needing to seek a mega-bailout when the market slumps. It only came into force in 2016 and has been fiercely opposed by major insurance lobbyists.
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And the Government will “reform” the firewall between investment and retail banking, introduced by Conservative Chancellor George Osborne during the coalition days to stop risky investment arms sinking people’s savings when bets go awry.
Jesse Griffiths, chief executive of the Finance Innovation Lab, told Byline Times the package was the “biggest change to the rules since the 1980s”. As many as 100 reforms are on the cards. “Taken together they represent a push to roll back protections since the crash. The Financial Services bill makes regulators cheerleaders of the sector. It is a really worrying step.”
Indeed, many of the Edinburgh Reforms were recommended by big finance firms in lobbying reports over the past few years. "The government just said yes to all of them, basically," Griffiths said.
Scrapping the cap on bankers’ bonuses will also encourage “risk-taking behaviour,” Griffiths added.
Ministers say the aim of scrapping the capital requirements for insurers is to increase productive investment in British industry. “But the insurance capital rules protect us all. There’s nothing in the government docs to say they must spend the freed up capital on green investment. It’s a hope, it’s just that,” Jesse Griffiths said.
Gambling on Food
The Financial Services and Markets Bill will scrap constraints on commodity market speculation introduced following the 2008 financial crisis. Campaign group War on Want says the boom in this form of trading has a “huge impact” on ordinary people when speculators bet on energy and food prices.
As a briefing by the group notes: “Deregulation of commodity markets on both sides of the Atlantic from the 1990s meant that speculative trading on these markets became lucrative. Many more financial funds suddenly entered the market, using new and risky forms of trading. For these speculators, they actually benefit from the volatility - it is as prices change that they make their profits."
By 2006, commodity index funds had grown to $260 billion worldwide. Then in 2007, as the housing market collapsed under the weight of subprime mortgages, the trade in commodities became even more attractive. “This drove the spike in food prices in 2008-9 - the price of wheat went up 136% while the price of rice doubled. This was not due to a shortage of food at all. In fact, the world was producing more food than ever before, outpacing population increases,” a spokesperson for War on Want said.
Taken together, the reforms mirror the ‘Big Bang’ deregulation of the City by Margaret Thatcher in the 1980s. Indeed, the government initially called the Edinburgh reforms ‘Big Bang 2’ - before changing it - allegedly due to its connotations of substantial financial crashes.
Simon Youel from Positive Money, a non-profit that calls for a “fair, democratic and sustainable economy” said regulators would be pushed to water down regulations. “The Government will have the ability to call in regulators to make them re-review rules in light of whether they are competitive. The industry would lobby the government to say ‘we’re finding these rules uncompetitive - we’re going to move.’ And the government would then pressure the regulators to relax the rules,” Youel said.
“Let’s say we want to properly regulate fossil fuel financing - making sure the risk of investing in fossil fuels is reflected in what capital banks have to hold. They’d say it was uncompetitive. Regulators could be at the whims of those lobbyists,” he added.
Jesse Griffiths echoed these concerns: “The Financial Services and Markets Bill gives regulators the power with the Treasury to change the rules without new legislation. The EU Parliament had a big role in that before. Now it will be decided between the regulators and the Treasury - in reality, handing more power to the organised lobbies.”
Accounting expert and Labour peer Lord Prem Sikka told Byline Times Ministers were laying the groundwork for another financial crisis.
“The objective of the regulators should be primarily to provide stability - not to promote growth or competitiveness. What do they mean by competitiveness? It means looking to undercut the US and EU. You benchmark the UK against lowest common denominators. It’s a race to the bottom,” he said.
There are also gifts for the cryptocurrency sector in the reforms, making some foreign-based cryptocurrency investors exempt from tax on some types of UK cryptocurrency transactions. Simon Youel said: “Sunak went on a trip to Silicon Valley a while back and drank the crypto Kool Aid…They no doubt convinced him crypto was the future. He wants to make the UK a crypto hub. The collapse of [cryptocurrency platform] FTX doesn’t seem to have dented his enthusiasm.”
Nick Dearden, chief executive of War on Want told Byline Times: “It’s only 15 year since the financial sector brought our economy crashing down. A large degree of responsibility for the political crises we're seeing in Britain, and around the world, can be laid at the feet of those financiers, who effectively gambled with our lives and livelihoods.
"Yet the British government sees fit to free them up once more, slashing regulations designed to protect the public from their dangerous speculation. They’ve explicitly said their plans are meant to mimic Thatcher’s ‘big bang’ which embedded the “greed is good” mantra at the heart of the City of London."
"While millions of people worry about whether they can eat or heat their homes, speculators will be given even more power to make a fast buck at our expense. I hope politicians see sense and kill these proposals.”
In reality, this will hand more power to the organised lobbies.”Jesse Griffiths, Finance Innovation Lab
Lord Sikka will be tabling amendments to the bill - but Labour is not expected to seriously challenge the legislation, as Labour attempts to woo the City ahead of the next general election.
Earlier this week, Bank of England governor Andrew Bailey told MPs the Conservatives’ changes to rules on insurers could lead to the government having to bail out policyholders – as happened 20 years ago after the near-collapse of life assurance company Equitable Life, reported.
Chancellor of the Exchequer, Jeremy Hunt said: “We are committed to securing the UK’s status as one of the most open, dynamic and competitive financial services hubs in the world.
“The Edinburgh Reforms seize on our Brexit freedoms to deliver an agile and home-grown regulatory regime that works in the interest of British people and our businesses. And we will go further – delivering reform of burdensome EU laws that choke off growth in other industries such as digital technology and life sciences.”
The legislation is due back in the House of Lords for amendments on January 25.
It comes as analysis from Positive Money found that of the 45 Peers who spoke at the second reading of the Financial Services and Markets Bill in the House of Lords last week, 29 had links to the finance sector, having either received payment from the industry while a member of the House of Lords, or having previously worked for a financial firm.
Strikingly, of the 15 backbench Peers who voiced explicit support towards the government’s proposals to give regulators a new objective to increase the ‘competitiveness’ of the City of London - widely understood as a bid to soften regulation - all have links to financial services.
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