The Edinburgh reforms, announced in the Autumn Statement, will bring significant changes to financial services.
As headlines go, it reads like good news.
Financial services is stated as one of the UK’s key growth sectors – unsurprising given the UK is the highest net exporter of financial services globally, and the sector contributes about 8 per cent of GDP.
Furthermore, the Edinburgh reforms and retained EU law bill promise to ignite the much promised ‘Brexit bonfire’ of regulation to create an innovative, sustainable, technologically advanced, and competitive marketplace.
But what impact will this have on the market, the financial advice community, and consumers?
Back in 2018, Altus released a white paper entitled "Regulation is eating the world", exploring the explosion of regulation in the aftermath of the banking crisis in 2008.
Not only did we see an increase in the volume of regulation being produced to restore confidence, but we also saw a change in its nature and scope: Mifid II, the US Foreign Account Tax Compliance Act and GDPR all have a multi-geography and multi-domain impact.
Are the Edinburgh reforms good news?
Prophecies at this stage would be subjective and require us to pre-judge what will be removed, and what will stand in its place, but if you cannot predict the future, you can look to the past.
A lesson from the past
Repealing regulation, while appealing, can lead to unintended and unforeseeable consequences.
In 1999, the US repealed the provision of the Banking Act 1933 (Glass-Steagall Act) through the Financial Services Modernization Act 1999 (Gramm-Leach-Bliley Act).
The act brought sweeping deregulation to financial services and marked the end of regulation that addressed the defects in the banking system thought to have caused the depression.
Seventy-five years since the last systemic financial crisis, the banking crisis came along under a decade later.
It is not plausible to explore all aspects of the Edinburgh reforms, given their scope, but the proposed reform of the ring-fencing regime is a good place to focus.
It seems fair to conclude that the government will implement the recommendation of the independent review of ring-fencing and proprietary trading by changing the scope of the ring-fencing rules to focus on large, complex banks, that would see smaller banks, and those that do not undertake excluded activities above a certain level, be exempt.
The report concluded the regime should be retained as it had made retail banking safer but found it had not increased the resilience of less complex banks. It also limits competition and imposes billion-dollar annual costs on the industry, and ultimately, the consumer.
The utopian pursuit for any regulator is proportionality. A flexible regime that imposes different requirements based on the firm’s business model and the risk it poses to the market.
