Britain in 1986 had experienced crippling industrial action, rampant inflation and in the background of the Soviet-Afghan war had taken an increasingly hard line on containing Russian influence along with key western allies. Thatcherism by now had revolutionised British industrial policy, taken on the coal miners and in 1986 turned its aim to the bowler hats of London that populated the dusty boardrooms of the city. The deregulation that took place in the city of London, known as the ‘Big Bang’, swapped out chumocracy for modernity, displaced the old guard with a vanguard of hungry young upstarts and replaced the roar of the trading floor with the tick of electronic trading. It is then no surprise that under the short tenure of Liz Truss as Prime Minister, obsessed with curating parallels between herself and Thatcher, dubbed her new reforms to financial services that were being developed as a Big Bang 2.0. She never got the chance to announce the reforms herself, instead being pushed out of office and I imagine has since come out of watching Avatar 2 adding Jake Sully to her list of the ‘anti-growth’ coalition.
This brings us to the Edinburgh reforms announced by Jeremy Hunt, which have been repackaged from the Big Bang 2.0 reforms of the Truss days. Just as in the 1980s when the UK went through a political revolution followed by an economic restructuring, the 2016 result in favour of leaving the European Union has meant that our economy is also being transformed. Leaving the largest single market in the world has meant that there has been some sole searching on what the future of the UK economy should look like. Under Boris, the state became more interventionist and focused on redistributing economic gains to lower-output regions. Liz Truss took a more libertarian approach, but her program of unfunded tax cuts was her ultimate undoing. Now Rishi Sunak seems to be batting to Britain’s comparative strengths, namely finance, life sciences (Oxford, Cambridge, London triangle) and other service-dominated sectors. The Edinburgh reforms have sought to make the UK’s finance industry more competitive by focusing on four key elements: promoting the effective use of capital, boosting sustainable finance, enhancing technology & innovation and lastly improving conditions for both consumers and business.
The most contentious policy, announced in the mini-budget made by Kwasi Kwarteng but retained by Hunt, is increasing the limit on bankers’ bonuses. The banker’s bonus limit was based on EU law post-2008 in the Capital Requirements Directive, part of a string of regulations placed on the financial sector to reduce the risk of repeating the mistakes leading to the Global Financial Crisis (GFC). The regulation meant that bonuses could only be 200% above the base salary, representing a significant fixed cost placed on UK-based banks. The changes will make UK banks better able to compete for global talent which tends to gravitate to the US due to the absence of a cap on bonuses. In addition, for each pound earned in financial bonuses, the UK treasury can reasonably expect to see 45 pence of that to be paid back in tax. As well as reforms to banker’s bonuses, changes to the insurance sector solvency II regulations would allow the UK insurance industry to invest in riskier assets, which when implemented could unleash £95 billion into the UK economy. The announcement also aims to build on the city’s lead as a global centre for green finance by releasing an update to its Green Finance strategy in 2023 which will continue to provide the roadmap for innovation to occur. Other reforms include lowering ring-fencing regimes in banking and taking a new look at rules around short selling.
Overall, the Edinburgh reforms could make the UK financial sector more competitive and is a welcome signal from a government prioritising an industry largely ignored since 2019. However, it has also drawn criticism during a time when costs are rising across the country and many households are seeing their living standards decline. It may make people wonder why banker’s bonuses are set to rise when the country is stagnating, it may even conjure up memories of a previous time when the British government chose the financial sector over the real economy.
Written By Henri Willmott