The UK government has announced its intention to ease some of the key regulations for the financial sector, in order to boost its competitiveness and attractiveness for investors after leaving the European Union.
Ring-fencing rule to be revised
One of the proposed changes is to increase the threshold at which the ring-fencing rule applies to banks from £25 billion to £35 billion. The ring-fencing rule, which was introduced in January 2019, requires banks to separate their retail and investment banking activities, in order to protect depositors from risky bets. However, this also adds costs and complexity for banks, and reduces their ability to lend to small businesses.
The UK finance ministry said that the planned revision would make the rule more adaptable and reduce the risk of unintended consequences. It also said that it would improve outcomes for banks and their customers, increase competition and improve the competitiveness of the UK banking sector.
The government intends to put forward secondary legislation for implementing the reforms in early 2024, with the changes coming into effect as soon as they clear parliament.
Solvency II reform to unlock billions for investment
Another major reform that the UK government is pursuing is to amend the Solvency II insurance capital rules that were inherited from the EU. The Solvency II rules aim to ensure that insurers have enough capital to withstand shocks and pay out claims, but they also impose strict limits on how insurers can invest their assets.
The Bank of England (BoE), which is responsible for regulating the insurance sector, has set out a proposal to adjust the regulations to reflect the decisions made by the government about the level of financial resilience that should be required of insurance companies. The proposal includes a change in the so-called matching adjustment, which determines how insurers discount their liabilities based on the cash flows of their assets.
The BoE said that its proposal would allow insurers to invest more in long-term productive assets, such as infrastructure and green projects, while maintaining high standards of prudence and policyholder protection. The insurance industry and some lawmakers who supported Brexit have welcomed the reform as a “Brexit dividend” that could unlock up to £100 billion for investment.
UK seeks to regain its global financial edge
The UK’s financial sector, which accounts for about 12% of its economic output, has faced significant challenges since leaving the EU, as it lost much of its access to the bloc’s single market. The UK and the EU have yet to agree on a framework for regulatory cooperation and equivalence, which would allow cross-border financial services trade.
Meanwhile, London’s financial hub also faces stiff competition from other global centres, such as New York and Singapore. A survey published on Thursday showed that Singapore is now almost neck-and-neck with London in global financial centre rankings. New York remains at the top spot, while Hong Kong and Shanghai are also rising fast.
The UK government has been trying to boost its financial sector by launching new initiatives, such as a review of listing rules, a digital currency taskforce, a green finance strategy and a fintech sandbox. The latest reforms of banking and insurance rules are part of its efforts to make the UK more attractive and innovative for investors and businesses after Brexit.