It is a truism that governments are never so powerful as at their inception. Following a campaign that shied away from specific commitments, yet voted in with a record majority, the new Labour administration is now be expected to launch a plethora of policy initiatives in the coming months. What does Labour’s “hundred days” hold, and how will this affect the regulation of financial services in the UK?
FCA watchers have been starved for the last few weeks as its news machine effectively went into purdah during the six-week campaign, with no new regulatory initiatives launched until the new administration is in place. The Regulatory Initiatives Grid, normally updated in June or July, has also being delayed until later in the year.
We attempt to peer through these uncertainties to pick out some of the main themes driving financial regulation in the months ahead:
1. Promoting economic growth
Putting the UK back on a growth trajectory is the cornerstone of Labour’s entire programme for government, without which most other initiatives will not be fundable. Within this, it sees the success of the financial services sector as key to the success of the country as a whole. In Financing Growth, its plan for financial services published in January 2024, Labour’s repeated refrain is promoting growth, backed by policies that are inclusive, sustainable and beneficial for wider society, and with an emphasis on long-term economic stability.
The British Business Bank is a focal point for the new government. In Financing Growth, it committed to “empowering the British Business Bank to invest more in growth capital, establishing a British ‘Tibi’ scheme to increase institutional investment in venture capital and small cap growth equity, and increasing investment in infrastructure and green industries through Solvency UK reforms.” More generally, the private equity and venture capital sectors are acknowledged as important facilitators of growth and the new government will seek to build on that. See below however, on carried interest which may undermine this.
2. Regulatory framework review
With continuity and stability the main watchwords, we expect the main initiatives already in play (notably those under the Edinburgh banner) to progress more or less unaffected in the short term. For example, existing proposals on research payment optionality and ideas for reforming SMCR and UK asset management seem likely to proceed as before. Less certain is the impetus for greater streamlining of the FCA rulebook – arguably, this was already running out of steam with a growing realisation on the part of industry stakeholders of the sheer scale of the task.
Labour has been careful to cultivate good relations with the financial sector in recent months and clearly wants to be seen to support innovation and investment. An early test of these credentials may be the FCA’s Consultation on publicising regulatory enforcement actions – at an early stage when this is deemed to be in the public interest. The previous Chancellor, Jeremy Hunt, was openly critical of this initiative which appears to give the FCA powers that can do real harm to individual firms. It will be interesting to see if the new Chancellor, Rachel Reeves, adopts a similar line or elects to hold fire for the time being.
3. Better relations with the EU
Whilst ruling out reapplying for EU membership (or the Single Market), improved trading relations with the EU/EEA is seen as important in reversing some of the economic damage caused by Brexit. Within the financial sector, securing some sort of access to EU markets is a key objective and “equivalence” of financial regulations the most likely conduit. Whilst the previous Conservative administration saw regulatory divergence as a badge of honour in the quest for Singapore-on-Thames, the UK Treasury is likely to be much more mindful of the EU regulatory landscape when drafting new initiatives. Whether individual EU member states are likely to be receptive to such overtures is, of course, a moot point.
4.Sustainable finance
This is an area where the Conservative government attempted to establish a clear distinction from Labour by reigning back on a number of climate-related initiatives. Although this has not noticeably fed through to the regulatory sphere – recent FCA initiatives on sustainability disclosure requirements and the anti-greenwashing rule focus more on consumer protection as opposed to promoting sustainability per se – we can expect much greater emphasis on promoting the UK as a hub for green finance going forward.
5. Regulating the regulator
One other initiative that seems likely now to be developed further is that of a super-regulator which will oversee and challenge the work of all regulatory bodies in the UK (not just financial ones). Back in February, the House of Lords Industry and Regulators Committee published a Report “Who Watches the Watchdogs”. This envisaged a body that will set the responsibilities and objectives of each individual regulator including a clear order of priorities. In addition to cross-sectoral regulatory cooperation, Labour has committed to a new Regulatory Innovation Office to improve accountability and promote innovation in regulation across sectors. It will “promote transparency on regulator performance, including the new metrics for the FCA and PRA to demonstrate progress towards the secondary objective on growth and competitiveness”.
A note on carried interest
The tax treatment of rewards within the private equity sector and in particular carried interest, has long been a bug bear for the Labour party. Carried interest is the share of profits realised from a private equity or venture capital fund’s investments that is paid to individual fund managers, typically on profits achieved above a specified “hurdle rate”. Currently subject to capital gains tax at a rate of 28%, the Labour manifesto states that “private equity is the only industry where performance related pay is treated as capital gains. Labour will close this loophole.” Although some dialogue during the election campaign has been more nuanced, this is an area that the private markets sector will be watching closely.
In summary
While current FCA initiatives seem unlikely to be knocked off course in the short term, one should not ignore some of the undercurrents (some of which contradict each other) which may well push the regulator in new directions over the medium term. As ever, the cycle of regulation/deregulation will be driven by the political climate – plenty to keep regulator watchers interested!
