Financial services firms and a new Labour government: the regulatory implications

The Labour Party's victory in the July 2024 UK election gives it the first chance since 2010 to shape the way UK financial services are regulated.

Even at this early stage, there are clear signals about what form that will take: within Labour's manifesto and its recent policy paper, "Financing Growth", as well as across Labour's wider social and economic goals outlined in the latest King's Speech and accompanying background briefing, and reiterated in Keir Starmer's first Commons speech as Prime Minister. It may be useful to shine a spotlight on all these signals and explain their potential implications for financial services firms.

Growth, wealth (and regulation)

The new government's intention is to lay a foundation of economic stability upon which to pursue a growth agenda. 

If true, that may give limited room to grow public spending. The government's plans instead involve "regulation for growth" coupled with (and perhaps reinforcing) capital re-allocation — for example, to venture capital, small cap growth equity, infrastructure, "green" energy and "green" home improvements. Adjacent to this is Starmer's expressed goal that "workers and business" be "united in the cause of wealth creation".

The financial services industry will be centrally involved in these endeavours, especially those involving private investment alone or alongside public investment (the National Wealth Fund will "aim to generate £3 of private sector investment for every £1 it invests"). This looks likely to entail interventions in the pensions and retirement landscape to incentivise certain investment choices, regulatory support for greater retail participation in capital markets, and policy measures to foster growth in the UK cooperative and mutuals sector.

Labour is receptive to innovations including regulatory relaxation to pilot innovative new savings products; appropriate regulation of AI; work on a central bank digital currency and appropriately regulated securities tokenisation; pursuing open banking/finance plans under its wider "Smart Data schemes" initiative; and establishing Digital Verification Services (money laundering reporting officers take note).

Labour's migration policy will need to be set sensitive to any developing need to attract those with digital financial services skills relevant to these projects.

More regulatory convergence?

Labour wants to improve the UK's trade and investment relationship with the EU. This includes removing unnecessary barriers for firms in areas such as green finance, mutual recognition of professional qualifications, and cross-border clearing, as well as reducing barriers to trade where regulations align. Here, promoting the competitiveness of UK financial services remains the primary concern. 

While there is unlikely to be a return to pre-Brexit levels of regulatory alignment, the UK will continue to engage in opportunistic regulatory divergences. The mood music, however, is shifting decidedly in favour of incrementally greater alignment with EU financial services regulation over time. Meanwhile, the Smarter Regulatory Framework review will continue and reforms already in place (such as the Financial Services and Markets Act 2023) will also continue as planned.

Streamlined rules with consumer protection focus

The new government has placed consumer protection at the heart of its financial regulatory proposals. It plans to usher in a cross-sector approach to fraud prevention, including to introduce anti-fraud friction into real time payments. It may also give the Financial Conduct Authority (FCA) new powers to maintain face-to-face banking services.

It intends to push through the regulation of buy now, pay later (BNPL) products, and to support HM Treasury's work with the FCA to articulate the advice-guidance boundary so as to close the "advice gap" in an effort to encourage firms to provide more customer support and guidance (though there remain real challenges in doing so, and in managing attendant complaints and claims risks).

It singles out pensions for specific intervention, with measures to consolidate defined contribution (DC) small pension pots, introduce standardised value-for-money tests for DC schemes, require occupational pension scheme trustees to offer retirement income solutions and consolidate the defined benefit (DB) market through commercial Superfunds. The Pensions Ombudsman will also be reaffirmed as a competent court, obviating the need for pension schemes to make court applications for recovery of over-payments.

It is not all about more regulation, however. In fact, Labour cites the Consumer Duty as an example of the type of outcomes-focused regulation that will allow the FCA to streamline its rulebook. It sees this as a template for future policy development, and will direct the FCA to ask industry to identify rules that the Consumer Duty may have rendered otiose.

The financial services sector should therefore expect fewer rules and more "outcomes"-focused policy in future. Whether this will lighten the regulatory burden, boosting productivity, or create regulatory ambiguity, leading to cautious and costly over-compliance, only time will tell.

Independent regulators … sort of

Labour's plan does not contemplate substantial changes to the existing regulatory framework dominated by the FCA and the Prudential Regulation Authority (PRA). It does, however, envisage exercising some control over the FCA's prioritisation and focus areas. It has spoken on several occasions about "instructing" the FCA to gather information or conduct a review. That said, it stresses that the FCA will retain "full independence" about how it responds to the information that it gathers.

On the other hand, the Bank of England gets a fillip to its powers with a new resolution mechanism targeted at small bank failures in which the Bank would obtain Financial Services Compensation Scheme (FSCS) funds for use in resolution, e.g., by purchasing newlyissued bank shares, with the FSCS to recover those funds via levies on the banking sector (but not credit unions).

Speaking of prioritisation, Labour recognises the need for taxation stability and measures to tackle tax avoidance; this may over time require cross-regulator coordination between HM Revenue & Customs, the FCA and the PRA to be properly effective. Essential to the success of the FCA/PRA relationship with government will be the extent to which those in government have confidence in the regulators' senior leadership. The first six months of the new government will be telling.

Regulators may also face longer-term scrutiny under Labour plans to establish a new Regulatory Innovation Office, promote transparency on regulator performance and identify overlaps and gaps in regulatory mandates. There may perhaps be some games of musical chairs in the medium term.

Tortoise beats the hare

The new government's immediate direction for financial services regulation is to maintain economic and institutional stability, enhance consumer protection and foster innovation and growth.

In the short-term, then, Labour is fairly light touch on financial services regulatory adjustments. That may not last. After all, Starmer's preferred approach is "slowly but surely". In that vein, the financial services sector should expect that, incrementally, Labour will make financial regulatory interventions in the service of its wider policy goals.

(First published by Thomson Reuters Accelus Regulatory Intelligence, 24 July 2024)