Nick King: London is unlikely to have another “Big Bang” moment – but here’s how we can boost its potential post-Brexit

15 Jan

Nick King is a Research Fellow at the Centre for Policy Studies

When Rishi Sunak was recently asked whether the UKs departure from the European Union meant we should revisit the Big Bang Playbook for the City of London, what choice was there but to agree? After all, what self-respecting neo-Thatcherite Chancellor of the Exchequer could say anything else when such an enticing proposition is dangled in front of them by a newspaper editor (in this case, Andy Silvester, of CityAM)?

But the world were living in is not that of the mid-80s. The EU, for all its faults, does not have the equivalent of the Restrictive Practices Act which Nigel Lawson – another political hero of the Chancellors – worked so hard to overturn. The idea of another Big Bang moment, the kind of sudden, overnight liberation which occurred on October 27, 1986, is unlikely to materialise.

But that doesn’t mean that there isn’t huge scope to use Brexit to boost the City, and the British economy – especially if we learn the right lessons from those Thatcher-era reforms.

As well as sweeping away anachronistic, inefficient practices, the Big Bang served to introduce three vital new operating principles to the City of London, turning it from a relatively sleepy, parochial industry into a global powerhouse. Those principles remain as valid today as they were in the 1980s.

The first was to open the City up to the world. For generations, the institutions of the City had been highly clubbable places, populated mainly by members of the British establishment. The Big Bang introduced competition – and global competition at that – which led to drastic changes in attitude and performance. In time, that led to London becoming one of the important financial hubs in the world alongside New York, in either first or second place for insurance, investment banking, asset management, FX trading and more.

Some worry that leaving the EU risks this preeminence. Certainly, ever since the Brexit vote, it has been clear that Paris, Amsterdam and Frankfurt (among others) have had more than one eye on the opportunity to knock London off its perch. Fortunately, for all the reports of 100,000+ jobs going, the impacts thus far have been limited. As one industry player put it to me, not even the Germans want to go to Frankfurt.

But the ability to access, and deploy, capital across the continent is clearly vital, and jeopardised by the fact we have left the European Single Market without a deal on services. It certainly does not make sense for the City to be regulated by Europe: given the relative size of our financial services industries, that would be the tail wagging the dog. But the Chancellor and the Treasury need to negotiate a Memorandum of Understanding that allows us to continue to operate in, and cooperate with, the EU as soon as possible.

Yet we must also turn that challenge into an opportunity – to not just maintain but enhance the UKs status as a global centre for capital and financial services.

Our equity markets are already some of the deepest in the world. But we need to remain world-class and be able to finance the industries of tomorrow. The Listings Review, being undertaken by Lord Hill, is fully focused on achieving precisely that by making the regime more competitive.

Already it is estimated that the UK investment management industry manages some £10 trillion of assets. But again, we need to work harder to attract more capital from South America, the Middle East and South East Asia.

Attracting more capital – and talent – while continuing to build our reputation as a global centre for financial services should a central pillar of the Global Britain agenda.

The second principle from the Big Bang is proportionate regulation. Just as those reforms were predicated on, and driven by, regulation that works, we now need to make sure that our regulatory regime is one which supports rather than stifles our financial services industry – and which is tailored to our needs.

Coming out of the Single Market there are few voices clamouring for a bonfire of regulations in financial services. But at the same time, there is no point in sticking rigidly to a set of rules which dont necessarily work for us or our markets. Other authors on this site have, rightly, pointed to changes which should be made around the Alternative Investment Fund Managers Directive and the Markets in Financial Instruments Directive II. The collapse of the financial advice industry, in particular, has been entirely been driven by overzealous, anti-competitive regulation.

Another set of regulations we should put in the crosshairs are the Basel capital requirements, which can treat a small bank or a building society in the same way as a large investment bank – which also damages competition by making it much harder for the new challenger banks to compete. By taking a more proportionate approach, and freeing up domestic lenders’ capital, UK regulators can create a more competitive market and immediately unlock more funding for domestic priorities like sustainability, net zero and levelling up. It is also striking that Britain’s regulators rarely have a duty to consider the growth impacts of their decisions: as George Osborne once said, we do not want the financial services industry to have the stability of the graveyard.

Proportionate regulation is linked to the third pillar that drove the Big Bang’s success: our absolute reliance on innovation. The reforms of the Thatcher era brought in new players, new instruments and new ways of doing things. That same willingness to embrace innovation is imperative if we are to thrive in the future.

Today, despite our world-leading fintech industry, much of the pioneering innovation in financial services happens in Singapore, Shanghai and other Asian markets. Industry insiders claim that an abundance of caution prevailsat the FCA. For all the successes of its innovation “sandbox” (a concept some claim was forced on it by Osborne), it is still not doing enough to support innovation or to open up new markets. These are issues I have written about before but those in the fintech industry tell me FCA authorisation still takes too long.

The tone for the regulators is set by the Treasury, of course – and the Treasury needs to back innovation now like never before. It must ensure its regulators lose the “gold plating” mentality of old, which has put us at a competitive disadvantage, and use the Future Regulatory Framework Review to help us capture the global opportunities which abound.

The fundamentals of our financial services industry remain strong, as the Chancellor himself said, but they cannot be taken for granted. Despite the fact we are blessed in our language, timezone, history and rule of law, the forces of competition are ever stronger – on the continent and beyond. To maintain London and the UKs preeminent status will take hard work and determination.

And that, I would argue, is the most important lesson of the Big Bang. The new entrants, innovation and subsequent global success came about because we had a government that was ready to back the industry as required. It was a Government that recognised that financial services, the profit motive and shareholder interest were fundamental goods – and spoke out on their behalf.

We might not be in line for another Big Bang but to help us make the most of Brexit we need the Government to be pro-business, pro-City and to offer financial services enduring political support. If those principles are in the Chancellors “Big Bank Playbook”, then sign me up.

Joel Gladwin: International rivals are catching up on the UK’s fintech success. Here’s how we can defend our crown.

27 Nov

Joel Gladwin is Head of Policy at the Coalition for a Digital Economy (Coadec).

Our fintech sector is a great British success story. Investment into UK fintech companies is at record highs, accounting for over a third of all investment into the sector in Europe. Last year, London had more people working in fintech and a greater number of venture capital investment deals than any other city in the world.

Companies like Monzo, Starling, Revolut and TransferWise are all less than 10 years old but they have matured into global brands in their own right. They have also grown into formidable rivals for customers and their cash, putting pressure on the rest of the financial services sector to step outside its comfort zone, innovate rapidly and embrace a fail-fast, customer-centric culture.

Our historic strength in financial services, combined with forward-thinking regulators in the Financial Conduct Authority (FCA) and pro-competition policy in the form of open banking, have all contributed to establishing London as the fintech capital of the world.

But that is enough backslapping for now.

Not only are our international rivals catching up when it comes to the volume of fintech deals, they are also drawing up plans to open up more financial – as well as non-financial – data for their fintechs to access and innovate. These plans go well beyond the limited scope of our own open banking regime. The key to defending our fintech crown will be building on this momentum.

Thankfully, the Government is already starting to think seriously about what comes next, with the Treasury and the FCA embarking upon a number of reviews this year including on payments regulations, open finance and the broader UK fintech sector.

Moving beyond open banking to open finance is the next logical step for our fintech sector’s growth and development. It will open up the savings, credit, mortgages and pensions sectors for innovation – and, ultimately, bring consumers more choice, convenience, and ease when it comes to managing their finances.

In its latest Digital Finance Strategy the EU has committed to establishing an open finance framework by 2024. As someone who was involved in the lobbying battles of getting PSD2 over the line – the EU regulation that made open banking possible – I know full well that this is an extremely ambitious target by European standards.

After all, the bureaucratic wranglings of Brussels led PSD2 to be an extremely lengthy project. It spanned five years (2013 to 2018), one directive, eight guidelines, six technical standards and seven opinions. And it has still not been delivered in parts of Europe to this very day. The UK’s approach towards a functional open finance ecosystem can now be quicker, leaner and more agile.

By returning to our principles based approach to regulation, rather than overly prescriptive technical standards, and enabling the market of AP specialists to get on and build the connections for open finance from below, new research by The Coalition for a Digital Economy (Coadec) suggests that it would be possible to unlock the benefits of open in two years.

This isn’t a novel idea either. It has been the approach taken by the Australian Government which has introduced arguably the most expansive open data regulatory initiative in the world.

The Australian Consumer Data Right (CDR) will give consumers the right to access not only their financial data but also utility and telecom data by 2021, even though they started on their journey two years later than us. A market-led, principles-based regulatory framework will allow the UK to deliver open finance much quicker than our near neighbours.

The Chancellor has also made it clear that he will “review our regulatory framework on financial services” and that “not being inside the EU more generally gives us a chance to do things differently.” One area that desperately needs the Treasury’s attention is the innovation-killing, anti-competitive, EU regulation that forces customers to re-authenticate third party access with their bank every 90 days – known as Secure Customer Authentication (SCA).

Imagine having to send your accountant, bookkeeper or financial adviser a new letter of authority every 90 days just so they can continue to work on your behalf. The chances of forgetting to do so would be high – potentially missing filing deadlines, payroll or important insights on your financial health. But this is precisely the situation that customers of accountancy software and financial adviser platforms face.

As a result, fintechs are forced to endure customer attrition rates between 13 per cent and 65 per cent according to industry data, rates which are not viable for any business at either end of the spectrum. This is made even worse by this process being managed by the very same banks for which open banking measures were introduced to provide competition. There is little incentive for them to get this right.

These barriers have thwarted open banking’s potential to add $1.4 billion to the UK’s GDP on an annual basis, according to analysis from the Centre for Economics & Business Research. It is vital that we address them.

The UK’s regulatory influence on the global stage will endure. Informal channels, networks and knowledge communities have always played a critical role in shaping the content and application of policy frameworks, especially in areas where technological progress necessitates new approaches such as fintech. By moving quickly to embrace an open finance environment, and correcting the deficiencies within existing European regulation, the UK can continue to lead on fintech.