Rachel Reeves’ banking reforms ‘unlikely to be transformative’
Rachel Reeves’ financial services growth mission faces a major blow with top City voices warning her regulatory reforms won’t be transformative.
The Chancellor unveiled her Leeds Reform package intended to “rewire the financial services industry” in July this year.
Whilst the moves were cheered by industry bigwigs, analysts have raised concerns the changes will fail to make material difference across the sector.
Simon Ainsworth, banking analyst at Moody’s Ratings, told Morning Wire the package was “not really going to be moving the dial to a material extent for UK banks”.
“They’re unlikely to be transformative, either for the banking system or as a driver for near term UK economic growth”.
Plans included a crackdown on the banking ombudsman amid fears it had become a “quasi-regulator” and changes to the MREL threshold, which dictates minimum amount of money and certain types of debt a bank must have.
Reeves also said the City minister, who was replaced by Lucy Rigby in the reshuffle, would lead a review into ring-fencing – the highly-contested system separating a lenders’ retail and investment activities.
The Chancellor has touted financial services as being “at the heart” of Labour’s strive for economic growth.
Lloyds chief Charlie Nunn welcomed the “ambition shown” in the Leeds Reforms whilst boss of Santander UK Mike Reigner said: “The changes outlined within the package are important steps to modernising the UK’s regulatory architecture.”
Reeves’ plans no ‘magic bullet’
But Ainsworth said the policies alone did not amount to “the magic bullet”.
“The Leeds package will not materially alter the credit risk or lending volumes that the banks are doing in and of itself,” he added.
The package also helped relax rules to allow banks to lend more money to first-time buyers (over 4.5 times their salary), while also keeping high Loan-to-Value (LTV) mortgages available via a new permanent guarantee scheme.
The Prudential Regulation Authority (PRA) has estimated the percentage of these loans would edge to 11 per cent from 9.7 per cent of all mortgage loans.
Ainsworth said this was “marginally positive, but not shifting the dial in terms of volume or credit risk”.
Mid-cap banks would likely be the target of any boost, Ainsworth said, with the reforms “broadly supportive of growth, particularly for smaller lenders”.
He said changes to the MREL should help the smaller firms but warned it was “still at the margins” with wider changes unlikely to reach the giants dominating the space.
Ring-fencing faces Bailey block
One area the top bankers had hoped for a regulatory boost was ring-fencing after the chiefs of HSBC, Lloyds, Natwest and Santander wrote to Reeves lobbying for her to take the axe to the system.
Barclays’ CS Venkatkrishnan broke from his peers to launch a defence of the regime.
Ainsworth said: “A change to ring fencing is likely to take primary legislation and is therefore unlikely to be as quick as maybe some of these other changes.”
He added: “These reforms really spoke to a range of measures which are relatively easy to deliver under the existing regulatory and legal framework.”
Governor of the Bank of England Andrew Bailey warned in a letter to the Treasury Committee in May that “removing the ring-fence would most likely have a negative effect on UK lending”.
The head of the banking watchdog Sam Woods is also set to depart from his role next year.
Reeves is expected to draft an “outsider” into the post as she attempts to cultivate favour with the City and supercharge her deregulation agenda.
Regulation still an issue
A number of the City’s banking giants are currently facing regulatory woes amidst the motor finance scandal, where lenders have been forced to up their provisions.
Ainsworth said the noise around redress could forge a “perception that the UK has a more onerous approach to consumer regulation”.
He added it could spook overseas firms looking to expand into the UK that a regulatory “surprise years down the line” could disrupt operations.
When approached for comment, the Treasury pointed to comments made following Revolut’s £3bn investment into the UK as part of the fintech’s mission to invest £10bn globally and create 10,000 new jobs worldwide.
The injection of capital followed asset manager Blackstone pledging £100bn in investment as well as £7bn from Blackrock and £1.25bn from top US financial giants.
Reeves said: “Through our Leeds Reforms we’re making Britain the best place for financial services companies to do business, pushing us ahead in the global race for investment and putting more money in people’s pockets through the Plan for Change.”