With 2022 fizzling out as swiftly as Pakistan’s bowling attack this morning, that Jeremy Hunt recently announced the most wide-ranging set of reforms to the City in decades received less attention than one might expect. Of course, at a point when the Government has added Netflix and AstroTurf to its hit-list of the the unions, small boats, and inflation, the dry details of financial tinkering would struggle to catch the eyes of most readers. But ConHome readers are more discerning than most, and the Chancellor’s reforms deserve some more attention.
These so-called “Edinburgh Reforms” are designed, according to Hunt, to use our exit from the European Union to make our financial sector more competitive. In doing so, he aims to scrap a few rules that have long annoyed the money men. To go are post-2008 rules on bank ringfencing, which separated retail activities from riskier investment banking, the Solvency II rules for insurers, and the Osborne-era “senior managers’ regime” designed to discourage risky decision-making.
All in all, more than 30 proposals have been outlined for repealing retained EU laws in financial services. The Government is keen to make this package seem radical, with a lot of talk about “Big Bang 2.0” and “Brexit freedoms”. For those free marketeers who thought that the implosion of Trussonomics might have killed the battle against the Anti-Growth Coalition stone dead, this should be treated as a welcome showing of a bit of supply-side leg.
We should not take the Treasury’s bumpf too seriously. Hunt himself gave a bit of the game away when he admitted many of the reforms could have been done in or out of the European Union. As with the vaccine rollout, one imagines the EU’s antipathy towards Anglo-Saxon finance might have discouraged such a move were we in hoc to Brussels. Nonetheless, I would argue that we should see these measures more in the context of 2008 than of 2016.
The spectre of removing measures designed to prevent a repeat of the financial crisis understandably concerns some. The explanation of where the Crash emerged from was quickly established. The fault was pinned on acts of liberalisation like Nigel Lawson’s “Big Bang” or Bill Clinton’s repeal of the Glass-Steagall Act across the Atlantic. Such measures were said to have encouraged financiers to indulge in ever-more risky acts of monetary wizardry, until a few home repossessions in southern California saw their luck run out.
Yet this is a slight misreading of history. As the historian Niall Ferguson has long argued, the problem pre-2008 was not a lack of regulation, but a lack of good regulation. Financial bubbles and crises are almost as old as money itself. From Renaissance Florence via Tulip mania to the South Sea Bubble, misguided speculation and the egg on faces it brings is an almost genetic defect of Homo economicus. Pax Trotsky, you might not be looking for a crash, but a crash is looking for you.
The rush to regulate after 2008 was thus something of an over-reaction. Clearly, the Government, the Bank of England, and the regulators took their eyes off the ball before 2008. A “light touch” Labour government that was rather too comfortable with friends in the City getting filthy rich should never be allowed to forget the dire consequences of Gordon Brown’s delusions about abolishing boom and bust. But thinking that tightening the rules would simply prevent future crises would be just as misguided.
The near-crash of pension funds during recent Truss-induced market turbulence shows that our regulatory system retains large and glaring holes. That is something with which Andrew Bailey should be familiar, since the Governor of the Bank of England’s time at the Financial Conduct Authority hardly covered him in glory. The question therefore arises: if we want our financial sector to be both competitive and secure, what should it look like?
Comrades, the answer to that is beyond my humble purview. For all their talent and expertise, it might also be beyond Sunak and Hunt’s. Better to stick to sticking it to Netflix and plastic grass than add a revolution in the City to their over-stuffed in-trays.