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How the UK Plans to Get a ‘Big Bang’ Out of Brexit

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Advocates of Britain’s exit from the European Union presented it as an opportunity to sweep aside unnecessary rules and regulations that were holding back economic growth. Key to this is a plan to replicate the “Big Bang,” the wave of deregulation in 1986 that turned the City of London into a global finance hub. The idea is to relax rules originally drawn up for 28 EU nations to make the country’s exchanges, banks, brokers and insurance firms more competitive, allowing them to grab a bigger share of global markets. Mounting evidence that Brexit is doing UK businesses more harm than good has added pressure on the government to make the financial reforms a success.

London’s failure this year to secure a primary listing for its biggest technology firm, chip designer ARM Ltd., was seen by the Conservative government as a wake-up call. It wants to change rules for stock offerings, private trading venues and other areas to give London an edge over rival financial centers. It’s also easing capital requirements for insurers, freeing up tens of billions of pounds that could be invested in national infrastructure. Some of the rules imposed on banks in the aftermath of the 2008 global financial crisis could also be dismantled.

In preparation for Brexit, EU statutes were grafted into British law with the aim of amending them at a later date. That process kicked off in July, when Prime Minister Boris Johnson’s administration introduced a parliamentary bill laying out a new legal framework for banks, insurers and asset managers. The bill is expected to become law in April or May 2023. Meanwhile, financial firms and their lobbyists are seeking to influence the shape of the reforms.

3. What will the final arrangements look like?

It’s not set in stone. When Johnson left office in September, his replacement Liz Truss tried to go further with the reforms by scrapping EU-era caps on banker bonuses and allowing ministers to block or change the decisions of the country’s financial regulators, the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority. Truss was ousted after just six weeks in office when her radical tax cutting plans sparked a bond crisis. Her replacement, Rishi Sunak, upheld the reform on bonuses. But he scrapped the idea of an intervention power over the FCA and PRA. The regulators had lobbied hard against the measure, saying any erosion of their independence would damage their credibility.

4. Do financial firms like the reforms?

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They’ve welcomed some of them, while lobbying for other changes. Banks, for example, want to scale back the ring-fencing of retail and investment banking. Small lenders would like to cut the amount of loss-absorbing capital they are required to hold. But the City’s broader appetite for a bonfire of EU-era regulations waned during Truss’s brief but chaotic tenure. Some senior bankers have been urging Sunak’s government to take a more gradual approach on the grounds that sudden and wholesale change to the rules under which they operate could sow more chaos in markets and pile too much compliance work on businesses just as the UK economy enters a recession.

The impact of the changes will help to determine the success of the wider Brexit project. Critics say that, far from making Britain a more agile trading nation, it’s harmed the economy by burdening businesses with extra paperwork. UK financial firms have lost automatic access to the bloc’s markets, and banks have had to rebase some employees and activities inside the EU to preserve business there. Britain’s EU counterparts have been anxious to preserve a regulatory “level playing field,” seeing the UK as too close and important a partner to allow for a complete dislocation of standards around business, taxation and the environment. There’s a risk the financial reforms may provoke the EU to restrict UK access to its markets in areas such as derivatives trading. Another concern is that if the measures go too far, they could undermine the stability and transparency that underpin the City’s appeal for international investors.

More stories like this are available on bloomberg.com



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