Business
UK banking rules in biggest shake-up
The government has announced what it describes as one of the biggest overhauls of financial regulation for more than three decades.
It says the package of more than 30 reforms will “cut red tape” and “turbocharge growth”.
Rules that forced banks to legally separate retail banking from riskier investment operations will be reviewed.
Those were introduced after the 2008 financial crisis when some banks faced collapse.
The package of changes, the “Edinburgh Reforms”, is being presented as an example of post-Brexit freedom to tailor regulation specifically to the needs and strengths of the UK economy.
However, critics say it risks forgetting the lessons of the financial crisis.
Between 2007 and 2009 the then-Labour government spent £137bn of public money to bail out banks.
Overall, taxpayers have lost £36.4bn on those bailouts, according to the latest estimate from independent forecaster the Office for Budget Responsibility.
The plans to ease regulations on financial services are being described as another “Big Bang” – a reference to the deregulation of financial services by Margaret Thatcher’s government in 1986.
The government has already announced it will scrap a cap on bankers’ bonuses and allow insurance companies to invest in long-term assets such as housing and windfarms to boost investment and help its levelling up agenda.
Rules governing how senior finance executives are hired, monitored and sanctioned will be overhauled.
There will also be new rules around bundling investments together into tradeable units – a process called securitisation.
Chancellor Jeremy Hunt said the changes would secure “the UK’s status as one of the most open, dynamic and competitive financial services hubs in the world”.
The reforms “seize on our Brexit freedoms to deliver an agile and home-grown regulatory regime that works in the interest of British people and our businesses”.
Mr Hunt met bosses of the UK’s largest financial services in Edinburgh on Friday to discuss the reforms.
While in Edinburgh he was asked whether the reforms risked sowing the seeds of the next financial crash.
He said: “We have learned the lessons of that crash, we put in place some very important guardrails which will remain, but the banks have become much healthier financially since 2008.”
‘Race to the bottom’
However, Labour’s shadow City minister Tulip Siddiq said the reforms would bring more risk.
“That this comes after the Tories crashed our economy is beyond misguided,” adding that the reforms were part of a “race to the bottom”.
Green charity the Finance Innovation Lab said the government “is taking major risks with the stability of the economy”.
“Weakening the essential protections that were put in place after the global financial crisis is an incredibly dangerous move – they help keep the system stable and our money safe,” said its chief executive Jesse Griffiths.
But Chris Hayward, policy chairman at the City of London Corporation, said the reforms would not weaken standards.
“It’s a chance to actually grow our economy and I think we should be very excited about it,” he said.
After the financial crisis of 2008, when the government had to spend billions supporting the UK banking system, a new regime was brought in to increase the personal accountability of senior risk-taking staff.
It allowed for fines, bans and even custodial sentences, although there have been very few examples of enforcement.
But City insiders say a major disadvantage it imposes is the lengthy process of getting the movement of senior staff to the UK approved by the regulator – making London less attractive to foreign firms.
After the financial crisis, large banks were forced to separate or “ring fence” their domestic banking operations – mortgages and loans for example – from their investment banking operations, which expose their own cash to market volatility and were deemed riskier.
The cost of having two separate shock-absorbing cushions of spare money was seen by some as placing extra costs on the sector.
Most of the big banks have spent billions on this ring fencing and are not calling for its reversal.
The reforms of ring fencing are aimed at mid-size banks such as Virgin Money and TSB.
The government also re-announced more freedom for the pensions and insurance industry to invest in longer term, illiquid assets – those that are hard to sell quickly such as social housing, windfarms, and nuclear – which the government will say helps their levelling up ambitions.
It is worth noting that although this will be billed as a Brexit freedom, the EU is undertaking similar reforms.
There was a nod to developing the UK as a centre for crypto assets, but with some caveats given the recent bloodbath after the demise of the cryptocurrency exchange FTX.
Most financial industry leaders say they are crypto curious but do not feel the need to be first on this. “Let the shipwrecks of others be your seamarks,” said one.
‘Jurassic Park of companies’
London’s position as the pre-eminent European financial centre has been dented in recent years.
The UK’s capital city briefly lost its long-time crown of most valuable European stock market to Paris before gains in the pound pushed it narrowly back ahead, while Amsterdam took the title of busiest European share dealing centre.
Leading hedge fund manager Sir Paul Marshall of Marshall Wace recently described the London financial markets as a “Jurassic Park” of old-fashioned companies and investors, and it has struggled to attract the world’s fastest growing companies to list on UK exchanges, often losing out to New York, Shanghai or even Amsterdam.
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The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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