Tory leadership hopefuls, and therefore candidates to be the next UK prime minister, Liz Truss and Rishi Sunak have made repeated promises to slash EU financial regulation.
Key stalwarts like the Markets in Financial Instruments Directive II (Mifid II) and the insurance focused Solvency II are all on the chopping block, however, as the pair sharpen their knives ahead of the regulatory carve up, they must remember why these rules were first introduced.
Born-again Brexiteer Liz Truss is intent on a “red tape bonfire” to erase EU regulations from UK law and unleash Britain’s potential.
Similarly, former vampire squid banker Rishi Sunak has promised a “Big Bang 2.0” if he is allowed to scrap EU financial laws, a reference to former PM Margaret Thatcher’s October 1986 deregulation of London's stock market.
Although this deregulation fuelled the City’s growth as a financial hub over the following years, Thatcher’s chancellor at the time, Nigel Lawson, would later remark that the resultant merger of investment and retail banks was an “unforeseen consequence” of the ‘Big Bang’ that led to the 2008 financial crisis.
Both Sunak and Truss hope that the reappealing of EU legislation would fuel a similar explosion in UK investment, although one would hope this is not paired with a similar implosion many years later.
For instance, Truss supporter and Brexit opportunities minister Jacob Rees Mogg claims that the reform of Solvency II “could release £65bn of investment” from the insurance industry.
Liz is patiently giving detailed answers, calling for reforming Solvency 2 which could release £65 billion of investment. It is a pity Rishi thinks this is too complicated for the rest of us to understand @trussliz #LizForLeader #LeadershipContest #BBCOurNextPM
— Jacob Rees-Mogg (@Jacob_Rees_Mogg) July 25, 2022
Furthermore, Truss claimed on Monday night that changing Solvency II is “about enabling investment into towns like Stoke-on-Trent”, where the debate was held.
Of course, there is a grain of truth to this. Law firm Allen & Overy told GlobalCapital earlier this year that changes to the UK’s Solvency II laws could grow the securitisation market in the country by making it a more appealing asset class for insurers to invest in.
However, as Sam Woods, CEO of the Prudential Regulation Authority, said in a speech earlier this month, reforming Solvency II is “not a free lunch” adding that “if changes simply loosen regulations which were over-cooked by the EU, without tackling other areas where regulations are too weak, then we are putting policyholders at risk”.
But despite what the two Tory leadership candidates are saying, not every part of existing regulatory regime is bad because it was drawn up by the EU. Solvency II, Mifid and its succussor Mifid II, are children of the 2008 financial crisis, born in the hope that they could prevent similar meltdowns when the next crisis hits.
Even then, the UK was arguably the driving force behind these rules and helped to devise many of them. It is therefore likely that some individuals will find themselves undoing the very work they put in over a decade ago.
When reappealing the existing legislation, UK lawmakers must ensure they are not pursuing a change in regulation purely for the sake of ostracising the EU.
There is evidence to prove that the UK has no problem with keeping old laws around if they still fit the bill. The Magna Carta’s clause guaranteeing the City of London’s “old Liberties and Customs” remains part of UK law 807 years after King John signed the charter.
However, the UK has already started repealing the hundreds of EU laws with its proposed Financial Services and Markets Bill, which was drawn up during Sunak’s tenure as UK chancellor and introduced to Parliament last Wednesday during Nadhim Zahawi’s speech at Mansion House.
But the UK government must ensure that it does not take its attempt to diverge from EU law too far.
Bank of England head Andrew Bailey expressed concerns earlier this month that the proposed package of reforms could undermine the independence of financial regulators.
Meanwhile, Markus Ferber, German conservative MEP and EPP coordinator in the European Parliament’s Economic and Monetary Affairs Committee (ECON) told GlobalCapital’s sister publication IFLR that if the UK goes ahead with its plans, then “equivalence will be off the table for good” adding that it should not spark a deregulation race to the bottom.
What Sunak, Truss and their future chancellors must bear in mind is that these existing regulations are not there to stifle growth, but to temper risk. As they start the process of rolling back hundreds of EU laws, they must remember why they exist in the first place.