This article first appeared in Thomson Reuters Regulatory Intelligence.
Political party manifestos are usually high-level to give a sense of direction, and both the Conservative and Labour party platforms largely reflect their previous proposals. The Conservatives have unsurprisingly committed to bolstering their Mansion House and Edinburgh Reforms, which were key components of their post-Brexit financial services policy. Most of Labour's platform reflect their previously published policy paper, Financing Growth.
Significant consensus
There is a significant degree of policy consensus between the parties when it comes to financial services. Both are keen to enhance the depth of UK capital markets and pursue environmental, social and governance (ESG) regulation, although with differences of nuance. Importantly, neither has proposed major structural reform to the division of powers between HM Treasury, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), indicating a shared commitment to stability in the sector.
Additionally, Labour is not calling for a return to the single market, but as noted below, there is a difference of emphasis regarding the EU. It is not even possible, at least from these summary policy positions, to draw a clear distinction between the parties on either tougher money laundering controls, which both parties favour, or the broad range of consumer-friendly regulation that Labour only briefly addressed in its proposals.
It is worth remembering that the Consumer Duty was introduced under a Conservative government, although by the FCA as an independent regulator. Taking a more macro perspective, some of the more radical proposals are found in the Liberal Democrat manifesto, such as medium-term re-entry into the single market and amending fiduciary duties to reflect social responsibility concerns.
It would be a mistake, however, to conclude that a new government would make no changes to financial services regulation. The direction of travel can be gauged from the tone of Labour's platform.
Competitiveness and growth
Labour focused on competitiveness and growth as pillars of its overall agenda and offered warm words for the financial services industry. This largely reflects a similar approach as the Conservatives, but Labour could theoretically take a new direction. The party's references to open banking and finance reflect this approach, and perhaps of greatest note is its call to promote innovation. This should be understood in the context of Labour's focus on economic and taxation stability as growth drivers. Its message that regulators must contribute to such stability is loud and clear.
Within this framework is the reference to the Regulatory Innovation Office, which will cover all industries (see below), and to a National Wealth Fund to encourage investment in key areas and initiatives, including environmental sustainability. While the need for consumer protection was mentioned, Labour's discussion of financial services did not specifically emphasise it. Additionally, there was no reference to crypto or buy-now-pay-later regulation.
One should not read too much into this because the Labour manifesto is necessarily a high-level summary. The party wants to reassure the industry that a Labour government would pursue pro-growth regulation. Unaddressed so far is the question of what happens when growth ambitions meet consumer protection concerns.
Unanswered questions
Labour's overall approach leaves many unanswered questions, and the authors highlight three points to watch for.
Regulatory independence
A Labour government would face a PRA and FCA whose powers have been much enhanced in the post-Brexit settlement and whose independence has been fixed within the statutory framework. The big question here is how the language and reality of Labour's "mission-driven government" will fit with regulators' independent policy-development process. Examples such as Basel 3 and a more muscular approach to Consumer Duty enforcement come to mind.
It is unclear how the proposed Regulatory Innovation Office will fit into this equation. There is no suggestion that financial services will be excluded. HM Treasury may have existing tools at its disposal, including FCA board reforms to convert Chancellor-appointed executive directors into full board members and change the board's executive/non-executive balance.
An important challenge is whether to resume HM Treasury's much-criticised override power, which the current government considered and then dropped. Determining the Regulatory Innovation Office's authority over financial services will be another challenge.
EU alignment
Labour's manifesto does not substantively address EU alignment. The document is understandably EU-friendly in terms of restoring damaged relationships and building on the EU-UK financial services memorandum. It remains to be seen what this will mean for financial services policy.
There is no suggestion that full equivalence is back on the table. Policy differences are significant and worth watching.
Pensions and savings
Labour has called for increased investment from pension schemes into UK assets. Combined with encouraging investment through initiatives such as the National Wealth Fund, Labour raised the interesting prospect of converging tax, regulatory and general policy agendas within a more activist policy framework designed to stimulate growth and savings. To some degree, the current Chancellor started down this path with recent ISA changes, and the question is how much further things will go.
Whoever wins...
It would be a mistake to think that "no change" is likely after the election.
From the Conservatives, the Edinburgh and Mansion House reforms will continue, as will the Smarter Regulatory Framework, which will move the vast number of post-Brexit statutory instruments into the PRA and FCA rulebooks.
Regulatory consultations will invariably lead to changes and perhaps more divergence from the EU. They are also likely to reveal market problems that both parties have failed to anticipate and that will need a response.
If Labour wins, most core aspects of the Edinburgh framework are likely to be implemented, but there may be differences in how closely the UK aligns with the EU. More generally, Labour may develop policy in several areas, particularly in relation to competitiveness, savings and relations with the EU.
A new government, particularly one possessing a significant majority, creates its own policy momentum as ideas are considered afresh and new decision-makers assume power. The lesson of 1997 remains. The Financial Services and Markets Act 2000 was originally intended as merely a consolidating piece of legislation, but that is not how things played out.
Questioning policy efficacy or seeking improvements places leaders on a path toward change. What starts as technical tweaks can turn into wholesale change. When a new government comes to power, even with independent regulators, there is a natural temptation to search for new policy levers and avoid the scandals to which the financial services industry has been prone. This temptation can sometimes be overwhelming.
Whatever one's political perspective, it is good to end on a high note. There is substantial policy continuity between the two main political parties, which is bolstered by the stability inherent to regulatory independence.
The centrality of the Labour and Conservative parties' growth and stability messaging is welcome and not always paralleled in other jurisdictions.
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