Ministers plan overhaul of capital market rules to boost City

The Treasury is drawing up plans to overhaul rules that have tightly governed London’s capital markets, looking to counter fears that the City is losing its place as a global financial centre after Brexit.

The proposals are expected to largely target Mifid II, the EU’s main financial services legislation, that set tough and often prescriptive rules to improve markets after the 2008 crisis, according to two people with knowledge of the plans.

Introduced in 2018 to inject more transparency and competition, executives have complained that large sections of Mifid II have had only marginal benefit and created layers of red tape.

Ministers are also planning a more wide-ranging review of UK financial markets rules to discard other EU standards and improve the City’s competitiveness against global rivals.

Chancellor Rishi Sunak has argued that the UK can regulate financial services, which contributed £76bn in tax receipts in 2019, more effectively than Brussels.

Officials said the reforms were needed to capitalise on the UK’s ability to set its own rules outside the EU. The Financial Conduct Authority, the main UK regulator, cannot make many changes as the standards are set in law.

The Treasury will launch a consultation on a set of detailed policy proposals this summer, with legislation likely to be ready before the end of the year.

A Treasury spokesperson said the government wanted “to make the UK the most open and dynamic financial centre in the world [and] reduce burdens for firms whilst maintaining high standards of regulation”.

Changes could include scrapping EU rules that determine where investors can trade stocks, known as the share-trading obligation. The standard forced €8bn a day of EU share trading out of London in January after the UK exited the single market, mainly to Amsterdam.

Officials could also ditch the cap on the amount of trading that investors can execute on private marketplaces known as “dark pools”, change transparency requirements for stock and bond markets, and revamp position limits or the amount of trading that can be done in one commodity.

The government wants to hand the FCA powers to shape future rules, rather than continue to make changes by parliamentary legislation. The intention is to give the FCA more flexibility to improve UK competitiveness, said one person familiar with the plans.

As part of the review, the government is expected to launch a broader, exploratory consultation aimed at reaffirming London as a pre-eminent world financial centre, including bolstering its position as a hub for derivatives trading. Although the activity has traditionally been a mainstay of the City, some of it has leaked to New York and Amsterdam since Brexit. 

The plans were first flagged in the budget last week, where the chancellor said the government will “next also examine the case for wider capital markets reforms, and will set out further plans on this soon”.

City minister John Glen told Bloomberg that the review would be “as broad and as inclusive as possible so that we really look at everything”.

The UK is also considering changing rules to make it easier for banks to hold capital, which serves as insurance for thousands of derivatives trades, in London, said one person who had discussed the plans with the government.

Ministers are expected to stress that any changes will seek to maintain high standards of regulation and market efficiency.

Leading City executives have warned the government against a bonfire of red tape, with many financial firms choosing to be in London for high standards in governance and accountability rather than ‘Singapore-on-Thames’ style deregulation.

The consultation forms part of a wider push to make London’s financial markets more competitive post-Brexit. 

The government has committed to opening up the IPO market by adopting reforms recommended by the Lord Hill review into UK listings. A separate review led by former Worldpay chief executive Ron Kalifa recommended measures to boost the fintech industry.