Sunak unveils post-Brexit City reforms

Rishi Sunak has unveiled a series of reforms designed to boost the City of London’s global pull for share trading and listings, following the loss of business after Brexit.

The chancellor on Thursday set out details of proposed changes to rules governing stock market listings, stock, bond and commodity trading and insurance, underscoring the UK’s willingness to split from the EU rule book it had once helped write.

Sunak said the proposals, which also seek to encourage new technologies and promote green finance, represented “a new chapter for financial services.”

In a wide-ranging review, the Treasury also announced plans to force large banks and building societies to guarantee cash withdrawal and deposit services are available within a “reasonable” distance of most of the population.

The UK’s proposals for financial services, one of the UK’s biggest export industries, have assumed greater urgency in the six months since it left the EU single market.

Around €8bn-a-day of EU equities trading moved to Amsterdam and Paris almost overnight after the end of the Brexit transition period on January 1 because Brussels’ rules barred it from remaining in London.

As a global financial centre, the UK needs to ensure open, deep and efficient capital markets and many of the proposed changes will support achieving that goal.

London has also lost out to Frankfurt and New York in the rush to attract so-called Spacs, or blank cheque companies, because of more favourable listing rules. At the same time, the City’s share of the global market for derivatives trading — one of its strengths — has also eroded as traders have been forced elsewhere.

Sunak admitted British efforts to re-establish more efficient access to EU markets, through so-called “equivalence” standards, had failed so far.

“The policy behind the proposals is striking — the UK intends to go in its own direction, uninfluenced by ongoing EU reforms, and unafraid of having non-equivalent rules,” said Rob Moulton, global co-chair of financial regulation at Latham & Watkins.

Many of the Treasury’s reforms focused on Mifid II, a vast rule book introduced by the EU in 2018 to clean up markets after the financial crisis. Since its introduction many executives have complained that many regulations are too prescriptive or create inefficiency while offering only marginal benefits to the market.

“It’s great to see market feedback taken on board in the review. As a global financial centre, the UK needs to ensure open, deep and efficient capital markets and many of the proposed changes will support achieving that goal,” said Kay Swinburne, vice chair of financial services at KPMG UK.

Among the EU rules the UK plans to scrap is a standard which determines where investors can trade stocks, known as the share trading obligation. The EU’s application of the standard forced the business out of London in January but it was originally designed to stop banks from trading their customers’ deals on their own trading desks, bypassing the stock exchange in the process.

It also said it wanted to scrap an EU rule capping the amount of trading that investors can execute on private marketplaces known as “dark pools”. John Glen, the City minister, said the cap was “well-intentioned but [had] no basis in evidence.”

The chancellor also backed some of the proposals laid out by Lord Hill’s report on UK listings, such as reforms to prospectus rules.

Other plans included reforms to commodity derivatives rules, which the Treasury described as “poorly designed and inefficient.” The implementation of Mifid rules at the time led to the Intercontinental Exchange to transfer trading in hundreds of energy futures contracts from London to the US so customers could circumvent the new standards.

The Treasury also labelled the system regulating the insurance industry “overly rigid and rules-based”. It said there was a “strong case” to reform the risk margin, which is used to calculate insurers’ capital requirements, as well as the so-called matching adjustment, which governs where they can invest.

The Association of British Insurers argued in February the changes could allow insurers to redeploy a total of £95bn of their capital and invest more freely in areas such as infrastructure and green assets.

The chancellor also pledged to allay concerns that millions of older and vulnerable consumers could be left without access to cash, as consumers rapidly shift to digital payments and banks close branches and ATMs.

Sunak confirmed banks would be compelled to fund the services and the Treasury would have powers to set “geographical access requirements” to ensure cash facilities were available. It has yet to set the limits on the distance to cash services or what percentage of the population should be within range.

John Howells, chief executive of Link, which runs the UK’s cash machine network, said the consultation was “very positive”, but added that “it needs to be in force quickly because ATMs and branches are closing literally daily.”