Has the Mansion House speech marked a start of a new relationship between Government and the banking sector?
Despite worries about the impact of ‘banker bashing’ on the future of the financial services sector in the UK, since the crisis of 2008 and the Libor and foreign exchange fixing scandals, politicians of all parties have seen the damaged reputation of the banking sector as a useful foil against which to demonstrate their concern for ‘ordinary workers’ or the ‘real economy’.
Seven years after the start of the financial crisis and three years since the exposure of the Libor scandal, the question is have we yet reached the point at which the policy and regulatory approach to banking can move on and settle into a new period of normality?
There are three reasons to think that the relationship between the banking sector and the Government is entering a new phase.
The first is the announcement in this week’s Mansion House Speech that the Government is beginning to divest its holding in RBS. Ending public ownership of our major banks would transform the relationship between the industry and the Government. The selloff would reduce pressure on the Treasury to use its shareholdings to influence the behaviour of the sector and begin to normalise the relationship between the Government and banks.
The second reason is the current threat by HSBC to relocate its headquarters from the UK to Hong Kong. Whilst the wave of regulatory reforms since the crash has led to constant warnings about the risk of banks leaving the UK, the threat of relocation by HSBC has focused minds about the attractiveness of the UK as a financial centre. The threat has almost certainly led to a halt in increases in the bank levy and might well mark the high tide in rise of Government imposed regulation and taxation on the banking sector.
Thirdly the publication of the final recommendations of the Fair and Effective Markets review signals a new approach to regulation of trading activity in the fixed income, currency, and commodity markets. The review, along with regulatory reform in other markets, marks a shift from the informal self-regulation by market participants, much of which pre-dated the Big Bang financial reforms of the 1980’s, and the principles based regulatory structure introduced in the early 2000.
New regulatory reforms are significantly tougher than previous regimes. The risk of criminal sanctions against those who are found guilty of market manipulation has significantly increased, but the new system seems to mark the apogee of efforts to introduce a more robust regulatory structure to prevent a repeat of the failures of the past.
Mark Carney has made it clear that he hopes implementation of the new regulatory system has provided an opportunity for both banks and regulators to move on from the period of the ‘big stick’ approach of huge fines as banks focus on delivering compliance and regulators delivering more certainty in their approach.
The combination of a more robust regulatory approach, the election of a majority Conservative Government, and signs that the Labour Party is looking to move on from some of the anti-business rhetoric of the last parliament promises to change the relationship between politics and the banking sector.
We heard warmer words from the Chancellor this week about the importance of the banking sector to the UK’s economic future. The question is have we yet reached the stage where the reputation of the banking sector being detoxified is enough for politicians to again act as cheer leaders for one of the UK’s most important industry sectors?