A Conservative Government was welcomed by the financial sector, but political risk hasn’t disappeared
The election of a Conservative Government was received as good news by many in the UK financial services sector. Despite the uncertainty which will follow after the Government delivers on its pledge to hold a referendum about UK’s membership in the EU, investors believe that a majority Conservative Government will support growth in the sector and help reduce the burden of tax and regulation.
But what has the effect of a Conservative Government on the financial services sector been, so far? The picture is a mixed one. There has been some good news for the international banking sector in terms of the reversal of hikes in the Bank Levy, but other sectors have taken a hit as the Treasury has looked to raise revenue elsewhere. Smaller banks and building societies have been hit by a surcharge on banks’ corporation tax and the insurance sector was hit by an unexpected increase in the insurance premium tax.
Over the course of current parliament the Government will face a number of different challenges and competing priorities all of which could lead to political and regulatory change. While the Government will be keen to promote the success of the sector, especially its international competitiveness, it is a Government with a small majority, still tackling a huge budget deficit. It is sensitive to the lingering unpopularity of the whole sector as a consequence of the financial crisis and the political importance of being seen to champion consumers rather than big business.
All this means that there is always risk of regulatory changes, not all of them predicted or expected. These are the five main potential areas of threat to the financial services sector in the UK:
The financial services sector has been increasingly affected by regulation from the EU. While some financial firms might see renegotiation and a possible exit from the EU as an opportunity to reduce the burden of regulation on the sector, most companies will see changes as a significant threat. The development of a single market in services has been a huge opportunity for UK based businesses. Any unravelling of the single market will be a challenge for business operating in regulated sectors, such as financial services. The ability to deliver an agreement that would provide the same access to the single market if the UK where to leave the EU would be much more of a challenge than delivering equivalent access to exporters of goods.
- Stealth taxes
The unpopularity of the financial services sector following the economic crisis has provided an opportunity for the Government to increase taxation. When looking to raise money when it has ruled out any income tax or National Insurance increases, government might well look towards the FS sector. The Bank Levy has been raised nine times since 2011 as the Government knew that the political mood of ‘banker bashing’ provided useful cover. Threats from HSBC and Standard Chartered to move their headquarters from the UK have changed the political climate and the Government has responded to concerns about the international competitiveness of the sector by reducing theBank Levy. However, this has been compensated by increasing taxes on those serving the domestic market. Not only have we seen a new surcharge on the UK profits for banks, the Chancellor has raided the insurance sector with an unexpected increase in the insurance premium tax. There is no doubt that the Government will be looking at other ways that income can be raised from the sector.
- Consumer driven regulatory changes
The fall out of from the financial crisis has led to significant increases in the regulatory burdens on the sector. The Governor of the Bank of England has signalled that he expects to see the implementation of the final recommendations of the Fair and Effective Markets review as the beginning of the end of the big stick approach to Bank regulation, but new pressures for intervention into markets are always possible. In the aftermath of the financial crisis few people predicted the fallout of the Libor scandal and the resulting round of regulatory intervention. This is especially true of areas that directly affect consumers and voters. The CMA’s current market investigation of the retail banking sector could recommend significant interventions into the market.
George Osborne’s approach to politics means that he is ready to take action if he sees a possible political threat. Last year’s clamp down on payday lenders is one example from the last parliament where effective campaigns changed policy. The fallout from the financial crisis means that regulatory intervention is generally politically popular. Treasury’s recent interest in the closure of bank branches shows that the Government will remain quick to react where they identify an issue which is of concern to voters.
- Pension changes
The Government’s decision to deliver radical changes in the pension system was one example of George Osborne’s love of unexpected but radical policy shifts. The change caught the pensions industry by surprise and has had a significant effect on annuity providers. The launch of a review of pension taxation in the budget means that we should expect further reform. It remains to be seen how radical these changes could be but they could potentially lead to the taxation regime being turned on its head which would have enormous consequences for the industry.
- Action on fees and charges
One of the areas of constant consumer concern about the financial services sector is the level of fees. The Coalition Government took action to impose a cap on pension fund management charges in the last parliament and the Government has recently launched a review on pension exit charges, which have been identified as a barrier to the implementation of the Government’s pension reforms. With the Government keen to be seen as standing up for consumers and the FCA keen to prove its worth as a watchdog, further action in this area is likely.