• Dr Gerard Lyons

26 Policy recommendations from my Policy Exchange strategy paper

Here are my 26 policy recommendations from my 75 page Policy Exchange strategy paper on the City and UK financial services. The sections being referenced appear in the paper:

Policy recommendations from A to Z

A. A vision and strategy is needed for the City and it should have two over-riding aims: a focus on ensuring that the City and the UK financial services sector play a leading role in addressing economic opportunities and helping to deliver strong, sustainable UK economic growth; and also a focus on enhancing the City’s competitiveness. These aims should be within the context of ensuring monetary and financial stability. (see section 4)

Policy proposals focused on the City and the economy (B to H):

B. Address the Macmillan Gap that was first identified in 1931. There needs to a review into why the funding gap to small and medium-sized enterprises (SMEs) still exists and is so large. In June 2019, the Bank of England acknowledged that this funding gap was £22 billion. (see section 5)

C. Reassess capital requirements on smaller to mid-tier banks, linked to the idea of boosting bank lending to the regions, while still maintaining tough regulatory controls to ensure financial stability. (see section 5)

D. Examine the opportunities to make regional centres outside of London attractive for back-office and other services. (This could be tied into the idea of free ports and special economic zones, with a focus here on connectivity and financial services). Create Wholesale Fund Hubs aimed at on-shoring jobs in all areas of wholesale financial services such as research, custody and administration. This would also support regional economies and the levelling up agenda. (see section 5)

E. Address financial inclusion. As part of the levelling up agenda, policy should help facilitate the creation of a private sectorled platform to bring banking services to the unbanked. The government needs to support the creation of social banks. (see section 5)

F. The UK needs to be mindful of how the world economy is changing through the emergence of the IndoPacific and because of the digital and data revolution. The UK’s approach should be based on a r.adical rejection of the mercantilist reflex of the EU and an appreciation that we should pursue an approach based on open markets and trade as we develop deeper partnerships with a range of important partners. (see section 6)

G. In order to unlock greater access to markets overseas, the UK should commit to financial dialogues, where it makes sense to do so, with large or growing economies. An example is the recent UK - Japan Comprehensive Economic Partnership, where there is a commitment to an annual dialogue to explore ways to reduce further regulatory frictions. (see section 6)

H. In addition, to unlock access to international markets, the UK should seek agreement with other countries focused on an outcomesbased approach, based on either enhanced equivalence or mutual recognition of high-level outcomes. (see section 6)

Policy proposals focused on the City and enhancing its competitiveness (I to X):

I. Be pro-active and safeguard the City’s inherent characteristics. The City’s success is based on many factors, one of which is its inherent characteristics including the rule of law, time zone and English language, among others. The question for policy makers is which of these inherent characteristics can be seen as controllables, over which policy can exercise an influence, and identify those that are threatened by measures elsewhere. (see section 7)

Policy proposals focused on regulation:

J. Outline clear regulatory principles. The UK needs to remain internationally respected in its approach to regulation and adopt high standards. In doing this, it should also focus on keeping down the rising cost of regulation, consistent with the agenda to cut red tape across swathes of the economy. There should be a regular review of regulations, both to retire those that become redundant and to keep pace with changing market practices. (see section 8)

K. The UK needs to endorse and promote global standards while retaining its own regulatory independence. The UK should continue to play a leading role at global financial fora in setting regulatory standards. However, even with global standards there can often be some flexibility in which they are implemented. Hence the vital importance of the UK reserving the right to set its own regulatory agenda, within this global context. (See section 8)

L. The UK should learn from best practice elsewhere, aiming to be at the forefront of modernising regulation, allowing innovative supervisory technology (SupTech) by financial authorities, such as encompassing big data architecture and supporting advanced analytic applications. (see section 8)

M. There is the need to embrace competition and the economic impact, alongside stability, in the remit of regulators. This recognises there may be some tension between a stable and a competitive financial sector and it does not mean sacrificing either but getting the balance right. The issues that arise from this are the need for Parliament to set the right regulatory framework, for regulators to be incentivised to follow this, and for Parliament to be able to debate, scrutinise and hold regulators to account. (see section 8)

Policy proposals on enhancing competitiveness:

N. Re-examine both MiFID II and Solvency II. We should seize the initiative and take advantage of leaving the EU to re-examine existing legislation to ensure it is fit for purpose. This, naturally, cannot happen overnight but two major pieces of legislation warranting immediate attention are MiFID II and re-examining Solvency II requirements for the capitalisation of insurance firms. Embed the aspect of MiFID II focused on the transparency of fees and costs, as such transparency and openness will allow people to see the variation in fees that firms charge. (see section 9)

O. Re-establish the City’s expertise in research, in order to compete effectively with New York and centres across Asia. This means rolling back those areas of MiFID II that have led to a reduction in expenditure on research. (see section 9)

Policy proposals to address immediate issues with the EU and to position the City to succeed:

P. The UK should continue to offer the Temporary Permissions Regime, highlighting its commitment to open markets. The large number of firms from the EEA that had applied for the UK’s Temporary Permissions Regime puts the UK in a relatively strong position. In December, 1,476 firms had applied for this. The UK could withdraw this facility, if it wished, but given the focus on open markets that might not be the best, long-term route to take. (see section 11)

Q. The UK should stand its ground in view of the EU’s stance towards it over financial services. Ensure that the EU does not “force” business that does not need to move to the euro area to do so. Recognise that there is a difference between trying to attract such business, which is legitimate, and the approach being taken by the EU, alluded to by the Governor in his mid-February speech. (see section 12)

R. The City should be keen about pushing London as an attractive venue for parallel markets in euro-denominated instruments and thus being a legitimate offshore trading centre of eurodenominated securities. As the EU effectively tries to create a walled garden around euro-denominated securities this could see London become an attractive venue for ‘euro-euro’ products. (see section 12)

S. Legitimise the legitimate, as firms should be encouraged to embrace ‘reverse solicitation’. Firms should not be discouraged from using it, as it is a recognised legitimate way to conduct business, where EU based customers can use UK financial services. (see section 12)

Policy proposals to strengthen the City’s infrastructure:

T. Very importantly, UK policymakers need to assess the resilience of the UK financial eco-system and not take anything for granted. Thus, there should be a risk assessment of how policy can help. It is important that any issues facing clearing houses are addressed and resolved, as even though they are seen by many as unlikely to move, we should ensure that they remain here. (see section 13)

U. There is a need to safeguard and strengthen fully the infrastructure needs of the City. This should include a focus on matching engines, as the recent announcement of the loss of one based in Basildon, should accelerate a policy focus on infrastructure as this is vital to London’s success. (see section 14)

V. London needs to remain at the forefront of being an attractive location for data centres and thus policy needs to be supportive of enhancing data capacity, including whether the City’s competitiveness would be strengthened by the UK hosting a cloud hub, while the importance of data democracy may warrant a greater role for the Information Commissioner’s Office. (see section 14)

Policy proposals to position the UK to succeed in growth areas:

W. Focus on positioning the City to be best placed to succeed in some of the future already identifiable growth areas including digital currencies, FinTech, Green Finance, Islamic Finance, and electronic and automated trading. The Government should not micro-manage this but provide incentives and support where needed; for instance, this report supports the announcement recently of a digital currency task force and would encourage other measures to boost growth areas, including more green sovereign bonds to help create a bigger pool of green assets. (see section 15)

X. Support the findings of the Hill Review into Listings and take into account the consultation feedback to the FCA. (see section 15)

Policy recommendations aimed at enhancing scrutiny and outcomes (Y and Z)

Y. The structure and remit of Committees in the UK Parliament needs to be amended to reflect the importance of financial services and the changes that are now merited as we have left the EU. We advocate the creation of a specialised committee of both Houses of Parliament to look at the specifics of financial services legislation. This new committee would need to engage more, on a rule-byrule basis with the regulators, and not take a hands-off approach. (see section 16)

Z. We echo the first recommendation of the Hill Review, for the Chancellor to make an annual statement about the City. A new structure needs to be created around this, to ensure all aspects of the City are represented, perhaps there could be a semi-formal, quarterly meeting to which all the City groups are invited. This group could produce a regular, ‘Barriers to Business Report’, to help inform the policy debate. (see section 17)