What can the financial services industry expect from the Labour Government?

With the Labour Government having now been in power for over a month, the financial services industry will be eager to understand what is on the regulatory agenda for the sector. 

A newly published Call for Input (dated 29 July 2024) may well have been one of the first publications directed by Labour policy where the Financial Conduct Authority (FCA) is seeking feedback from the industry on how they can simplify and avoid complexity and duplication in retail conduct rules and guidance. The background section to the Call for Input praises the “outcomes-based approach” of the Consumer Duty, “allowing firms to adapt and innovate in a way that helps consumers and is responsive to technological change and market developments” and considers whether the FCA could remove overly prescriptive requirements covering similar issues.

This echoes the Labour Government’s “Financing Growth” plan for the Financial Services industry published January 2024 which states: “Labour will direct the FCA to issue an open call to industry to identify rules which have been made redundant by the Consumer Duty, and will call on the FCA to define a transparent process for evaluating and responding to suggestions. Labour respects the FCA’s independence in determining the appropriate changes in line with the Consumer Duty.” It does appear therefore that the Government is already actively looking to push forward with its proposals for the sector. What else does “Financing Growth” tell us about what might be on the agenda? We have identified the following key themes and potential proposals.

Growing the financial services sector on a national scale

Labour has repeatedly confirmed that its goal is to secure sustained growth and productivity in all parts of the country. “Financing Growth” tells us that this will be achieved in part through the FS sector: “Labour’s ambition is for the FS sector to be the engine of growth in the UK economy, by providing the policy and regulatory environment it needs to compete on a global level and increase investment in the UK economy.” “Financing Growth” suggests this will be achieved by scaling regional financial centres alongside hubs in London and Edinburgh as well as unlocking potential within mutuals (which are located nationwide). We have seen some recent reform to the Building Societies Act and we anticipate further amendments through secondary legislation to modernise the sector and somewhat level the playing field with other types of financial institution.

Diversity and inclusion

“Financing Growth” suggests that the FS sector has a long way to go to address representation statistics and the gender pay gap, which is said to be significantly greater in financial services than for the broader UK market. “Financing Growth” confirms that Labour actively supports the FCA’s proposed guidance on diversity and inclusion for financial services; while the reporting element of the proposals has come under criticism, it is understood that the rules on non-financial misconduct are due imminently and under the Labour Government are no doubt likely to be prioritised. We anticipate final rules in this regard in the latter part of this year. 

Remaining competitive on an international scale

“Financing Growth” expresses concerns around London falling behind as a financial sector on the world stage and explains that the UK must work on enhancing competitiveness through cross-border access and efficient regulation. 

The paper talks about a new “Regulatory Innovation Office” which shall be set up to “improve accountability and promote innovation in regulation across sectors” and which will: “promote transparency on regulator performance, including the new metrics for the FCA and PRA to demonstrate progress towards the secondary objective on growth and competitiveness.”

There is an intention to promote the financial services sector outside the UK by expanding agreements with international financial services (Singapore and Switzerland are mentioned).  Labour also makes the point that the EU remains a key market for the UK and that they will adopt a more “pragmatic and cooperative approach to working with the EU”. As part of this, Labour will seek to build on and enhance the UK – EU Financial Services Memorandum of Understanding and work to secure mutual recognition of professional qualifications. It will also work to reduce barriers to trade with the EU where regulations deliver similar outcomes.

Reinforcing consumer protection

“Financing Growth” makes clear that Labour intends to improve people’s access to financial services based on the policy of “Secureconomics”, an idea that people can only plan ahead when they have the economic security to do so. In this vein, Labour intends to improve the regulatory framework to reduce fraud as well as empowering payment services providers to delay possibly fraudulent payments. Labour also intends to push forward with the move to regulate the “buy now, pay later” sector. Further plans include rolling out additional banking hubs across the UK so that people can bank in person and increasing the number of UK adults who receive advice from financial advisers. There are also other ideas in the pipeline such as encouraging longer fixed-rated mortgages to allow for affordability and encouraging workplace savings plans.

Sustainable finance

Another one of Labour’s flagship policies is working towards achieving Net Zero; “Financing Growth” suggests that Labour views the financial services sector as one of the means to facilitate this transition. In order to achieve this, Labour has said it intends to require financial institutions to publish their carbon footprint and to adopt credible 1.5-C aligned transition plans. Labour proposes to advance the plans for the UK Green Taxonomy and fulfil the UK’s commitment to Sustainability Disclosure Requirements (although the FCA has already introduced a disclosure regime coming into force for asset managers as well as a general anti-greenwashing rule which applies to all investment firms). 

There is a further intention to work with industry to come up with a model for tracking green finance flows to monitor the UK’s Net Zero transition. Further, there is a plan to ask the regulators and the Treasury to consult on allowing banks and insurers to issue covered bonds secured against green infrastructure.

Another goal is to partner with the financial services sector to make domestic housing more energy efficient. Labour intends to work with banks to expand the offering of affordable insulation and heat pumps and support the extending of green mortgages (including financing for retrofitting within the loan). 

Embracing innovation and fintech

Labour notes that the UK has led the world in fintech but that it is in danger of slipping behind in innovation; in particular Labour observes that consumer credit regulation is failing consumers and stifling innovation: “It requires updating to provide an outcomes-based approach which is fit for the digital age.” The first steps of Labour’s strategy here include leading the way in relation to the use of AI in financial services, supporting the next phase of Open Banking while ensuring consumer protections are in place (for example, eliminating penalties for failed direct debits) and embracing open finance (to support financial inclusion and spur innovation). Labour further intends to support a state backed-digital pound, make the UK a global leader in tokenisation (by clarifying the law and working on outcomes-based regulation) as well as establishing a regulatory sandbox testing financial products to reach “underserved communities”.

Reinvigorating capital markets

Labour discusses that the UK’s capital markets are one of the most developed in the world yet there has been a recent reduction in investment in UK markets, causing some companies to choose not to list in London. 

Labours plans here include reviewing the pensions landscape to see if it is possible to invest more into UK capital markets, further empowering the British Business Bank and setting up a scheme to allow for defined contribution schemes to invest into UK growth assets.

There will also be a move to support increased retail investment into capital markets.  “Financing Growth” comments: “participation by retail investors in UK public equity markets remains well below comparable markets and that an additional £740 billion could flow into the UK economy if households invested a quarter of their savings in shares and funds.” Further, Labour intends to simplify the ISA landscape: “to make it as easy as possible for people to feel the benefits of saving and investing their money, including through increased utilisation of stocks and shares ISAs.”

Financing Growth concludes by telling the reader that: “The defining economic mission of the next Labour government will be to revive strong economic growth, with rising living standards and productivity in every part of the United Kingdom.” Further, Labour observes that the financial services industry can be strong and innovative but “only if government ensures a competitive regulatory environment and removes barriers to success.” 

Labour’s plans for the financial services sector are ambitious and there is certainly a lot to get on with. No doubt the industry will watch with interest to see how their proposals develop into concrete initiatives over the coming years.