A new order?

July 2024

Following a landmark victory in the UK General Election, the newly formed Labour government must now set about putting its plans and promises into action. In this article, we predict what the new government is likely to mean for the regulatory agenda for financial services.  

The financial services policy section of the Labour manifesto was relatively light, but was foreshadowed with a more detailed plan for the sector in January. However, central to the manifesto itself is growth and this includes initiatives closely linked to regulatory priorities for the UK financial services sector, such as the commitment to hold a global summit for investment into the UK in the first 100 days. The King's Speech has given more details on specific laws to be brought forward — see box below.

Labour has consulted widely with industry bodies and participants to develop its approaches to the financial services sector. It has pledged to identify overlaps in regulatory mandates to improve efficiency and may also seek to build a closer relationship with the EU. Additionally, it has promised to be forward-looking rather than reconsidering reforms which are already in flight and has reconfirmed its support for the PRA and FCA's secondary objective on competitiveness and growth.

We do not therefore anticipate revolution in the regulatory landscape. However, we do expect stronger focus on consumers, a recommitment to ESG and sustainability outcomes and a determination to work alongside the financial services sector to deliver UK investment and growth.

Below, we look at some of the key areas where there may be direct implications for the regulatory landscape in the UK. 

Labour has praised the Consumer Duty as an example of effective principles-based regulation. It will continue to support consumer protection measures but plans to ask the FCA to work with industry to identify rules that have become redundant following introduction of the Duty. Labour intends to involve tech companies in the fight against fraud and will support the FCA and PSR in exploring whether allowing payment service providers to delay suspicious payments will also help reduce fraud. It has confirmed its support for the FCA and PRA's proposed requirements for diversity and inclusion and will ask the regulators to consider expanding the scope to include socioeconomic diversity.

More broadly, there are plans to regulate the buy-now-pay-later industry and to expand banking hubs and create a national financial inclusion strategy. Notably, there is support for the ongoing review of the advice/guidance boundary designed to generate better customer outcomes. 

Labour has acknowledged the sustained reduction in investment in UK capital markets, including the fall in the number of listed companies, and the many reviews of the causes of this since the UK left in the EU. It will evaluate progress on implementing review recommendations and continue to work with industry on shaping policy ideas. Given the low level of UK pension fund investment in UK capital markets and their relatively poor returns, Labour has committed to reviewing the pensions landscape and assessing what further steps might be needed to improve pension outcomes. It has already met with industry representatives to discuss how pension providers' Mansion House Compact promises can be turned into a tangible flow of investment into the UK economy.

Proposals in the "Financing Growth" plan included enabling consolidation across all pensions and retirement schemes, working with local government pensions schemes evaluate different models for pooling, including increasing in-house fund management capacity at the pool level, giving the Pensions Regulator the power to intervene for direct contribution schemes to ensure value, and establishing a British Tibi scheme modelled on the French opt-in model to encourage defined contribution (DC) fund investment into growth assets. Labour will also look at measures to increase retail participation in capital markets.

In addition to expanding banking hubs, Labour proposes to build on the Financial Services and Markets Act by requiring FS regulators to report annually to parliament on their considerations regarding the needs of mutuals. It has said that it will seek to double the size of the co-operative and mutual sector and would modernise the Building Societies Act in relation to retail funding limits. It has also committed to strengthening the SME bank referral scheme to support more businesses who are rejected for bank loans to secure financing from alternative sources such as co-operatives, building societies and community development finance institutions.

There has been no indication that there will be any divergence from the prudential regulatory agenda already in progress for banks and building societies. Labour has not set out a position on Basel 3.1, for which the final rules are due imminently. We expect continuing support for proportionate approaches such as the new prudential regime for smaller domestic deposit takers. Labour has also said that it will support the industry by reducing bureaucracy — including by upholding ringfencing — and promoting innovation (see more below).   

Labour has been engaging with insurance and long-term savings providers to inform its plans for the sector. Policy direction echoes the party's overarching themes, including increasing investment into the UK economy and transition to Net Zero.

As noted above, consumer protection and inclusive finance are likely to feature on the agenda. In an insurance context, it will be interesting to see if this will include closer scrutiny of the use of risk-based factors in pricing — a fundamental of the insurance business model, but one that can arguably lead to worse outcomes for those most vulnerable. The rising cost of motor insurance has also featured in policy discussions, although policy proposals at this stage are unclear.

From a prudential policy perspective, Labour has not foreshadowed any departure from the regulatory agenda to date. Indeed, it has reemphasised commitment to the implementation of Solvency UK, due to be completed by the end of 2024. The working assumption is that it will take on the introduction of primary legislation already on the horizon, notably the Insurance Resolution Regime and a framework for Captive insurers. Consultations on both files are expected this year. Finally, insurers will be hoping to work closely with the new government on key priorities ranging from improving the pensions landscape to enhancing flood resilience, as well as joint initiatives to deliver on the growth mission.More broadly, there are plans to regulate the buy-now-pay-later industry and to expand banking hubs and create a national financial inclusion strategy. Notably, there is support for the ongoing review of the advice/guidance boundary designed to generate better customer outcomes. 

Very little information has been published on Labour's plans for the wealth and asset management sector, apart from comments supporting the review of the advice/guidance boundary (see above), and sustainable finance commitments (see below).

Notably, the private assets industry has been put on notice in the context of remuneration. Labour's manifesto stated that private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this perceived loophole. Any tax-related changes have the potential to impact on other parts of financial services, where significant proportion of firms are PE-owned.  

The Labour manifesto committed to making the UK “the green finance capital of the world”. Key initiatives include mandating UK-regulated financial institutions including banks, asset managers, pension funds, insurers and FTSE 100 companies to publish their carbon footprint and develop and implement credible transition plans. There was also commitment to advancing plans for the UK Green Taxonomy and support for aligning UK sustainability disclosure requirements with the ISSB and TPT frameworks.

The government plans to work with the financial sector on a potential model for tracking green finance flows, explore the potential for nature-related finance and support a greater range of green mortgages. HMT, the PRA and the FCA will be asked to consult on allowing banks and insurers to issue covered bonds. Labour plans to restore plans to ban the sale of new petrol and diesel cars from 2030 and, from 2028, to require all landlords to provide EPC certificates of C or above. Both initiatives will have impacts on the financial sector.

Plans to ban the sale of new petrol and diesel cars from 2030 and, from 2028, to require all landlords to provide EPC certificates of C or above will have knock-on impacts on the financial sector.

In its financial services sector plan, Labour pledged to adopt a coordinated strategy to embrace new technology and enable a pro-innovation regulatory framework to support growth. It has committed to setting clear standards for AI safety, with a focus on consumer protection. However, it wants to adopt an agile approach to regulation so that the technology can be utilised by FS firms and other organisations to boost economic growth.

Labour supports the continued development of Open Banking to promote competition in retail payments as well as taking forward the Data Protection and Digital Information Bill to facilitate Open Finance. The Bank of England's work on the "Digital Pound" will be supported with a focus on privacy and financial inclusion. Labour would like the UK to become a global leader in tokenisation and will work with regulators (including those in other financial centres) to continue the work on identifying regulatory bottlenecks.   

The government proposes to establish a new Regulatory Innovation Office (RIO). Although originally conceived with tech and medical regulators in mind, the FS sector plan confirmed that the RIO is intended to “improve accountability and promote innovation in regulation across sectors” and “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”.

The RIO is expected to set and monitor targets for regulatory approval timelines, benchmarked against international comparators, provide a “strategic steer” for regulatory priorities and provide a greater role for the existing Regulatory Horizons Council (RHC), with a new requirement for government to respond to its reports within a set time period. The regulators already have a heavy workload transferring and amending onshored EU legislation into the UK rulebooks under "the smarter regulatory framework". Much of this work is in train so there may be some difficult prioritisation discussions between the government and regulators. 

Work in progress

In the pre-election “quiet period”, UK policymakers and regulators put several key files on hold. In some cases, there is a clear timeline for these to be resumed. For others there is still some uncertainty:

• Publication of the eighth edition of the Regulatory Initiatives Grid — now due “later this year”. 
• The PRA's second policy statement (PS) on the UK implementation of Basel 3.1 — previously expected in Q2. It is not yet clear when exactly this will now be issued, with potential implications for the implementation timeline. 
• Publication of the PRA's proposed capital regime for Small Domestic Deposit Takers (SDDTs) — part of the Simpler Regime that will sit alongside Basel 3.1. This was expected at the same time as the Basel 3.1 PS.
• FCA Policy Statement on reform to listing regime — published 11 July.
• SM&CR Consultation Paper — likely to fall in H2 2024. 
• FCA consultation on reforming the retail disclosure regime and PRIIPs — potentially Q3 2024. 
• FCA policy statement on payment for research changes — potentially Q3 2024.
• Advice guidance boundary review — potentially Q4 2024.
• FCA policy statement on greater transparency around its enforcement actions — timing to be confirmed.
• Legislation on Insurance Resolution Regime and UK Captives framework — both presumed to go ahead, but timing unclear.