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Banking reforms will cut red tape and turbocharge growth say Government

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The government has announced a set of banking reforms that will overhaul financial regulation in the United Kingdom. The government are saying that the package, known as the Edinburgh reforms, is possible thanks to the post-Brexit freedom which allows them to tailor regulation to the needs of the UK economy.

As a result, several EU rules will be reviewed, including one that states brokers must charge clients for investment research separately from trading fees. It is believed that this rule benefits bankers in overseas countries.

Also part of the reforms was the re-announcement of more freedom for the pensions and insurance industry to invest in long-term assets. These assets which include social housing, windfarms and nuclear are typically difficult to sell quickly which the government believe will help with levelling.

What might not help with levelling up, though, is the confirmation that bonus caps for bankers are to be scrapped while thousands struggle to heat their homes. This was first brought to the table back in September when Kwasi Kwarteng was Chancellor. 

Looking back at 2008

The headline news from the announcement, though, ranges from plans to consult on a new central bank digital currency to plans to change tax rules for investment trusts that are involved in real estate. Perhaps most surprising of all, though, is the plan to review the rules that were put in place on the back of the 2008 financial crisis.

After the banking collapse in 2008, the Labour government had to spend £137bn of public money to bail out banks. As a result, rules were brought in to ensure banks were sensible with investment operations. The current rules state that banks have to separate their retail banking operations from their investment activity.

This rule effectively protests customers’ against the bank using their money for risky investment operations. If they are relaxed, then it may well leave some people in the country feeling uneasy about depositing large sums of money into their bank accounts.

Another rule that was introduced in the wake of the 2008 financial crisis was the “Senior Managers’ regime. This rule states that Senior Managers of banks are to be held personally responsible for any financial issues that their banks suffer on their watch. The idea behind this is that it makes them act more cautiously with investment. This rule is also set to be reviewed as part of the reforms.

The Chancellor’s statement

Upon these reforms being announced, Chancellor of the Exchequer Jeremy Hunt – who is on his way to Edinburgh to meet with the bosses of the UK’s largest financial services –  released a statement saying that they would secure “the UK’s status as one of the most open, dynamic and competitive financial service hubs in the world.” He added:

“The Edinburgh Reforms seize on our Brexit freedoms to deliver an agile and homegrown regulatory regime that works in the interest of British people and our businesses.

And we will go further – delivering reform of burdensome EU laws that choke off growth in other industries such as digital technology and life sciences.”

Responding to the reforms

Many people are suggesting that the majority of the reforms are ignoring mistakes made in the past. Potentially tearing up rules that helped the country get out of the financial mess in 2008 feels like a dangerous game to play.

Additionally, some critics are unhappy with how Hunt is trying to suggest that the reforms are only possible because of Brexit. Interestingly enough, the EU are also currently undertaking similar reforms of its own suggesting this has very little to do with Brexit.

There are supporters of the reforms, as well though. Policy Chairman at the City of London Corporation believes that the reforms are a “chance to actually grow our economy and I think we should be very excited about it.”

They are also set to please Sir Paul Marshall, a leading Hedge Fund Manager, who recently described the UK’s financial markets as old-fashioned.

Final thought

The United Kingdom is expected to enter into a recession at some point next year. The last time we were in a recession was between 2007-2009 when labour had to use billions of public money to bail out banks. Some of the reforms today leave banks with the potential to cause the same issues that they did 15 years ago, which makes little sense given the current state of the UK’s economy.

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