The ‘Edinburgh Reforms’ are a sensible package of measures which should improve the competitiveness of the UK financial sector and boost growth across the whole economy.
Fears that a ‘bonfire of regulations’ will lead to a ‘race to the bottom’ are misplaced. Many of the rules introduced after the global financial crisis went much further than necessary to reduce the risks of another disaster.
For example, the ringfencing of retail and investment banking imposes disproportionate costs on smaller banks. The Edinburgh Reforms will lighten the burden on these banks, while still targeting those that might pose a systemic risk.
The rules on the appointment and remuneration of senior managers have also become too clunky and, like the ‘bankers bonus cap’, are simply increasing costs without any real benefits.
Significantly, even the EU is looking again at some of these rules. This includes the regulations (known as ‘Solvency II’) which prevent insurance companies from making long-term investments in assets such as housing and energy infrastructure.
It is worth noting too that the EU abandoned plans to ringfence retail and investment banking back in 2017.
In some areas, the Edinburgh Reforms will actually tighten regulation, including in growth areas such as crowdfunding and cryptoassets, where rules have failed to keep pace with changes in the industry.
It is also wrong to claim that supporting the City is inconsistent with the ‘levelling up’ agenda. For a start, the financial services sector is not limited to London. Edinburgh itself consistently ranks above many other European cities, including Madrid, Milan and Dublin, in the Global Financial Centres Index (a widely-watched survey of competitiveness).
What’s more, a strong financial sector can contribute to ‘levelling up’ by providing the tax revenues and, especially, the private capital needed to fund investment throughout the country.
Financial services is a sector where the UK has a substantial comparative advantage. Brexit provides the opportunity to steal a march on the EU and build on these strengths.
This comment was first released by the IEA on 9 December 2022