The regulatory outlook – a period of transition

Posted: 17/01/2025

Over the coming year, the financial regulation team will be writing a series of articles on the future of financial regulation in the brave new world of Brexit, a Labour government, the Trump administration, and the imperative for growth.

This first article will look at the various tensions within the HR aspect of financial regulation.

The demand for a growth economy on a sector that accounts for 12% of the UK’s GDP is having a major impact on the regulation of workers within financial services, as, still, is Brexit. These tensions are seen in the long-running debate as to whether regulation is necessary for growth or hampers it.

In October we saw Prime Minister Keir Starmer stating that innovation is too easily ‘mired down’ in the UK, and that: ‘the key test for me on regulation is growth’. He has established the Regulatory Innovation Office to advise on the updating of regulation. This follows the previous government having given both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) the express objective to promote economic growth as a mandatory requirement in all measures.

With the new Trump administration in the US, Wall Street is expecting a loosening of the rules, and this will put pressure on the UK for deregulation. Chancellor of the Exchequer, Rachel Reeves, has singled out the US as the most important destination for the UK’s financial services trade. She has said it is time to move the focus of regulation from risk and has sent remit letters to City regulators telling them to expand on plans for economic growth.

While tempting to see the incoming Trump administration as all-persuasive, it is important not to overlook the EU. The 2023 abolition of the bankers’ bonus cap and last November’s proposals to accelerate the payment of deferred bonuses for bankers under the dual Remuneration Code both take advantage of the freedoms given by Brexit. Whilst the need for strict regulatory equivalence may be fading as the UK’s attempt to seek a deal with the EU on financial services has yet to bear fruit, to diverge too far from the EU could itself be damaging in a global industry.

Indeed, the proposals for the accelerated receipt of deferred bonuses are a good example of this. It is planned that executives will be able to earn dividends on their deferred shares, have accelerated receipt (seven down to five years) and that the full restrictions of the Remuneration Code should apply to fewer people. Despite this, the PRA states firms should continue ‘to make every effort to comply with aspects of the European Banking Authority’s (EBA) 2015 guidelines on sound remuneration policies’.

What we are seeing amongst these tensions is a balance. Industry will not want to operate in a market with protections that are so weakened that stability is at risk. In December, the chair of the FCA pointed out that the UK has competitive advantages in its role in ‘influencing and embedding international standards’. For example, the strict regulation, and potential personal liability, introduced after the financial crash through the Senior Managers and Certification Regime (SMCR) is something the chancellor wants consultation on.  A lighter touch policy for ‘certification’ staff under the SMCR has been suggested, but there is no suggestion that the core protections of responsible management under that regime should be removed.

In this period of transition, a balancing of the tensions between regulation and deregulation, risk and growth, Brexit and ‘freedoms’, and the EU and the US, is to be expected. Perhaps this is a natural position for an Atlantic island nation, between the continent and the United States, aiming to take advantage of both, but at risk of falling between the two great economic powers.

More domestically, the FCA has struggled over the last year to get the balance right on important HR areas. It was damned in a parliamentary report in November as being ‘incompetent at best, dishonest at worst’ in the way it dealt with internal and external whistleblowers. It is now reworking its policies to ensure that whistleblowers are better informed, and anonymity better protected. There have even been calls to give financial rewards to whistleblowers in line with the US system again. There are competing interests in a system that relies on effective whistleblowing for its integrity, but which does not want to be clogged down with procedures and litigation.

The delayed final regulations on diversity and inclusion are still awaited; the discussion paper was first published in 2021 and the new rules are expected later this year. There is an argument that the reporting proposals go too far and impinge on areas of personal data for employees. Despite this being an incomplete process, last month a call was made for the reporting duty to be increased to cover the socioeconomic background of staff. The financial services sector employs 90% of senior employees from a higher background. Is this pushing it too far, or is it belatedly introducing what the Solicitors Regulation Authority (SRA) has been doing for years?

It is inevitable that all changes will be carefully scrutinised as the government tries to strike the balance between risk and freedoms to promote growth and innovation. Perhaps, however, we can take some optimism from what has happened over the last nine years. After Brexit many people foresaw the rapid decline of the City of London. It is true it has lost out to other European capitals, but it is still the dominant financial force in Europe.

Financial firms across all sectors simply want to be able to continue to trade profitably in a business-friendly environment. There has been an impatience with the political demands placed on them by post-Brexit national agendas. Perhaps, we can take hope from Joseph Conrad’s great book that begins with the engineer Marlow sitting on a boat in the Thames, surveying the heart of darkness all around him. If you just get on with your job and do it to the best of your abilities, you will come through. 

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