Is Labour playing with fire when it comes to lighter regulation for bankers?

Independent

5 days ago

The chair and chief executive of Goldman Sachs, David Solomon, has told Sky News that London's status as one of the world's pre-eminent financial centres is ' fragile ', because of the continuing effects of Brexit, increased competition from other European centres, and the tax treatment of the US investment bank's most highly paid staff.
Although Solomon cuts a rather remote figure with concerns far removed from the average British family, the fact is that financial services and the City are such a significant part of the economy that his remarks carry some serious implications for the economy, and thus the living standards of all. So he's worth listening to.
What is at issue?
Solomon points out that his bank, one of the largest in the world, has more people employed in continental Europe and proportionally fewer in London than was the case before Brexit. As a result, the UK doesn't enjoy the spending these 'absent' workers would otherwise inject into the local economy. Even in its current 'fragile' state, the financial services sector contributes about £44bn to the Exchequer, not far off the entire defence budget, and it could be even more, given the right conditions. The temptation for ministers is to change rules on tax and regulatory rulebooks, to boost banking profits and thus tax revenues, social spending and investment. We may term this 'Rachel's Dream'.
What's wrong with London?
Solomon is fairly clear that Brexit put up too many barriers with the EU in the financial sector, so relocation of certain functions and staff became inevitable. Tax and 'incentives' are also significant factors in the leakage of people and money abroad to rival centres. The abolition of ' non-dom ' status under the Conservatives, with additional tax liabilities added by Labour, Solomon says, has also depopulated the UK tax base.
'Incentives matter. If you create tax policy or incentives that push people away, you harm your economy … in Goldman Sachs today, if you're in Europe, you can live in London, you can live in Paris, you can live in Germany, in Frankfurt or Munich, you can live in Italy, you can live in Switzerland.'
The government has already softened the former non-doms' tax obligations; paying inheritance tax is a particular concern for the super-rich. Thus far, the Labour left hasn't objected much.
What else does this major investor want?
Lighter regulation, as also suggested by the chancellor, Rachel Reeves, in her Mansion House speech last week. In particular, he wants the rules introduced in the aftermath of the global financial crisis of 2008, which keep 'high street' retail banking and 'casino' investment banking separate, to be reformed: 'It's a place where the UK is an outlier, and by being an outlier, it prevents capital formation and growth. What's the justification for being an outlier? Why is this so difficult to change? It's hard to make a substantive policy argument that this is like a great policy for the UK. So why is it so hard to change?'
Well, why is it so hard to change?
It's precisely because the UK has such an outsized financial sector compared to the size of its GDP that leaves the government and British taxpayers badly exposed if banks overextend themselves and have to be rescued with public funds – as happened before with Northern Rock, RBS, HBOS et al. Put simply, given the national debt, another banking crash could collapse the British public finances.
The governor of the Bank of England, Andrew Bailey, is alive to the dangers. He said only this week that such 'ring fencing' rules needed to be kept in place: 'I do think the ring-fencing regime is an important part of the structure of the banking system. It makes the resolution of banks if they're in trouble much easier, and it benefits, particularly in terms of the UK, consumers, business and households.'
Who will win?
The Bank is operationally independent, and has to be to maintain confidence, so no chancellor would be reckless enough to undermine its status (as happened, in a different context, with the infamous Truss mini-Budget of 2022). However, the chancellor in the final analysis sets the Bank's remit, with parliamentary authority, and can prevail on a governor to contemplate change. Bailey hasn't ruled out reform, but banking supervision is a delicate and complex task, and there is much devilment in the detail.
There will probably be some compromise and consequent quiet deregulation because the government is so desperate to boost growth, even if it means the system taking on more risk. No one will notice such boring developments – unless/until they go wrong. If they do, and if the Starmer government is still in charge, then the Labour Party would collapse along with the banks. How much of a gamble are Starmer and Reeves ready to take on the likes of Goldman Sachs getting it right? As the old saying goes, the most dangerous words in finance are 'this time, it's different'.