Rachel Reeves says regulations are ‘boot on the neck’ of innovation as she announces sweeping financial reforms
Rachel Reeves has unveiled “the biggest package of reforms” to the UK's financial system, which will see a host of regulations slashed to boost economic growth.
Listen to this article
Part of the measures will be focused on encouraging retail investing, and the Chancellor says the reforms will make it easier for those on low incomes to get a mortgage and own a house.
Changes include reforming the bank ring-fencing regime and reducing burdensome regulation in the City in order to reintroduce "informed risk-taking" into the financial system, the Government said.
The Chancellor said the "Leeds reforms", unveiled in the West Yorkshire city, "represent the widest set of reforms to financial services for more than a decade".
“It is clear that we must do more,” Reeves said. “In too many areas, regulation still acts as a boot on the neck of businesses, choking off the enterprise and innovation that is the lifeblood of growth.
“Regulators in other sectors must take up the call I make this evening, not to bend to the temptation of excessive caution, but to boldly regulate for growth in the service of prosperity across our country.”
New measures are intended to help drive increased levels of investment among both financial firms and individuals.
The Treasury said the ring-fencing regime - which was brought in after the 2008 financial crisis to separate banks' retail and investment banking activities - will be reformed.
Economic Secretary Emma Reynolds will lead a review into how changes can strike the right balance between growth and stability, including protecting consumers' deposits, it said.
Read more: Nobody has been fired over £7 billion Afghan data breach, LBC understands
Britain is a global outlier in enforcing ring-fencing, and major banks have been divided over whether the system is necessary to protect savers or is overly burdensome.
The Treasury said it was backing regulatory reforms for mid-sized banks to free up money for lending and investment.
The plans also include cutting layers of red tape for businesses in the City.
This will see the UK's Financial Ombudsman Service - which settles complaints between consumers and businesses - modernised and simplified to help create a more predictable system and prevent consumer compensation being delayed.
It will also speed up changes to the senior managers regime, which was also brought in after the 2008 crisis to vet individuals before they are appointed and hold them accountable for problems and risk-taking.
The Government said it will radically streamline the current regime and cut the burden on firms in half.
Cuts to City red tape sit alongside efforts to boost the level of investment among individuals.
This includes rolling out "targeted support" from April next year, whereby banks can alert customers with cash sitting in low-return current accounts about investment opportunities.
Major banks and financial firms including Barclays, Lloyds, Vanguard and Hargreaves Lansdown are backing a new advertising campaign highlighting the benefits of investing.
Risk warnings on investment products could also potentially be watered down as part of a review into possible barriers to investing.
The Government also said it will continue to consider reforms to ISAs and savings to strike the right balance between cash savings and investment.
Ms Reeves confirmed she will leave cash ISAs untouched in the measures announced on Tuesday, following speculation that she was planning to cut the annual tax-free allowance in a bid to spark more investment instead.
"We are fundamentally reforming the regulatory system, freeing up firms to take risks and to drive growth," Ms Reeves told finance chiefs when setting out the reforms in Leeds.
The "much-needed" measures are intended to "really invigorate our financial services sector, but with the core purpose of therefore reinvigorating the whole economy," she said.
The reforms build on changes that loosen mortgage lending rules for banks.
It means more mortgages will be available at more than 4.5 times a buyer's income, which is expected to open the door to thousands more loans for first-time buyers.
Chris Cummings, chief executive of the Investment Association, said: "We called on the Government to undertake bold reforms to strengthen the UK's retail investment culture and they have done so.
"Better communication of the returns investing brings is key if we're to empower more people to invest, and we're proud to take part in the industry-led campaign to raise awareness of the benefits of investing and the review of risk warnings."
Sarah Coles, head of personal finance for Hargreaves Lansdown, said: "It's incredibly positive to see Rachel Reeves take some key steps towards closing the UK's yawning retail investment gap.
"There will be a new era of investment with the advent of new rules allowing companies to offer targeted support to their clients, alongside changes to risk warnings so they actively help retail investors understand their options rather than standing in their way of harnessing the incredible power of investment."
The proposals have sparked fears of a financial crisis, but financial watchdogs have insisted that the risk of a crisis will not increase.
Under questioning by the Commons Business and Trade Committee, a senior civil servant also confirmed the target to cut red tape by 25% will be measured in terms of costs to firms of current requirements, with a baseline set to be confirmed in 18 months.
Liam Byrne, Labour chairman of the Business and Trade Committee and a former chief secretary to the Treasury, said evidence suggests liberalisation of regulation is "often accompanied by lending booms that end badly".
He asked senior officials tasked with implementing the changes whether the announcements made by the Chancellor would increase the risk of a financial turmoil.
David Bailey, executive director at the Prudential Regulation Authority (PRA), said the organisation had "built overall resilience in the system" since the financial crash in 2008.
He added: "The risk of a financial crisis, from the PRA's perspective in banking insurance, has not gone up because we have maintained the same level of reliance."
Sarah Pritchard, deputy chief executive at the Financial Conduct Authority, said there should be a public debate about "where should the risk appetite be set" if, for example, greater access to mortgages leads to an increase in repossessions in the event of an economic downturn.
When pressed on how measures announced today are different to previous "liberalisation" implemented before previous financial crises, she added: "There is nothing in today's set of announcements that causes me any different concern to that that David has set out."
When questioned on whether the measures will lead to a rise in asset prices if lending increases, Ms Pritchard added: "There are a range of different factors at play.
"I think regulation is one aspect, but the general environment in which we all operate, in particular the UK being a global connected system, there is no one point that I would refer to in terms of that package today that is saying that will cause any different market risk or volatility."
Mr Byrne later pressed Chris Carr, director at the Department of Business and Trade, on how the target to reduce the administrative burden of regulation by 25% will be set.
He confirmed the target is to reduce the burden to the planned level over the course of this Parliament and said the cost in pounds to businesses caused by red tape will be the measure.
Mr Carr added: "We have to agree and publish a baseline of the administrative burden and then strive to reduce it by 25%."
When asked how long it is expected to take for the baseline to be set, competition and markets minister Justin Madders said: "We think it is going to take about 18 months, which is akin to the timescale it took under the last Labour government's similar exercise."