Possibilities to address future challenges as a major international and domestic hub
This report explores how the financial sector in the United Kingdom could potentially be positioned to respond to the global and domestic challenges ahead via updated interpretive mechanisms to support coordination on the highest-level strategic priorities between government and independent delegated expert authorities, alongside targeted adjustments to elements of financial sector regulation.
These steps might, in principle, support emerging areas of strategic global importance, including transition finance, through efficiency and flexibility for key sectors. They might also contribute to stable background conditions for the provision of long-term patient capital to the domestic real economy, including, perhaps, the climate-resilient infrastructure sector.
While the policy options in this report are hypothetical and exploratory, intended to inform discussion, the issues are important given developments over the past few years in the global context affecting financial services business and investment across jurisdictions.
Overview
The financial sector in the United Kingdom, and particularly London, plays a crucial role in facilitating international capital flows and other cross-border financial activity, in addition to intermediating savings and investment for the UK economy.
The United Kingdom is a major net exporter of financial services, at US$127 billion, compared to other jurisdictions, even the United States. The sector also makes material contributions to national tax receipts, at 12%, and employment, at 7.5%, with early signs of self-sustaining agglomeration effects recently taking hold in some regions and cities, such as Leeds.
But under the surface, there may be structural opportunities to position the sector to respond to the global and domestic challenges ahead, including those associated with secular shifts such as appropriately financing the climate transition and best harnessing AI.
Over the past decade, industry participants, regulators, and politicians appear to have experienced different but related frustrations associated with unintended and cumulative effects of slow-moving changes to the UK financial system. These may have incrementally contributed to complexity and cost, leading to debate about regulatory proportionality.
It is therefore an opportune moment to ask:
(a) How could these ebbs and flows be, fundamentally, ironed out through incentives that shape the UK’s financial system architecture over long periods? (b) Might there be more immediate ways to affect individual sectors, with potentially tangible real-world benefits, that could be unexploited?
(a) Retain but reframe — gradual coordination effects
Since the late 1990s, the United Kingdom has increasingly used independent delegated expert authorities to achieve key economic and financial policy goals on behalf of government. Evidence shows that this has had many benefits, that it has been effective, and that it is an approach mirrored internationally.
But it may be worth considering whether emphasising system-level effects across such authorities could support coordination and contribute to rounded economic outcomes in a way that is straightforward and suitably futureproofed, including in relation to “gold-plating”, without undermining independent authority.
This is similar in spirit to ideas advanced by some former UK policy officials and academics. Among other things, it could potentially contribute to stable background conditions for the provision of long-term patient capital. This, in turn, may contribute to objectives such as sustainable economic growth, although it may take time for effects to come through.
(b) Targeted tweaks — sector effects
Over the past few years, regulators have adjusted various financial sector regulations for proportionality. Even still, there may be at least ten exploratory policy options that might, in principle, support overall efficiency and flexibility for the financial sector, including by alleviating operational burden. These span banks (1 ring-fencing), insurers (2 Matching Adjustment, 3 Part VII transfers), pension funds (4 superfunds), and asset managers (5 outcomes focus, 6 UK investment indexes), amongst others. Counterfactual analysis suggests that aggregate systemlevel effects could be material; indicatively, hundreds of billions of pounds sterling under illustrative but uncertain modelling assumptions relative to assumed baselines from those four sectors. But without the previous step, the underlying issues that may be responsible for today’s frustrations could be left unresolved, risking a creeping re-emergence over time.
While hypothetical and exploratory, the policy options in this report are intended to be constructive, responsible, pragmatic, and, in principle, possible to consider individually and collectively. In any case, the scale and timing of any effects would likely depend heavily on implementation decisions and broader economic conditions.
The different exploratory policy options are intended to rely only on the broad assumption that all governments seek to pursue effective economic and financial policy outcomes, including regarding sustainable economic growth, employment, and international competitiveness. This could perhaps include targets or minima for those goals, and/or a low-frequency independent technocratic check on at least cumulative effects.
As such, they do not require fiscal measures. But fiscal measures could, in principle, be incorporated as a third step to amplify incentives for change in particular market segments, if chosen by policymakers.
For example, as has been suggested by others, sectors with business models that inherently lend themselves to holding long-term assets could be given incentives to do so, if this were deemed a priority.
In any case, such decisions are likely to be most effective as part of a consistent overarching vision and strategy. The issues are important given developments over the past few years in the global context affecting financial services and business investment across jurisdictions.