A Labour Government’s Regulation of the UK Asset Management Sector: Evolution, Not Revolution

"Financial services are one of Britain’s greatest success stories. Labour will create the conditions to support innovation and growth in the sector through supporting new technology, including Open Banking and Open Finance and ensuring a pro-innovation regulatory framework."

The statement above, from the Labour Party’s 2024 manifesto, is a near-perfect encapsulation of the economic role the new Chancellor, The Right Honourable Rachel Reeves. She envisions the asset management sector contributing to the central objective of her chancellorship, improving Britain’s anemic economic performance of the last decade, through:

• Increasing private sector investment into the high-skill sectors of the UK economy (e.g., life sciences, financial technology and creative industries) to create the companies and the jobs of the future
• Providing high-skill and high-wage employment across the UK
• Supporting UK households to more effectively save for their futures

Yet this provokes two questions: What is a pro-innovation regulatory framework? Secondly, can Labour deliver for the sector?

A Pro-Innovation Framework

The most significant preview of Labour’s plans was released in January 2024 in a working paper titled Financing Growth: Labour’s Plan for Financial Services. It offered the asset management sector a reduction in the regulatory burden by streamlining UK financial services law. However, the price for this “smarter regulation” is a financial regulatory paradigm focused on achieving better outcomes for UK investors modelled on the Consumer Duty.

This is a clear endorsement of the reforms proposed in the FCA’s asset management review (DP/23/2) to rationalise the post-Brexit regulatory framework by adopting a more coherent approach to achieve the regime’s objectives.

However, while there are clear, noble intentions in focusing regulations on the best outcomes for UK investors, a reasonable industry observer, having seen the first 11 months of the Consumer Duty in operation, may have real concerns that this outcomes-focused approach to regulation may consume more, not less energy and resources for a firm to comply. Therefore, industry engagement with the new government will be vital to ensure this approach achieves its stated ambitions of being “pro-innovation”.

Further, the more eagle-eyed readers will notice that this “outcome-based” agenda is strongly aligned with the current direction for financial regulation articulated by the FCA in recent months.

This alignment in agendas between the FCA and the new government is a marriage of intellectual consensus, stating that long-term success for the sector is built on a regulatory framework that builds market confidence by achieving better outcomes for UK investors. Therefore, one should not expect a grand change of direction from the current path, but rather a slower evolution to achieve this vision of outcome-focused regulation.

Equivalence: The Blue and Yellow Elephant in the Room

Having greater access to the most significant international market on their doorstep (the European Union) would be conducive to achieving the three objectives that Labour have stated as its goals for the sector’s contribution to the UK economy. Indeed, the new Chancellor supports improving trade in financial services between the EU and the UK.

The most logical route for improving trading relations between UK asset managers and European savers is by the European Commission granting third-country equivalence under MiFIR to enable UK asset managers to serve European professional clients. Yet the prospects of the European Commission granting the UK equivalency under this new government seem slim.

Firstly, the European Commission has yet to grant any third country equivalence however, warm their relations have been with the EU; thus, it’s a prize no country outside of the EU has achieved. Therefore, if the new government, unlike its predecessor, wishes to prioritise equivalence for the UK to be granted, it will take a significant diplomatic endeavour, which the Labour Party, in opposition, showed no inclination to expend.

Secondly, the European Commission’s price for granting equivalence would be very high to protect the flow of well-paid jobs gained in member states across the EU as a result of international firms establishing “Brexit firms,” which a UK equivalence decision could slow down. Many of the potential reciprocal policy demands from the European Commission, such as greater free movement to the UK for EU citizens, are likely to exceed the political cost the new government is willing to pay to achieve equivalence.

However, Labour’s long-term ambitions towards seeking equivalence will be revealed by the scope of the “streamlining” process discussed above. An ambitious removal of key EU law concepts from UK financial services law is likely to be viewed by the European Commission as “divergence”, thus making the UK’s path of seeking third-country equivalence even harder. A narrower set of reforms to the UK rulebook leaves an easier road ahead if the circumstances change and the new government’s ambitions for relations with the EU grow.

In the medium term, there will be a dichotomy between the new government’s stated objectives for the sector and the policy solutions concerning EU market access it will be able to offer.

Conclusion

Labour has a clear vision of how it wishes to reform the regulatory framework governing the asset management sector; however, the delivery of this “pro-innovation” agenda is hoped to be achieved through a deliberative approach led by the FCA. This should not dissuade the sector from having constructive dialogue with the City Minster (likely to be Hon Tulip Saddiq) and other members of the new government to ensure the promised benefits of this approach are delivered.

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