The Future of UK Banking and Finance

This report outlines an ambitious blueprint for the future of UK banking and finance in three broad areas: rebooting domestic capital markets to enable the industry to better support the UK economy; improving the international competitiveness of the UK as an international financial centre; and mapping the potential role the UK could play in developing global cooperation and partnerships.

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New Financial would like to thank Atlantic Council for partnering on this project at a critical time for the UK financial sector and enabling the reform required for the UK to continue to play a key role, in the international financial system.

The banking and finance industry is one of the most successful industries in the UK. As a sector, it makes a huge direct contribution to the UK economy, plays a vital role in supporting the wider economy, and sits at the heart of the global economy as a dominant European and global financial centre. Brexit provides the UK with a rare opportunity - but also an imperative - to rethink its approach to the banking and finance industry. The current position is a good place to start, but faster coordinated action on taxation, regulation, and access to world-class talent is needed to ensure the UK remains well ahead of competitors.

Key Findings:

1. A good place to start: The banking and finance industry in the UK has a strong platform on which to build as it charts a new path.

• A direct contribution: The sector employs 1.1 million people across the UK, accounts for 7% of UK gross value added, and generates more than 10% of all tax receipts.

• Supporting the economy: More than 95% of large UK companies use capital markets to finance investment and manage their risks. UK capital markets are twice as deep relative to GDP as in the rest of Europe.

• A global financial centre: The UK’s role as a European hub is underlined by the fact that in sectors where firms can choose where to locate their businesses, the UK accounts for between 40% of asset management activity in Europe and over 80% of derivatives and foreign-exchange trading.

2. Warning signs: In a number of sectors, the UK has been losing ground over the past few decades. The number of listed companies has fallen by more than 40% in the past twenty years, while the UK’s share of global initial public offerings has dropped from 13% to less than 4% over the same period. The amount of long-term capital invested is far below the levels of comparable developed economies. Brexit has directly caused the relocation of some operations in foreign equity trading and derivatives.

3. Out of line: The UK has been a strong advocate of global standards, but in some areas has become an unfortunate outlier in applying additional rules and constraints. These include the taxation of banking and finance (where the UK has the highest total tax rate), rules on pay and bonuses (where the UK retains EU rules on top of its own rules on clawback), and issues such as ring-fencing (where the UK is the only major market to require a formal separation of retail and investment banking).

4. Growth potential: Our analysis suggests that the UK has the potential to achieve as much as 40% growth in its capital markets. If the UK industry can close half the gap between UK and US capital markets, nearly two thousand additional companies a year could raise an additional $75 billion per year in the capital markets, an increase of around 40% The same analysis suggests a potential increase in pools of long-term capital of around $2.5 trillion. This growth would significantly boost economic growth, innovation, productivity, and investment across the UK.

5. The scope for reform: There are two main types of potential reform. First, addressing the low-hanging fruit left behind by EU rules which are not appropriate for the unique UK market. Many of these have already been identified in the various reviews and the UK should accelerate implementing agreed changes. Second, regarding UK-specific rules, the UK should be wary of going above and beyond the standards implemented in other markets.

This process of reform is not a race to the bottom but a sensible reappraisal of which parts of the current framework make sense, which don’t, and how the overall framework can be improved while balancing financial stability, customer outcomes, investor protection, and international competitiveness.

6. Priorities for reform: Five broad principles for reform cut across domestic markets and international activity.

• The UK should develop a clear strategy for the future, backed up with metrics and milestones and supported by closer cooperation between government departments.

• The new rules framework should be dynamic, agile, outcomes based, and data driven.

• Prudential and market policy should not block the industry from supporting the wider UK economy, nor put UK firms at an obvious international competitive disadvantage.

• The taxation of financial services should incentivize wider participation and investment and also serve competitiveness.

• The recalibration of the UK framework should take a “digital first” approach with the aim to take a global lead in areas such as data sharing, open banking and digital IDs.

7. Rebooting domestic capital markets: Domestic markets in the UK are deep, efficient, and liquid. There is, however, scope to reform the framework for banking and finance to help make them more dynamic, and enable the UK industry to better support the government’s levelling up agenda to reduce inequalities among regions, and the transition to net zero carbon emissions.

8. Ensuring the competitiveness of the UK: While the UK is a dominant international financial centre, international finance has become more competitive in recent years. It is even more imperative that the UK framework does not put firms at a clear competitive disadvantage.

9. International alignment and cooperation: In a post-Brexit world, the UK is a significant “free agent,” and can play a significant role in helping to shape global standards on a par with the three economic superpowers: the United States, the EU, and China.

In key areas such as sustainable finance, fintech, capital requirements, and trading rules and the principles of international regulation, the UK’s scale, expertise, and experience can play an important role. The UK also can build on its long history as an international crossroads for trade in financial services and develop closer bilateral relations with developed markets such as the United States, Switzerland, Japan, and Australia based on openness and collaboration.

10. The transatlantic relationship: The US and UK financial systems are already highly interconnected, but there is scope for a deeper transatlantic relationship. The UK banking and finance industry is already mid-Atlantic. It is closer to the US in its approach to open markets and its outcomes focused approach to supervision and regulation. In markets such as derivatives, trading, clearing, asset management, and international capital raising—where the United States and the UK represent a de facto global market between them—there is an obvious case for closer cooperation.