Hunt’s financial reforms could win an election – and crash the UK economy
The chancellor has put the economy on the line to appeal to Brexiteers, hedge fund manegers and City oligarchs
Today, Jeremy Hunt unveiled the Conservative Party’s plan for re-election in 2024.
At a meeting with bank bosses in Edinburgh, the chancellor announced the biggest cuts to financial regulations in a generation, butchering laws introduced after the 2008 crash to protect customers – and the state – from the gambling addiction of coked-up city slickers.
The aim, it appears, is twofold.
First, it appeals to the Tory base. The government can tell frustrated Leavers that it is finally taking ‘full advantage of Brexit’ by ripping up EU-era legislation.
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While Boris Johnson represented all of the bombast of the Leave campaign, Rishi Sunak is an expression of the real money behind it: a smart-suited hard Brexiteer, keen to double down on the UK’s offshore status. Conservative donors – the party relies on millions from hedge funders and City oligarchs – will reap rewards too.
Second, the government hopes to initiate a new Big Bang – the explosion of the City in the 1980s oft-attributed to then-chancellor Nigel Lawson’s round of deregulation. In the short term, Hunt may be able to inflate a financial bubble, which could just about carry the party over the line in the next election, if enough people feel like they’re getting richer.
And if it all goes pop again right after that? Well, the Tories will have five years to clean it up.
For most of the country, though, this news is a disaster. I spoke to Jesse Griffiths, the CEO of the Finance Innovation Lab, a network of banking sector experts, about the details.
Hunt plans to repeal and replace a set of laws known as ‘Solvency II’, Griffiths explained, to allow insurance companies to hold back less capital to protect themselves from going bankrupt.
The UK is a major global insurance market, meaning British insurers are exposed to risks all over the world. As the climate crisis escalates, the idea that they will need less cash in reserve is, to say the least, very surprising.
In the short term, the new law will mean there is more capital around for the finance sector to invest. But in the medium term, it means there is a much higher risk of the whole insurance industry collapsing – and taking much of the economy with it.
Hunt has also confirmed the government wants to loosen ‘ring-fencing’, a rule that bans big banks from gambling money from ordinary customers’ accounts in the riskier ends of the financial market.
Ring-fencing was introduced in 2019, following a long review of what financial laws could help to prevent another financial crash, and abolishing it is great for the City – bankers will now be able to play their games with your or your granny’s savings. But it exposes you to much more risk if everything goes wrong.
Hunt said his reforms will also create a legal requirement for regulators to “facilitate… the international competitiveness of” the sector. In other words, the people who are meant to police the City will now be forced to become its cheerleaders, making them much less likely to hold back the most dangerous – or even borderline criminal – elements of the industry.
And the limit on bankers’ bonuses will be scrapped, likely to encourage risk-taking over prudential management. Senior managers will no longer be legally accountable for failures in their banks.
The context for all of this matters. There is more debt now, globally, than there has ever been. The UK’s pension sector has already come close to collapse this year, in the wake of Liz Truss’s disastrous budget in September, and remains vulnerable to future shocks.
“Some very rich and powerful people will benefit” from Hunt’s reforms, Griffiths explains, but for most of us, they mean we are “much more likely to have a very big and more damaging financial crisis”.
Perhaps most importantly, the reforms seem to misunderstand the point of a financial sector in an economy. On their own, financial services are socially useless – they don’t, in themselves, make things people use or enjoy. They are a means to an end. “A bigger financial sector is not better for UK plc,” says Griffiths. “The financial sector should support jobs and productivity across the economy,” he adds, which usually means more traditional investments in firms that actually do productive things, rather than the high-stakes, high-reward speculation on currency, derivative and other financial markets, which largely exist for their own sake.
Worse, an oversized financial sector skews the economy, sucking investment away from regions outside the south-east of England (and, to some extent, Scotland’s central belt).
Part of the problem, argues Griffiths, is that official debate about financial sector regulation “does not include proper input from civil society groups and those representing the public. The government ends up bowing to the will of the big finance lobby.”
If groups representing wider society were able to influence government policy on banking, Griffiths believes reforms would look at issues such as access to banking. He explains: “The cost of living crisis has been ramping up financial exclusion, a million people have had to turn to illegal loan sharks.”
Tory mythology around the success of Lawson’s deregulation of the City forgets that at the time, Britain had just struck oil
I suspect there is another problem with these reforms, too. It’s not at all clear they are going to work.
Tory mythology, regularly pushed by the UK media, says Lawson’s deregulation of the City got the British economy growing in the mid-1980s. But this narrative quietly forgets that Britain had just struck oil. By the mid-1980s, 10% of government revenue came from the North Sea, and the expansion of the City of London was partly driven by the UK’s sudden status as an oil-rich country.
It was convenient for Conservatives to credit Thatcher and her chancellor with wealth that just happened to come on tap when she was in power. A generation later, they seem to have bought their own lie.
Rishi Sunak and Jeremy Hunt are gambling hard with Britain’s economy. If they’re lucky, a flurry of short-term activity might drive enough growth to hand them the next election. But in the long run, it will come crashing down, and the only people to have profited will be the spivs, hedge funders and oligarchs who stoked the whole thing in the first place.
But then again, that’s who funds the Tories anyway, so maybe they won’t mind.
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