Reeves urges risk to drive financial services growth

Chancellor Rachel Reeves will unveil the so-called ‘Leeds Reforms’ this evening during her second Mansion House speech. According to the Treasury, the reforms aim to, “tear down the barriers to attracting investment in the finance sector by reintroducing informed risk-taking into the system, cutting unnecessary red tape, driving more finance into public markets, and actively helping international companies to set up in the UK.” 

The speech comes less than two weeks after Reeves was visibly emotional during Prime Minister’s Questions, following the collapse of the government’s welfare reform plans under pressure from Labour backbenchers. Tonight’s address is expected to be a reset moment, with Reeves seeking to demonstrate how embracing risk can enable the financial services sector to deliver tangible benefits for households across the country. 

Unsurprisingly, Reeves will continue to centre her message around the government’s driving mission: growth. Following news at the end of last week that the economy shrank by 0.1% in May, the second consecutive month of 0.1% drop, and the Office for Budget Responsibility (OBR) published a scathing report on the state of the UK’s public finances, pressure has increased on Reeves to deliver on this crucial promise. She is expected to say, “I have placed financial services at the heart of the government’s growth mission – recognising that Britain cannot succeed and meet its growth ambitions without a financial services sector that is fighting fit and thriving.” 

Part of achieving the government’s aim of seeing growth filter through society takes shape in the plans to make it easier for first-time buyers to receive support to get on the housing ladder. The Bank of England will allow more lending at over 4.5 times a buyer’s income. This move is expected to help 36,000 more people buy a home over its first year. The government will also introduce a government-backed Mortgage Guarantee Scheme.  

While Reeves was also planning to introduce wider reforms to the Individual Savings Accounts (Isas) by reducing the amount that can be put in tax-free cash savings account in order to encourage more money into stocks and shares, these changes have been put on hold, although not completely ruled out for a later date. The Financial Times has reported that tonight’s speech will include plans to give “the information and support they need to start investing in stocks and shares”, moving away from cash savings. 

After spending much of their first year in government pushing the regulators to put a greater focus on ‘growth’, Reeves will be pleased to see that ahead of her speech the Financial Conduct Authority (FCA) has published reforms to the rules governing fundraisings by listed companies aimed at revitalising the UK’s capital markets – a key priority for the Chancellor. New rules will also be introduced that will halve the time it takes between initial documents being published and an IPO to list on the London Stock Exchange. Reeves will welcome the fact that these announcements come as the FTSE 100 hit 9,000 points for the first time ever this morning.  

Reeves has taken this opportunity to undo much of the regulation brought in following the 2008 financial crisis – mortgage lending limits, capital requirements, the ring-fencing regime and the Senior Managers and Certification Regime. This suggests that the view of government is that post-crisis regulations went too far and we need to allow more risk in the system.  

However, there are warnings to be careful what you wish for, Chaitanya Kumar, head of economy and environment at the New Economics Foundation thinktank, reminded the Chancellor that it wasn’t so long ago the message was to get rid of risk in the financial services sector, he said: “The 2008 crash and what followed should have been a very strong lesson to everybody in not completely letting the financial services sector off its leash: but that’s what we seem to be doing.”