With Labour’s victory in the 2024 general election, the UK’s financial services sector stands on the brink of significant change. The Labour Party’s manifesto, with its broad promises of economic reform, tighter regulations, and a renewed focus on social equality, has implications that will ripple across the sector. As the new government settles into power, financial services firms must brace themselves for a new regulatory landscape and adapt to the evolving economic policies that Labour intends to implement.
Increased Regulation and Oversight
Labour has consistently advocated for greater oversight of the financial services sector, aiming to prevent the excesses that contributed to past financial crises. The manifesto outlines plans to bolster regulatory bodies such as the Financial Conduct Authority (FCA), granting them more authority to monitor and intervene in financial institutions’ activities. This enhanced oversight is intended to protect consumers and ensure the stability of the financial system. However, financial firms may face increased compliance costs and operational challenges as they adapt to stricter regulations.
The FRC’s transformation into ARGA
The new Labour government will be widely expected to accelerate the Financial Reporting Council’s (FRC) transformation into ARGA. The move, which has been delayed a number of times, is expected to be a major drain on the FRC’s resources, as outlined on its 2023 3-year plan. The FRC anticipates an increase of £6.5m ($7.9m) in its overall costs for 2023-24, reflecting a delay in the creation of the Audit, Reporting and Governance Authority (ARGA), and has re-prioritised its work to focus on changes that can be made using its existing powers and remit and where appropriate, planning for the creation of new ARGA powers and functions.
Focus on Ethical Banking and Investment
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By GlobalDataA cornerstone of Labour’s economic policy is the promotion of ethical banking and investment practices. The party has pledged to encourage financial institutions to invest more in sustainable projects and ethical businesses. This shift towards socially responsible investing aligns with global trends but will require significant adjustments from firms that have traditionally prioritised short-term profits. Financial institutions may need to reassess their investment portfolios and develop new strategies to align with the government’s emphasis on environmental, social, and governance (ESG) criteria.
Reform of the Taxation System
Labour’s manifesto also includes a commitment to reforming the taxation system to ensure that corporations, including those in the financial services sector, contribute their fair share to the economy. The proposed changes include closing loopholes that allow tax avoidance and implementing a more progressive tax structure. For financial services firms, this could mean higher tax liabilities and a need for more transparent accounting practices. While these reforms aim to create a fairer tax system, they may also reduce profitability for some firms and necessitate a reevaluation of their financial strategies, a fact noted on by HW Fisher business solutions CEO, Simon Michaels prior to the election on the 4th of July.
Michaels said: “The rising number of company insolvencies should ring alarm bells — yet we’ve seen little action to help small businesses survive the UK’s current high interest rate environment. We need fresh measures to support SMEs, starting with addressing their cash flow challenges. One option is a new payment initiative for large companies and government agencies to guarantee faster payments for SMEs.
“A recent Treasury Committee report reveals how banks are mistreating small businesses. In the last year more than 140,000 have been ‘de-banked.’ Loan approval rates are falling drastically, and more business owners are being forced to use their personal assets as collateral.
“Instead of turning their backs on businesses in their time of need, we need to see more government backed schemes that ensure fair access to low-interest loans for SMEs. Otherwise, the incentive for entrepreneurs to start their own business will quickly disappear.”
Support for SMEs and Entrepreneurs
Labour has expressed strong support for small and medium-sized enterprises (SMEs) and entrepreneurs, recognising their crucial role in the UK economy. The party’s plans to streamline business rates, provide better access to finance, and ensure prompt payments from larger corporations and government bodies will be welcomed by the SME community. Financial services firms, particularly those involved in lending and investment, may find new opportunities to support and collaborate with the SME sector, fostering innovation and economic growth.
Impact on Trade and Brexit-Related Challenges
Despite Labour’s pledge not to return to the single market or customs union, the party has committed to improving the UK’s trade relationship with the EU. For the financial services sector, which has been grappling with the complexities of post-Brexit regulations and market access, Labour’s approach could provide some relief. Efforts to reduce trade barriers and streamline regulatory alignment with the EU may facilitate smoother cross-border operations and enhance the sector’s competitiveness in Europe.
The Path Ahead
The sector must navigate the challenges and opportunities presented by the prospect of increased regulation, ethical investment mandates, tax reforms, and enhanced support for SMEs. While some firms may initially struggle with the adjustments required, others may find new avenues for growth and innovation in a more regulated and socially responsible landscape. As Labour’s policies begin to take shape, the financial services sector’s adaptability and resilience will be critical in shaping its future success in a changing economic environment.
