Impacts of a Hung Parliament upon the Financial Services Industry

A hung parliament means no party has more than half of MPs in the House of Commons.  It means that whichever party ends up in power it will not be able to win votes to pass laws without the support of members of other parties.

During the election all three parties proposed making changes to the Financial Services infrastructure with particular emphasis upon the banking sector. 

On Friday David Cameron stated that the UK needs a government that reassures the international markets with policies that will bring economic recovery.  Following the Conservative Leader’s statement it was announced that talks between the Conservatives and the Liberal Democrats would commence later that same day.

Conservative-Liberal Democrat Coalition

If the Conservatives are successful in their negotiations with the Liberal Democrats, then we can expect to see compromise on both sides.  However, given the current state of the UK’s economy and the continuing crisis in Europe the next government will need to ensure the stability of the UK’s economy.  There will be a keen interest in both parties’ attitudes to reforming financial services.  The Conservative’s election manifesto highlighted the need to:

n  Reform both the regulation and the structure of the banking systems

n  Introduce regulatory budgets forcing the proposals for new regulation to reduce regulation elsewhere and empower the public to force the repeal of the worst regulations

n  Introduce a levy on banks

n  Abolish the tripartite system of regulation – giving the Bank of England responsibility for prudential supervision and monitoring the overall growth of the credit and debt in the economy;

n  Pursue internationally an agreement to prevent retail banks from engaging in activities, such as large-scale proprietary trading, that put the stability of the system at risk;

n  Empower the Bank of England to crack down on risky bonus arrangements;

n  Increase competition in the banking industry, starting with a study of competition in the sector to inform the strategy for selling the government’s stakes in the banks; and, as the government comes to sell off its holdings in the banks, offer a ‘people’s bank bonus’, so that everybody in the country has the chance to buy a stake in the state-owned banks.

The Conservatives also favour the establishment of a Consumer Protection Agency which will consolidate the powers currently shared by the Office of Fair Trading and the FSA.  It would also supervise those small firms currently managed by the FSA’s small firms division.

Liberal Democrat’s manifesto also set out their approach to reform the financial services industry and there appears to be a meeting of minds at least in principle to the key activities required.  Liberal Democrats believe in the need to:

n  break-up the banking groups to minimise high-risk banking;

n  maintain a clear separation of low-risk retail banking from the high-risk investment banking;

n  encourage local and regional banks

n  introduce a Banking Levy so banks pay for the tax-payer guarantee until the break-up of the banking groups is complete

However, whilst we will have to wait for the detail around how such measures can be introduced one thing is guaranteed, there will be a levy on banks!

Labour-Liberal Democrats Coalition

If talks between the Conservative and Liberal Democrats are not fruitful we can expect the Labour to begin negotiations with the Liberal Democrats.  Labour plan greater international cooperation and:

n  greater responsibility and accountability at board level

n  banks required to hold more and better quality capital

n  a levy on financial services

n  the Council for Financial Stability will monitor and help address asset bubbles and financial imbalances

n  granting the FSA additional powers to constrain and quash executive remuneration

n  tough action where bonus rules are evaded

Labour is also keen to note the value of building societies and is keen to strengthen this sector.  It is likely that core to any negotiations between the two parties will be election reforms and the economic recovery.

The Future of UK Regulation

If Labour manages to hold on to power the FSA is likely to maintain its current status and powers.  However, if the Conservatives do agree a coalition, then this could mean a restructuring of UK regulation with the Bank of England being given more responsibility to safeguard the financial services sector. 

We hope you have found this overview useful.  If there is any aspect of regulatory compliance you wish to discuss please contact us on 020 7645 8808 or email info@theconsultingconsortium.com

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