Rethink ring-fencing for growth, say majority of UK financial services leaders

• FS industry calls for significant reform as Chancellor prepares to unveil her growth strategy for Financial Services.
• 80% agree that overhauling the regime would support economic growth.

Almost two-thirds (62%) of financial services leaders are calling for a ring-fence 2.0 – an adapted version of the current rules to make them more dynamic, risk-based or institution-specific. A fifth (20%) believe the rules should be completely abolished, according to KPMG’s latest UK Financial Services Sentiment survey, which tracks sentiment among over 150 leaders in the sector.

“Whichever side of the argument you sit on, the industry is calling out for fresh thinking on ring-fencing”, said Karim Haji, global and UK head of financial services at KPMG.

“It’s not 2008 anymore. Everything has changed, from the state of geopolitics to the way the world does business, and the rules need to reflect that.”

Most leaders (80%) agree that overhauling the current regime would support economic growth by enabling more efficient use of capital. Enhanced international competitiveness is cited as another major benefit, with almost two-thirds (64%) of leaders saying that ring-fencing puts UK banks at a competitive disadvantage on the global stage. Given the rise of non-bank financial institutions, two-thirds of leaders believe that ring-fencing doesn’t address the right risks in today’s market.

However, whilst regulation must address today's risks, it’s important reform does not re-introduce yesterday's problems. Almost two-thirds (63%) highlighted risks around 'too big to fail' reminiscent of the 2008 financial crisis and 39% around financial stability, whilst almost a quarter also highlighted market complexity and confusion (23%).

Karim added: “There is a clear benefit of regulating for macro-prudential growth, but this cannot be at the expense of micro-prudential stability, a balance is needed. The key question for Whitehall policymakers and City regulators is whether other reforms such as increased capital requirements and a more effective resolution regime, already secure financial stability by other means.

“While the industry is waiting on the Chancellor’s next move, banks should be analysing all possible scenarios to understand the opportunities and the challenges, and how they should respond. The market wants responsible and risk-aware reform not a regulatory 'race to the bottom.”

Asked how they would invest the approximately £1.5 billion annually saved in legal, operational and compliance expenses if the regime were to be abolished, banking respondents cited investment in digital innovation (42%), enhancing customer service and experience (40%) and lending to SME’s (34%) as the areas that would benefit the most.