Westminster Watch: What the manifestos mean for the financial services sector

With the UK general election taking place in just over a week, all major political parties have now released their manifestos. It is in the interests of all businesses to understand the impact of each party’s manifesto commitments on their industry.

The Financial Times’ aggregation of national voting polls suggests the Labour Party maintains a 20 percentage point lead on the Conservatives (FT, 25 June 2024). No incumbent party has ever bounced back to close such a significant polling gap so far into the campaign season.

As such, it seems likely that the Labour Party will achieve an electoral majority on 4 July, although it is difficult to predict how significant this majority will be, as levels of voter turnout remain uncertain.

While there’s always a possibility that unexpected developments may change the trajectory of the campaign, as it reaches its closing stages, we advise clients to consider the policy commitments the Labour Party is proposing in their manifesto.

Our UK Government Affairs team are publishing a series of Westminster Watch client alerts analysing the impact of the party manifestos on key sectors across the UK economy. We’ll focus on the two major political parties, with additional insight into the manifestos of the Liberal Democrats and Reform UK to illustrate the parameters of this campaign’s political debate.

Written with our Financial Services team, this Westminster Watch offers an overview of the commitments affecting the financial services sector in the UK.

THE LABOUR PARTY MANIFESTO

The Labour Party’s manifesto presents its solution to the fundamental challenge of rebuilding Britain: kickstarting economic growth (The Labour Party, 13 June 2024). The first of the Labour Party’s five missions, outlined at the start of the manifesto, is to secure the “highest sustained growth in the G7.”

To do so, the Labour Party aims for government to become a “strategic partner” with businesses, including those in the financial services sector, which it describes as “one of Britain’s greatest success stories.”

The manifesto doesn’t give more details of the precise forms in which these partnerships with business will take.

Instead, it reproduces, in condensed form, key initiatives from an earlier document setting out Labour’s plan for financial services (Financing Growth, January 2024). Across the board, as promised, the Labour Party manifesto contained “no new surprises” (Sky News, 14 January 2024).

The Labour Party’s primary aim is to increase productive investment in the UK economy. It will do so through a combination of structural reforms and two flagship initiatives, namely, by establishing:

• A National Wealth Fund, which will be capitalised with GBP7.3bn over the next five years and aims to attract GBP3 of private sector investment for every GBP1 of public sector investment. The fund will invest in ports, automotive industry gigafactories, carbon capture and green hydrogen technologies, and steel (which will be allocated the greatest portion of funding, GBP2.5bn); and
• Great British Energy, capitalised with GBP8.3bn over the course of the next parliament. The publicly owned enterprise will have a mandate to partner with industry and trade unions to deliver clean energy. The first GBP3.3bn of funding will be allocated towards small community-led on-shore wind and solar projects. The remaining GBP5bn will be initial investment capital for the company’s investments in emerging energy technologies.

At first, both would be small players in their relative industries, with their significance to the wider financial services sector depending on their growth trajectories over time.

Much depends on whether Labour can maintain the stability of the strategic focus that it has set out in their manifesto over the long term.

The Trades Union Congress calculated that Great British Energy would need between GBP61bn and GBP82bn of investment across more than a decade to take advantage of the economies of scale needed to compete with the likes of France’s EDF (TUC, August 2023).

Ed Miliband, Shadow Secretary of State for Energy Security and Net Zero, referenced Denmark’s public sector clean energy company, which owns 30% of the UK’s offshore wind and has an estimated market capitalisation of GBP24bn, in a recent interview: “It’s not going to become an Ørsted overnight.” (Politics Home, 2 May 2024).

The structural and regulatory reforms that Labour plans to implement to reinvigorate the UK’s capital markets may be of more immediate relevance to the financial services sector. The Labour Party promises to create a “pro-innovation regulatory framework” by:

• Establishing a new Regulatory Innovation Office, merging the Better Regulation Executive and the secretariat of the Regulatory Horizons Council. It would aim to improve regulator accountability, promote innovation, and increase transparency on performance. Its remit would include tracking the progress made by the Financial Conduct Authority and the Prudential Regulatory Authority on their secondary objective to facilitate the UK’s competitiveness, introduced in the Financial Services and Markets Act 2023.
• Reforming pension schemes to encourage greater consolidation. The Labour Party have promised an in-government review of all pensions, to address (at least in part) the barriers to schemes investing more in UK startups and infrastructure projects. This may include empowering The Pensions Regulator to consolidate defined contribution pension schemes that do not offer value to members, and setting up an opt-in scheme for DC pensions to invest in UK productive assets, akin to the French ”Tibi” scheme (Financing Growth, January 2024).
• Continuing work to set out a long-term roadmap in support of open banking and open finance and other private sector innovative financial products.
• Making the UK the “green finance capital of the world,” by directing all UK-regulated financial institutions and FTSE 100 companies to develop and implement credible green transition plans as set out by the Paris Agreement.

It remains to be seen how wide-ranging these initiatives will be. On pensions, regulatory change will be required if the Labour Party wishes to mandate more investment in infrastructure by pension funds, given the current duties of pension trustees to maximise risk-adjusted returns for members.

On the objective to become the green finance capital of the world, much will depend on whether the measures introduced will have extraterritorial impact, given that many FTSE 100 companies conduct most of their business outside the UK.

Businesses will be partly reassured by the Labour Party’s commitment to building a stable political and regulatory environment in the UK, but will be holding their breath on the form this will take.

Rachel Reeves has pledged to uphold a “robust fiscal and monetary framework” to “retain market confidence,” excluding any increases in VAT, income tax or national insurance in the Labour Party’s first parliament (but notably not other taxes).

If elected, the Labour Party has said it would only have one major fiscal event each year, with each budget subject to independent scrutiny by the Office of Budget Responsibility.

To increase the amount of government borrowing allowed for investment, the Labour Party would relax the definitions of the government’s fiscal rules, introduced in February 2023.

Unlike the current fiscal rules, which are based on net financial debt and thus do not recognise the government’s non-financial assets, the changes proposed by the Shadow Chancellor would distinguish between investment and day-to-day spending (FT, 14 June 2024). Andrew Haldane, former chief economist of the Bank of England, has called for a similar update to the rules (FT, May 2023)

The promise to replace the business rates system with a fairer model, provide full expensing for capital investment, and maintain a competitive corporation tax rate capped at the current 25%, signal a pro-business and pro-markets stance.

These measures aim to incentivize investment and create a predictable fiscal environment, which is crucial for business planning and growth. By addressing issues such as late payments and access to finance, the Labour Party aims to create a more supportive ecosystem for fintech entrepreneurs and smaller firms, which are vital for the UK’s financial services as a whole.

But while the Labour Party has shown broad-brush commitment to the access to capital agenda for UK businesses, including the growth fund model being explored by the British Business Bank and referenced in the Chancellor’s latest Mansion House Reforms, it remains to be seen which technical implementation measures they will actually pursue.

Ultimately, the success of the Labour Party’s plan to unlock economic growth will depend on its consistent implementation over the long term. Along the path to economic growth, collaboration with industry stakeholders will be crucial to ensuring that the UK’s financial services remain competitive.

The British Infrastructure Council, convened by Shadow Chancellor Rachel Reeves with extensive representation of the UK’s largest financial services firms, will continue to meet should the Labour Party assume power.

But the Labour Party will be looking to engage with all businesses, not just the largest, in its first months in power, as it develops policies that work for all stakeholders in the financial services sector. This represents an opportunity that businesses should be preparing for now.

THE CONSERVATIVE MANIFESTO

Despite offering an estimated GBP17bn of tax cuts per year, the Conservative Party’s manifesto policies as they apply to the financial sector represent in large part a continuation of the status quo.

This is because many of the Conservatives’ financial reforms are already underway, via the Financial Services and Markets Act 2023, Edinburgh Reforms of December 2022 and the Mansion House Reforms presented by Chancellor Jeremy Hunt in July 2023.

The Conservative manifesto references these reforms to the UK’s regulatory framework for finance, committing to ensuring the “UK continues to be the world’s most innovative and competitive global financial centre” and the leading market for fintech startups.

These ambitions are counterbalanced by the necessary concern for maintaining the “highest standards of consumer protection and prudential regulation” including a commitment to ban cold calls on financial products, so fraudsters cannot dupe people into buying fake investments.

The Conservatives would retain the Venture Capital Trust, the Enterprise Investment Scheme and business asset disposal relief and would not increase capital gains tax. The manifesto includes a commitment to progress with the retail sale of the government’s shares in NatWest.

For small businesses, the Conservatives propose a ten-point plan. This includes improving access to finance by expanding the open finance programme and exploring the creation of regional mutual banks.

The Conservatives promise to ensure that the capital requirements of Basel III, the internationally agreed regulatory framework for banks, do not unduly hold back lending to small- and medium-sized businesses, but don’t share details as to how they will do so.

The manifesto also commits to promoting digital invoicing and improving enforcement of the Prompt Payment Code, to address issues with bad payment practices.

Overall, the manifesto leans towards pro-business policies. By pledging to maintain a competitive tax system, extend full expensing policies to leasing (albeit once fiscal conditions allow), and avoid raising corporation tax, the manifesto aims to create a favourable environment for businesses.

Measures like reducing National Insurance for the self-employed and simplifying business regulations further indicate a strong pro-business orientation.

In common with the Labour Party, and unsurprisingly, the policies in the Conservative manifesto are driven by ambitions to unlock economic growth and maintain the competitiveness of the UK’s financial services sector.

Current polls predict a change of government at the general election on 4 July, as the likely official opposition, the Conservatives would maintain a significant role in driving debate in Westminster.

THE LIBERAL DEMOCRAT MANIFESTO

While the Liberal Democrat party is unlikely to win an outright majority, its policies represent an alternative model for UK financial services. The Liberal Democrat manifesto sets out a wide-ranging set of increases in regulatory oversight and taxation for the financial services sector.

The Liberal Democrats would reverse the Conservatives’ tax cuts for large banks, restoring the revenues from the bank surcharge and bank levy to 2016 levels, adjusting for inflation.

In large corporations, staff would have the right to request shares and every company would have a “statement of corporate purpose” as part of their fiduciary duties. Share buyback schemes would be taxed at 4%, and all firms would be required to set targets consistent with net zero and report on their progress.

Along with expanding the role of the British Business Bank, these policies could encourage the sector to make a greater contribution to the green transition.

Critics say this would come at the risk of a decrease in international competitiveness, as UK companies would face increased taxes and the higher costs of complying with additional reporting requirements.

THE REFORM UK MANIFESTO

Reform UK has seen a rise in polling since Nigel Farage announced his intention to stand as an MP. The party is averaging around 15% in the polls, aiming to establish a small cohort of MPs in the next parliament (FT, 25 June 2024).

Reform is unlikely to have a significant voice in the House of Commons, as consistent levels of minority support across many constituencies are not conducive to electing MPs under Britain’s first-past-the-post voting system.

But polls suggest Reform’s policies have been gaining traction with disillusioned Conservative voters, a trend that may well continue after the election.

Reform UK’s “Contract With You” pledges GBP88bn in tax cuts (Reform UK, 17 June 2024). The threshold at which businesses would have to register for VAT would increase from GBP90,000 to GBP150,000, with a policy to exempt the first GBP100,000 of profits from corporation tax.

Reform has also promised to reduce the main corporation tax rate over three years from 25%, to 20% and then 15%. The party contends that this pro-business orientation would make the UK a more supportive ecosystem for entrepreneurs and smaller firms, particularly in the technology industry.

On the other hand, strict controls on immigration – including raising the National Insurance rate to 20% for foreign workers – may limit access to international talent, which is crucial for innovation in the financial services sector.

NEXT STEPS: 4 JULY AND BEYOND

Polling day is 4 July. On 9 July, Parliament returns for the election of the Speaker. The State Opening of Parliament is set for 17 July, when the King’s Speech will set out the new government’s proposed legislation for the coming session.

Before the election was called, the House of Commons was scheduled to break for summer recess on 23 July. But if the Labour Party wins the general election, it may extend the sitting of parliament until early August to keep momentum up to implement its legislative priorities (FT, 12 June 2024).

The first hundred days of a new government is a critical period of time. Whichever party wins the election, new secretaries of state and their special advisors will be entering government departments with the ambition and momentum of a recently elected administration.

With campaigning behind them, ministers will have to get up to speed with the regulatory and legislative complexities of government.

Both of the major political parties have signalled their openness to working with the private sector to broaden their understanding of the issues concerned.

Businesses have an important contribution to make to the development and implementation of effective policy, targeted at specific outcomes and minimising any unintended consequences that could unduly affect their commercial interests.

HOW WE CAN HELP

Our UK Government Affairs team supports companies to take a proactive approach to addressing the risks and opportunities arising from political change.

Unlike government affairs agencies, we combine political, legal and regulatory knowledge with an in-depth understanding of the workings of Westminster and Whitehall. As regulated Consultant Lobbyists, we’re experienced in supporting you in executing sophisticated engagement and advocacy strategies.

Our clients also benefit from the insights and understanding of our strategic consultants Lord David Blunkett, Lord Edward Garnier, Lord Gavin Barwell and Lord Andrew Tyrie.

Please contact Paul Hardy for further information on how we can support you to navigate the opportunities arising from a new government in the UK.