The key policy issues in the financial services sector facing the new Government

The rhetoric for financial sector reform has not been this high on the agenda for many a year. Given the so-called ‘sub-prime’ crisis, which led to a near-global recession, the finger has been decidedly pointed at the financial services and, more specifically, the investment banks.

 The issue has become regulation; the method, uncertain.

 Unilateral banking reform risks putting the entire sector in the UK at an unfair disadvantage. Measures such as the separation of retail banking from proprietary trading – coined as the ‘Volcker Rule’ in the US – is a distinct option and one which was advocated by the Liberal Democrats pre-election. The fear, however, is that given the global nature of the financial sector, these institutions would leave; for a country who relies so heavily on the sector, this would be troublesome.

 Discussion with eurozone members is also of importance, especially within the context of the Greek crisis and the shift in financial sector reform ideology. Angela Merkel, the German Chancellor, has recently announced a ban on ‘naked short-selling’ attributed to its inherent risky nature. The new government will have to contemplate whether this will mean riskier activities are encouraged, implicitly, in the UK.

 The need for balanced economic growth across a myriad of business sectors is important. According to many business leaders, economic growth has to be driven through small businesses. There has been much debate about the apparent drop in credit to small business which, given the economic climate, has been to the sector’s detriment.

 However, this raises the issue of the specific regulatory body. Pre-election, the Conservatives indicated that the role of the Financial Services Authority would be at best, diminished and at worst, removed. Recently the government has announced that the Bank of England would play a bigger role in the financial stability and does question the UK’s tripartite regulatory system.

 In a political manoeuvre the new government will be persuaded to pursue a policy of taxation on banks. This would go someway to soothing public opinion, especially on the issue of bankers’ bonuses, but it could also fund a bail-out contingency reserve. Whether this will stunt the banks’ contribution to the economy or whether the bail-out reserve would lead to higher risk being taken due to moral hazard remains to be seen.

 There is a sweeping wave of change coming across the industrialised nations and the UK, US and the eurozone is at the heart of it. Since the worldwide recession there has never been a debate about whether regulation of the financial system was needed; rather how best to undertake the task.

 The new government inherits the largest post-war national debt level and it has an extremely difficult task in regulating a flawed system whilst promoting economic growth and cutting the deficit. A policy which does not put the economy at an unfair disadvantage whilst regulating the risk of another recession is key; a wrong move and it could end worse than previously.

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