'Big Bang' News. Or is It?

This is such a philosophical question. Stay tuned for the answer. I'm David Merritts and I'm Francine Laqua and this is In the City, Bloomberg's podcast, connecting you to the stories and the voices at the heart of the City of London. This week Big Bang two point oh, it's back, Dave, of course, being the long promised relaxation of post brexit financial services rules. That's everyone in the city has been waiting for this and we've had a big step forward

this week. We voted for Brexit and now there's an opportunity to sweep aside unnecessary rules and regulations that were holding back economic growth, So what will they mean Dave. My conversation also with the newest Lord Mayor of the City of London, Nicholas Lions. He shows his vision for elevating the city during his year as Lord Mayor. And then this week's big news, we have the relaxing of what is called the ring fencing of banks. That was a rule brought in after the financial crisis of two

thousand and eight. Seems that is about to be scrapped. So we're going to talk to Bloomberg's Finance editor Katherine Griffiths, who will walk us through what ring fencing is, why there's been a change of heart, and how the UK plans to turn this into its next big bang. So Catherine, welcome to the podcast. We may no longer have ring fencing in the UK. Is that a real game changer for banks? Yes, Um, it would be a big game

changer if they really did take down the ring fence. Um. I think quite possibly they'll do something smaller than that. They may mess around with the level that the ring fence kicks in at, which is billion pounds of deposits. They may mess around with the rules so that it's easier for banks to sort of serve customers that fall on either side of the ring fence. Um, they may exempt kind of smaller banks that don't do anything risky.

We're not quite sure at this point. So just to explain to all to our listeners who might not be back clear what ring fencing is, Katherine, this was the idea. The idea was to separate out retail banking, so general consumers and their bank accounts from the kind of the risky stuff, right investment banking and all the stuff that blew up in two thousand and eight. Can you explain

what they're thinking was there? Yeah, that's exactly. It's so ordinary people had to spend forty six billion pounds bailing out Royal Bank of Scotland UM, and other many other painful things too. After that, the idea was that we should never have to do that again. So one of the measures that was put in place was this ring fencing idea, so that banks, big banks should slice themselves

into two parts. Um, the sort of high street lending to individuals and small businesses, medium sized businesses, That stuff goes inside the ring fence, and then the riskier, more volatile investment banking business which sits in another entity outside the ring fence, and the idea is that if that bank gets into trouble, the investment banking business can can be left, can can fail, and that's fine, the market can absorb that, but that the the safe retail deposits,

small business lending part needs to be protected. It needs to be a much safer institution with its own capital, so that taxpayers don't in the future have to bail out those entities ever again. But so Cather, just to be clear at these measures, as you say, basically designed as way as to avoid another future taxpayer bailout. We're not hu mandated. There were British rules, Yes, there were British rules, and the idea was that banking makes up

such a huge part of the UK economy. It was a really central part of the thinking of officials at the time that we needed to have these really really safe, robust rules. But so no other banks in Europe had to do the same. So European and US banks have versions of ring fencing. But one of the arguments put forward in this country is that our rules are particularly draconian. Right, but you know, this being built as a Brexit dividend

that's not quite right. Then this is something we unilaterally introduced in the UK and therefore presumed even if we were still in the EU, EU could unilaterally remove. Yeah, that's right. This doesn't have to be a Brexit dividend. Um. And there's been thinking on tinkering around with the ring fence for quite a while. I mean weirdly. Actually, ring fencing only came in because it's so kind of complicated in cumbersome and banks spent about collectively have spent about

three billion pounds making all the changes they needed to make. Um. So officially it's only been with us since. But there's a view that you know, markets change, economies change, and so they needed to be a sort of rethink about whether we still needed ring fencing. So under the sunac government, I guess ring fencing has been one of the many, many pieces of legislation under review and trying to help

the bolster the financial service sector. Yes, it was. It's been reviews reviewed by SUNAC UM and someone called Keith Skiokuza, senior business figure, was commissioned to do a report. Um. He did that report and he recommended a range of things. It was quite a sort of conservative report but it did say that these smaller banks that didn't do anything risky perhaps shouldn't be subject to ring fencing rules. It's a bit of a sort of regulatory car crashes in this.

I mean, two thousand and eight was the financial crisis. You know, the world nearly came to its knees in terms of the banking system, and more than it takes more than a decade to implement this rule that's supposed to protect people's savings and personal bank accounts, and just three years later they've decided it's not fit for purpose. Yes, I mean I strongly suspect they won't actually do anything particularly radical on ring fencing. I think they may tinker

around with it. And the thing is if if they if they exempt the likes of TSB Virgin Money, these sort of medium sized banks in this country, that's great for them, but it really won't kind of release billions of pounds of capital into the economy because they don't really do anything that's not not ring fence business. So if they suddenly don't have a ring fence, there isn't

this sort of magical benefit that will be created. I mean, it's probably a sensible measure, but I think perhaps the notion that it will kind of unleash lots and lots of capital into the economy might might not be true because we've we've got the City Minister. I've got a quote a hit from him and Drew Griffiths who said this week we can make the UK a better place to be a bank to release some of that trapped

capital over time around the ring fence. But sounds like what you're saying, Katherine, and he's he's not being entirely straightforward there. Well, um, I mean that's a shocking thought for an instant not to be straightforward. Um. I mean, I think it will be really interesting to see what they are actually planning. One of the kind of sort of juicy juicy aspects to this is whether they raise the level from twenty five billion that's the level of deposits you have before you have to go into the

ring fence, to say fifty or a hundred. Because if they go down that path, some of the chief beneficiaries will could well be the big American banks. So Goldman, Saxes Marcus has about twenty three billion pounds worth of deposits at the moment in the UK and Chase. The digital bank from JP Morgan has sort of just over ten at the moment, so if they tinker around with the level, then it might be those banks that have big benefits. So Big Bang two point oh, was this

like Liszt Trust? Was this something under Quarte? And this goes back to hurricanes bag, to the wave of deregulation six which at the time actually really made London a financial center. But things are different now. We were not

innovating like we were in six No. And actually one of the things I think it's quite interesting about back to the eighties, I was talking to a very senior person from the city, someone called Sir Nigel Boardman, who is now chairman of bus Not Bank and was a very senior lawyer at slaughter May for a long time, and he was reminding me recently that he used to sit on kind of panels back in the eighties asking which which kind of European financial center will will be

the pre eminent one, just as Big Bang was happening, and he was saying that it wasn't at all clear at that point that London would in fact come out come out on top, and of course that is what happened so that was an inflection point, and you know, the optimists now think it's an inflection point now. I mean, although a lot of the stories, and we've talked about this on in the city in the last few weeks

have pointed the other way, haven't they. We've seen Paris overtake London in terms of the overall market capitalization of the stock market. We've had stories this week about Golden Sacks moving jobs to Milan. Um. You know, the picture of London's dominance in Europe is pretty murky at the moment, isn't it. And the and the long term trend seems to be a drift of capital trading to other centers

in the European Union. I mean, I mean this measure, which sounds like it's less impressive than perhaps on paper, isn't going to reverse that, isn't No, that's certainly not going to reverse it. I mean, what we're waiting for, very excitingly for our Christmas present is a wider a wider range of ideas from the City Minister Andrew Griffith. They're meant to be coming before Christmas, so um, you know, perhaps along with this Santa with his Santa hat on

going around the city. Who's going to get a lump of coal? Um? They assume, yes, exactly there you know there will be others, um, so we may we may get some others which as and I suppose the point is perhaps that you know, cumulatively, they may well have have an effect. I mean people will say London has a huge liquid markets and lots and lots of expertise, um, the language, the times and all the rest of it.

I mean, these are very substantial things. So if Griffith does in fact come up with some really sort of meaty ideas, then perhaps it will make a difference. Catherine, thank you so much. Always always under money, Katherine Griffin there, thank you. I mean, Frank, I just think it's amazing that this big bang so called the government is trumpeting.

When you start looking under the herd, it's really nothing of the sort, right, And I just think, you know, what is the city going to really badly do substantially it is going to move the needle here? Yeah, maybe it's nothing of the sort they're trying. And this maybe was something different that we didn't have under the Boris government. And Dave I spoke to Nicholas Lions now he comes from a financial services background, which is a good thing for a Lord Mayor at the moment. That's right. He's

somebody who's worked in the city for forty years. It's been an investment banker for more than twenty years, and the last eighteen he sat on the boards of insurance companies and asset managers and he's now taking a sabbatical for being chairman of Phoenix Group to take on this role of Lord Mayor. And his main point is really it's time to capture maybe some of the positives of Brexit. So we began by discussing how he's seen the city

evolved over the past forty years. It has changed dramatically. I mean when I started, we still had stock jobbers who used to walk around the City of London and top hats. So fortunately we've moved on from that. No longer except what there's a little side street around here,

actually two worktop has once in a while. Well that's true, but I think, you know, technology has made a huge difference, Globalization has made a huge difference, and we have always managed to attract the brightest and the best from around the world, and that's I think hugely to our credit and usually to our benefit, and I think that's probably

the biggest change of all. Back in two it was a very sort of British city and now it's a very very multinational global city, and this is thanks to regulation. I mean, there was an attraction of capital to the city of London which was actually quite incredible in the last fourteen fifteen years, which I imagine has to do

with the time zone. Time zone has been always a real help, but when we when we started looking at twenty four hour trading for international banks and asset managers, that really played to our strength sitting between New York on the one side and Asia on the other, So that I think has been a big, big benefit. But clearly changes in regulation. Big Bang was, it was a transformative thing, and now we're talking about Big Bang two

point zero. But in the meantime has it declined in the last four to five years because regulation has not really maybe as nimble as other places like Amsterdam, or not been as aggressive enough as New York. I think it's absolutely fair to say that other financial centers have tried to take advantage of the uncertainty that was created by Brexit to try and build their own capabilities. But actually, you know, we we still have the same number of

people employed in financial services here. We've we've still managed to increase the assets under under management here in the UK about ten trillion pounds of assets and international assets up from four point four to four point six trillion.

There's never room form acency. And actually, the way I look at it is this is a wonderful wake up call for London as a global financial center as we look at technological changes that financial centers like Singapore are introducing that will that will help trigger a response from London that will be strong and and and coaching. But overall, has it has it lost something? You know since since Brexit?

I don't think so, I really don't. I think, um, there are there were always going to be people in frontline jobs that because of Brexit had to relocate to other parts of Europe. But we've seen you know, small impacts in Dublin, in Luxembourg, in Paris, in Amsterdam, in Frankfort, but nothing compares to London. And you know, and London is always going to be the most powerful, the most important and most relevant global financial center in our time zone.

Feel like every two weeks there's a story saying, well, after dam overtook us on the pipelines, or I p o s in the pipeline, or there was a story in terms of the how big the stock exchanges France overtook us two weeks ago. Yeah, you can. You know, you're always going to find little anecdotes to support particular theory. Um. It sort of depends which end of the of the lens you're looking through. Um. But it's not so much

that London has to be the biggest at everything. The fact is what we are is an extraordinary ecosystem that's got a significant chunk of everything. And it's when you put the whole thing together. It's not just financial services, it's also traditional financial sort of fintech, which is where we're real leaders. But it's also the whole legal infrastructure. So you know, the primacy of the rule of law and our independent judiciary, the fact that contracts are written

under English law. All over the world, people want disputes to be resolved oolved here in the UK because of

the quality of our of our judicial system. So and we've got terrific risk management, compliance, technology management consultants, Order to the actor as you name it, it's when you look at it in the round, it's it's I'll stop short of saying it's impossible for anyone to challenge that, but it's going to take many, many, many decades of concerted effort, and frankly, I don't think that's going to happen.

But the City of London with Boris Johnson as head of government is maybe different to the City of London with Prime Minister Rushi Sunac just because of the amount of attention and love it got from Boris Johnson. Is that fair? I think what I would say is that we now have in number ten and number eleven two people who really understand not just business but financial services. And that's I think very very important because we can't have a thriving national economy without an immensely strong City

of London. And in purely factual terms, we know from the reaction of the bond markets to the Liz Trust qua quatting period of trust and omics as it's called, that there is a limit to the amount that you can just borrow to pay your bills. So we need growth and we need investment, and that has to come from the private sector, primarily from the private sector. Because the government doesn't have a huge resource at its disposal. There are two massive parts of capital in this country.

One is in the real estate market and the other is in the pension market, and we need to mobilize pension capital. So you have an agenda of things that you want to to, if not pushed through, certainly reformed for the City of London. So there are there are three big areas that I really wanted to focus on in the course of my mayor or year and it is just I'm afraid one year. UM. One is an

initiative around the global investment future. So this is a this is a scheme that Corporation works on with the Investment Association and the Department of International Trade to attract overseas capital from large asset owners to come into the UK and be managed in the UK. And we have a we have a plan by thirty to increase from ten trillion in the amount of assets that we have

being managed here to twenty trillion pounds. The second area is around financial inclusion and within that sort of subset of financial literacy. Financial inclusion is a real challenge at this time with the with the cost of living crisis that we've got. We've got seventeen million people in this country with savings of less than one hundred pounds so and the only one and a half million of those who are unemployed. So over fifteen million people in this

country are working in work. They're earning a wage, but they can't think beyond budget the budget for the next week. So I want to convene a meeting with a lot of the large financial service organizations, with the charities that are involved in financial inclusion and see if we can't get a really good plan of what's best practice around how we can help people. And it's easier to go that way instead of the government doing it because it's

more efficient or it gets so quicker. I just think that it's the people who are who have the customer relationships. It's where the rubber meets the road. So there's a default I think to say the government should do everything. The truth of it is the government can't do everything. Um And I'm here to promote a resilient, resourceful and responsible city and therefore this is a really important area

where the city can be responsible. How difficult will it be to attracts international capital to the UK given the turbulence and markets that we saw in October. When I talked to sort of sovereign wealth funds around the world and asked them to allocate more money here, and they raised this issue about sort of political turmoil. I remind them the city has been around for twice as long

as we've had parliamentary democracy in this country. You know, we we have, we have survived everything that's come our way. We shouldn't lose lose sight of the fact that long term guilt yields are now down to below the levels that they were at before this trust became PM, so that the panic that there was in international markets. Bon bond investors are very sophisticated, you know, they do the maths.

They look at government plans and government strategies, and the Prime Minister and the chances of the Exchequer, to be fair, have put together a really coherent plan to get us to balance the books. That has restored confidence. I don't think one should necessarily look at what happens to the pound against the dollar and come to any great conclusions, because that's more to do with what's happening in the US.

I wonder how much you think Brexit contributed to a tight labor market and therefore putting pressure on a lot of wages. I don't think that there was a huge amount of support in the city for Brexit. I think the city looks always at its competitive position, and you don't want to damage your competitive position if you can avoid it. But the fact is, you know that happened

in sixteen. You know, we've we've moved on. What we do need to do now is work together to make sure that we can take advantage of regulatory freedoms so that I think the problem that we have at the moment is, you know, we had the Brexit was always going to have, you know, some negatives, but we always

hope that there would be some positives as well. We've taken the negatives, we haven't we haven't captured the positives yet, so we've The announcements on solvency tore at the autumn Statement were the first signs of that and very welcome. They were too. How do you just sorry? I talk often about solvency too, but we don't want to borre

everyone who's listening. Although it's extremely important. What was positive in that that it didn't make you think that the chancer understood some some of the pitfalls of what the financial services are dealing with. Oh yeah, absolutely, and and again you know, to have a prime minister who worked for an American investment bank and a hedge fund means that you can have detailed conversations about technical things which

are completely understood. And I would actually also take this opportunity to pay tribute to John Glenn when he was City Minister and Economic Secretary to the Treasury, who worked tirelessly in getting to know about these issues and worked very very well with the Treasury, particularly Gwyneth Nurse who is now Director General Financial Institutions in the Treasury. That they should take a huge amount of credit for where

we are. And you know, and well done to Andrew Griffith for you know, grabbing the battle on running with it. And it's very good for the city to know that that. Now John Glenn is back as Chief Secretary to the Treasury, so I I feel that we've got good, you know, people who are very knowledgeable in important positions so that

we can have these conversations. There was talk about ministers being able to overrule some of the regulation specific cases, and I still can't figure out whether that's good or bad, because it does if you have a rule of law and regulation here in the UK is gold a standard. Does it hurt their regulation? So does it actually take away business? Yeah? I think you're you're you're talking about

the call in power that was being considered. The city was not supportive of that for the simple reason you you've sort of pointed to it with your question, which is that when you get political interference with due processes of the regulator, you're inevitably going to get inconsistencies in the way that that's used, and so you'll get more volatility. And that's not what businesses want. We want a strong

regulatory regime, which we've got. We've got an absolutely excellent chief executive of the p r A in the form of Sam Words, and an excellent chief executive of the f c A and in the form of Nicol Ratti. They have very difficult jobs to do um but they do it extremely well. And it's it's very important for us as a global financial center to have the reputation

of strong regulation and strong regulators. I would much rather as a business, as a city business, or as a city lord mayor deal with the chief executive of the p r a then a politician, what do you think will be most frustrating for you when you look at some of the regulation And I know you're very positive about the future of the City of London, it's place in the world, and how it contract capital and talent if you had a magic wand is there something that

you would change today? Yeah, because and this comes to the sort of the third piece of what I wanted to accomplish in the course of my mayorty that the theme of my majority is financing our future and the components of that are psalms to reform. So I put a big tick in the box there. I can't can't take any credit myself happen in week one. The second is green and sustainable finance, where London has a huge role to play in that global debate. But the third

really important area is the growth economy. And this is this is the area that I you know that the moment is of immense frustration to me and where I would really want to see great change. We have got and we have had for decades, you know, great entrepreneurs building great early stage businesses. In that we've got four of the best ten universities in the world. Seven of

the best twenty universities in the world. We've got good venture capital that goes into those universities, but we don't have the depth of capital markets to provide the accelerator funding for this. So time and time again, sophisticated international investors have come in and provided that capital and indeed some expertise, and then these businesses get sold internationally or they list on US exchanges and about fifty of the capital that comes in to invest in these businesses comes

from North America. So this is this is the area which we've really got to address. How do you fix it? When you fix it? And there have been a lot of reviews of this, so the Jonathan Hill Lord Hill did his Hill review, ron Khalifa did his Khalifa Review. Now with Mark Austin from fresh Fields has done a secondary listing review. These are all extremely important parts of

the jigsaw. Now, under the leadership of Julie Hoggett, who is the Chief Executive of the London Stock Exchange, we have the Capital Markets Industry Task Force looking to identify the regulatory and the statutory changes that need to be made and also the practice changes in on the listing

rules side. So that we get rid of those those obstacles and what we need to be able to do, and this I believe really really strongly, is that we need to be able to mobilize the DC pensions to find contribution pensions and to get them to invest in this asset class. They don't have to invest much, sort of five percent of funds, but that would make a

huge difference. Lord Mayor, if you were to give the City of London report card, what grade would you give it today and and what grade would you give it in in hopefully at the end of your tenure in twelve months, I would say that the City of London today isn't eight out of ten out of ten, not bad, and I want to get it to a nine because we're never going to be perfect almost perfect, Lord Mayor, thank you so much. You're very welcome. Thanks for listening

to this week's in the City. We will be back next week, but in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate, review and subscribe. This episode was hosted by me David Merritt and me Franci Laqua and it was produced by Summersati editing and sound designed by Blake Maples. Special thanks to Catherine Griffi's and Lord Mayor Necklace Lions