Is Rishi Sunak good news for UK financial services?

Andries Smit goes through the challenges the new British Prime Minister will have to overtake to support the country’s financial industry.
November 14, 2022
5 minutes
Andries Smit

After recent turmoil in Downing Street Number 10 and an historic short term service of Liz Truss, one question on everybody's mind seems to be: will newly appointed PM Rishi Sunak be able to steer the ship in the good direction and guide the UK financial sector to safer shores? Indeed, before embarking on a whirlwind political career that took him from being a Member of Parliament to Prime Minister in just seven years, Sunak spent the first part of his professional career navigating the intricacies of the financial sector.

Following a distinguished academic record, Rishi Sunak began his career as a junior analyst at the investment bank Goldman Sachs. He then pursued his development in several investment funds, including the Children's Investment Fund, one of London's most prominent hedge funds. This career path enabled him to build a very substantial fortune: the combined wealth of the former minister and his wife is estimated at over £730 million (€836 million).

Above all, this background convinced him to commit to liberal economic reforms. "I have seen first-hand how politicians should support free enterprise and innovation to ensure our future prosperity", he says on his website.

A specialist at the helm

This pro-business approach was reflected in his work as Chancellor of the Exchequer in the Johnson government - a position he held between February 2020 and July 2022.

Sunak, amongst others, attended a meeting organised by the Fintech Founders group on February 1, 2022, to talk about the importance of Fintech in the UK economy and his ambition to make the country a leader in this space.

A strong promoter of the interests of the financial sector during his time at the economy ministry, Sunak had pushed for reforms to boost the competitiveness of the City. While this will presumably continue with him as Prime Minister, the confirmation of Jeremy Hunt as Chancellor means that the immediate responsibility for financial services will be in the hands of someone less used to defending the interests of the City.

However, Sunak's work as Chancellor of the Exchequer suggests a closer focus on the UK financial sector and, more importantly, a keen understanding of the sector's needs. His financial experience is widely believed to give him an understanding of the intricacies of the financial market at a much deeper level than one would expect from a government official.

A need for speed

Besides being a specialist in how financial institutions operate, Sunak, as Chancellor of the Exchequer, also proved highly responsive during the pandemic. The establishment of the Future Fund and the Furlough scheme were exceptional in their speed and moved from ideation to implementation exceptionally quickly, ​​even if they did not meet with unanimous approval.

Preliminary results on the effectiveness of the Future Fund were recently published. The British Business Bank, which administered the funding, revealed that 464 of the loans have now been converted into equity. However, 67 of the companies supported by the government have failed. Over time, the British Business Bank has invested £1.14 billion in 1,190 businesses through convertible loans.

Sunak will need to demonstrate the same experience and responsiveness he showed during the pandemic to reinvigorate the UK fintech sector, as the industry is feeling the full impact of the current economic crisis. This crown jewel has seen its investment drop from $27.8 billion in the first half of 2021 to $9.6 billion in the first half of 2022, a 65% drop. With this dramatic fall, the City's ambition of becoming the world leader in digital finance is being shattered and requires immediate attention.

Indeed, while Fintechs and global banks are radically transforming the capital markets infrastructure through digitisation and decentralisation of infrastructure, the UK could miss the opportunity to be a player in this new digitised world and retain its position as a leading financial centre if it does not act now.

A boost for crypto?

Andrew Griffith MP, the new Economic Secretary to the Treasury, has taken a first step by proposing to include crypto assets within the scope of regulated financial services. This is a shrewd move - the UK has the last-mover advantage between the US and Europe and should seek to align and compete in the cryptocurrency and stablecoins markets.

The cryptocurrency world is optimistic about Sunak's future action as Prime Minister. Indeed, Sunak is often portrayed as a crypto-friendly leader open to cryptocurrencies and other digital assets. "It's my ambition to make the UK a global hub for crypto-asset technology," Sunak said as Chancellor of the Exchequer, highlighting the need to "ensure firms can invest, innovate and scale up in this country."

As Finance Minister under former Prime Minister Boris Johnson, the Stanford graduate pushed through several cryptocurrency-related initiatives as part of an overall agenda to standardise and advance the crypto ecosystem in the UK.

In 2020, Sunak announced his intention to prioritise financial technologies, such as central bank digital currencies (CBDCs) and stablecoins, to keep the country in the zeitgeist or, in his words, "ensure that the UK financial services industry is always at the forefront of technology and innovation."

In 2021, he identified the need for pioneering reforms "to support the safe adoption of crypto assets and stablecoins" and went so far as to suggest that the Bank of England explore the possibility of a CBDC. As recently as this spring, he ordered the Royal Mint to launch a government-backed NFT to highlight the 1,136-year-old institution's "forward-looking approach" and introduced legislation to "see stablecoins recognised as a valid form of payment in the UK."

New rules to come for the City

But that is not all. One of the other main challenges facing the UK financial services industry that Sunak will have to address during his tenure is finalising regulatory change for the London market. However, this is going to take a lot of work and may even prove to be perilous.

Before Sunak arrived at 10 Downing Street, discussions on removing EU regulations had already begun.

The plan was put forward by Liz Truss, who intended to implement the new regulations within 18 months when she was Prime Minister and was met with a wave of scepticism, with many people considering such a plan unworkable in such a short timeframe. The Bill was set to allow the UK government to remove all existing EU financial regulations - including the Markets in Financial Instruments Directive, the Solvency II Directive for the insurance sector, and retail investment and insurance products - and replace them with UK regulations or even none at all.

It remains to be seen whether Sunak, who in the Tory leadership contest set out a 10-point plan to remove all EU laws considered as a drag on the UK economy before the next election in 2025, will follow through on this ambition and to what extent he will be able to achieve it.

While it is still too early to tell whether Sunak will succeed in achieving his agenda for UK financial services, his background in the financial sector and his accomplishments as Chancellor of the Exchequer is creating momentum in the industry and driving a certain degree of optimism towards the future. After years of political turmoil, the arrival of Rishi Sunak marks a new start; and, hopefully, some much-needed stability.

Andries Smit

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