Top UK bankers warn prospect of windfall tax is spooking investors
Top UK bankers have warned that tough regulation and high taxes are denting investment in Britain’s financial services sector ahead of Labour’s much-anticipated Budget on 30 October.
Senior executives privately sounded the alarm over potential risks to competitiveness arising from government policy and the regulatory rulebook.
One leading UK banker called for “some regulatory understanding of the constraints that we are under, especially in new sectors that we can’t have quite the data, quite the statistics to forecast losses and risks”.
Analysts have found a transatlantic valuation gap based on the proportion of UK banks trading below their book value compared to the US.
“Part of that comes from either talk about windfall taxes or extra taxes,” the banker said. “We are not just among the most regulated, we are among the most highly taxed industries in the UK.”
The banking sector, which enjoyed record profits last year, is considered an easy target for a tax raid as Labour scrambles to fill an alleged £22bn “black hole” in the public finances.
Since the general election, the Treasury has neither committed to nor ruled out tax hikes on the sector. A spokesperson said Reeves had “been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy”.
The UK financial services industry has warned that high tax rates relative to other European hubs risk dragging on the City’s international standing. The sector contributed record tax receipts of more than £110bn to the Treasury last year, according to PwC.
Elsewhere, banking trade body UK Finance has called for a dedicated government champion to review and tackle regulation that hurts the sector’s competitiveness.
“[Investors] already have lots of risks,” the banker said. “They have economic risks, they have credit risks, they have operational risks in the company and so on. But if on top of that you add regulatory uncertainty, it’s a much harder risk to price.
“A banking system where the banks themselves trade at high prices is itself a stronger banking system. So if you bring so much regulation that a bank is strong on the inside but it’s not viewed so on the outside, you’ve not achieved a lot.”
Last year, the previous Conservative government gave Britain’s financial regulators a “secondary objective” to facilitate economic growth – something which Labour has pledged to continue.
The Financial Conduct Authority and Bank of England’s Prudential Regulation Authority have insisted that they are committed to the mandate and are already taking steps to support growth.
Still, the banker argued that there were parts of consumer regulation “where the UK has gone on its own in certain things – like fraud, where one part of the system can’t bear all of the costs. It’s just unfair.”
They were referring to a world-first mandatory fraud compensation scheme that came into force on Monday, requiring banks and other payment firms to reimburse victims of authorised push payment (APP) fraud up to a limit of £85,000 per claim.
Britain’s payments regulator lowered the cap from £415,000 at the eleventh-hour following heavy industry lobbying and pressure from ministers amid fears that it could put smaller firms out of business and encourage new types of scams.
Another leading banker criticised the rules for placing no reimbursement liability on social media firms for the roughly three-quarters of APP fraud that originates online, a sentiment publicly voiced by several major lenders in recent weeks.
The person added that investors were wary of “the uncertainty that banks are facing by way of additional capital rules, et cetera”.
Senior bankers breathed a sigh of relief last month after the Bank of England confirmed it was relaxing its proposed implementation of Basel 3.1 capital requirements for lenders in a bid to support “growth and competitiveness”.
“Buy and large I think we’ve achieved a lot of that certainty,” the banker said. “But on the other hand, we also need to be mindful that among all financial institutions, banks are probably the ones who are the heaviest regulated.”
They warned the government and regulators to “be mindful that you don’t create too much of an uneven playing field” between different parts of the financial sector.
“You have a whole set of non-bank financial institutions who have more certainty due to the fact that they are less regulated,” the banker said.