One area of particular focus is financial services – Liz Truss raised the issue in the BBC’s debate on 25 July 2022. Financial and professional services constitutes 12% of GDP and much of the regulatory regime has been determined at an EU level. With very little progress having been made on concluding EU/UK equivalence agreements, some have argued that the UK has little to lose in going its own way.

Rishi Sunak has made it clear that he favours divergence on a number of fronts and the Financial Services and Markets Bill, published on 20 July 2022 but prepared on Sunak’s watch at the Treasury, sets out the direction of travel with, for example, plans to reform the solvency regime which applies to insurers. The Bill proposes to give the regulators sweeping powers to reform EU regulations, and to give the Government and Parliament respectively role in overseeing and nudging the reform process. A leading EU parliamentarian, Markus Weber, describes the legislation as “a clear signal that the UK is out to compete for financial services business with the EU”.

The fact that Sunak has knowledge of the issues – and has the support of John Glen who was, until he recently resigned, the longstanding and well-respected City minister – may be to his advantage. The challenge, however, is that criticism had been growing from the Eurosceptic right of the Conservative Party that the Government in general, and the Treasury in particular, had been too slow in “exploiting the benefits of Brexit”.

For example, Lord Hannan, writing on the Conservative Home website in February, expressed his disappointment at the failure to deregulate financial services. “Whenever you push them,” complained Hannan, “Treasury ministers say that it’s all in hand, that they’re conducting a review and something or other and mimblewimble. But, more than two years after winning an 80-seat majority, the Government has done nothing.”

Responding a week later on the same site, Glen defended the Government’s record and stated that “high standards and robust but reliable regulators enhance competitiveness”. “We are not interested in a race to the bottom… creating a Wild West for financial services – judging success by how many regulations we have disposed of” argued the then City Minister. He went on to state that “many of the legacies of EU directives are embedded in cost structures and corporate thinking” and the Government’s job was “to enable the swift rightsizing of such rules in a way that industry finds helpful” and that it sought to do this “in ways that minimise disruption and new costs as global growth opportunities abound”. In other words, regulatory reform should be pursued in consultation with an industry which is concerned that some changes will add – not reduce – costs and increase uncertainty.

Since Hannan’s criticisms were made, the Government has announced its intention to proceed with reforming Solvency II, arguing that this will free up billions of pounds for investment in infrastructure and other long term growth areas. It is a policy which has the support of both Truss and Sunak.

But even this is proving to be problematic with the Prudential Regulatory Authority, part of the Bank of England, setting forward plans to liberalise some rules but tighten up others. The Association of British Insurers has stated that, in the round, the reforms may increase costs for insurers and result in lower investment in productive assets.

The reality is that identifying and delivering regulatory reforms for financial services in a post-Brexit world has not proven as easy as some had predicted. 

Some will argue that this demonstrates a failure of leadership by Ministers to overcome the caution of Treasury officials and regulators. Given that the Chancellor for nearly all of the relevant period has been Rishi Sunak, one can easily imagine Liz Truss’s campaign making that argument. Indeed, writing in the Daily Telegraph on 19 July 2022, Truss stated her commitment “to accelerating our regulatory divergence from the European Union”.

Others will argue that this was always going to be a complex process, that any change must be assessed on the basis of the specific costs and benefits and that, especially for businesses trading in both the UK and the EU, divergence inevitably creates challenges because of the need to comply with two separate regimes.

Many industry voices would support the second view but that is unlikely to be the majority opinion amongst Conservative members. This means that over the weeks ahead, we may see both candidates developing a policy agenda of reform that moves further and faster than was previously expected.

The focus may fall on the contents of the Financial Services and Markets Bill. This already contains provision for Ministers to require regulators to look again at new proposed rules but there is scope for this to be strengthened during the Bill’s Parliamentary progress. One option would be to give Ministers the power to “call-in” new regulatory proposals and intervene if in the public interest. Depending upon one’s point of view, this could increase accountability or increase the politicisation of the financial services regulatory system.

In any event, the debate on how we regulate financial services is becoming an unexpected feature in determining the identity of the next Prime Minister.