Kemi Badenoch's bold agenda for the City of London is set to shake up the UK's financial services sector with a £30bn regulatory overhaul, promising to unleash growth and challenge stifling regulations that have hindered development for nearly two decades. The plan includes significant reforms such as abolishing bank ring-fencing, recalibrating capital requirements, and replacing the Financial Ombudsman Service.
A key target of Badenoch's proposals is the abolition of bank ring-fencing, a measure introduced after the 2008 financial crisis to separate retail banking from investment banking activities. Critics argue that this regime, which applies above a certain deposit threshold, disincentivises growth among challenger banks, with an estimated annual cost of £1.5bn according to an independent review by Skeoch. This burden has been exacerbated since its implementation in 2019, with ongoing costs approaching £10bn, exceeding the £1.3bn raised by the bank levy in 2024-25.
Furthermore, the effectiveness of ring-fencing in preventing 'too-big-to-fail' scenarios has been questioned. Analysis by the Bank of England and the Financial Stability Board, cited in the Skeoch Review, concluded that progress in this area was primarily due to the UK's resolution regime and tighter liquidity standards, rather than ring-fencing itself.
The reform package also targets capital requirements, which dictate the amount of capital banks must hold to absorb losses. While acknowledging their necessity, the plan suggests that Britain's current approach has drifted beyond international Basel standards, with multiple overlapping buffers and a restrictive leverage ratio. UK Finance estimates that the current regime restricts lending capacity by up to £450bn – £250bn from overlapping buffers and £200bn from leverage rules.
These proposed changes mark a significant shift in the government's approach to the City of London, moving away from the cautious post-2008 stance. The aim is to enhance competition, foster innovation, and unlock substantial lending capacity, ultimately contributing to broader economic growth across the UK.