GK adviser and education expert, Monica Thompson, shares her thoughts on the Government’s new Schools White Paper
Read your copy here: The Schools White Paper
to discuss the White Paper and what it means for you, please email Monica@gkstrategy.com to set up a meeting
“Well, you might almost think that there is an election on the way! Or maybe that the Chancellor is seeking to position himself more favourably with Tory MPs in case there is a leadership election any time soon.
“This is the Chancellor, after all, who until recently had been jacking taxes up through the roof – higher NICs, frozen personal allowances, higher corporation tax. Today, he moved to cut petrol duties by 5p per litre, increase the amount people can earn before paying national insurance and – the big rabbit out of the hat – announced a 1p cut in the basic rate of income, for 2024.
“This package will cheer up Tory backbenchers, many voters and the Conservative supporting media. But it’s not obvious that the Chancellor has tackled the broad range of problems confronting the economy.
“Inflation is set to average 7.4% this year, which will squeeze living standards, not least for those too poor to benefit from the higher national insurance threshold. The package delivered very little for those on the lowest incomes – poverty is likely to increase notably. Perhaps the Chancellor has decided that those in poverty are not his target audience?
“Growth forecasts have been slashed almost in half for the current year, which will boost borrowing. Debt interest payments are surging higher because of rocketing inflation. The Chancellor is gambling on growth being strong enough to keep the deficit falling, but there are significant risks here.
“Meanwhile, many people will wonder what sense there is in increasing national insurance by 1.25% now, and then cutting income tax by 1% in two years time. This means lower taxes for pensioners and high taxes on workers – not perhaps much economic sense or fairness.
“Beneath these headline announcements are some interesting suggestions of policy changes to boost training and reform R and D tax credits. As ever with these statements, we now need to look closely at the small print.”
When Rishi Sunak rises to deliver today’s Spring Statement, it would be easy to forget that he has been ChanceIlor for barely two years. At the same time, it’s hard to recall any Chancellor who has had quite such a fierce baptism of fire. A plausible case could made for Hugh Dalton in 1945 (immediately after the Second World War) or Sir Geoffrey Howe in 1979 (following the so-called ‘Winter of Discontent’). But Sunak has had perhaps the hardest inheritance of all. Not only did he become Chancellor with precious little ministerial experience, but he took over in unusually difficult circumstances – after 10 Downing Street had made the position of his predecessor and friend, Sajid Javid, completely untenable. Then, almost immediately, Sunak was confronted by a Covid-inspired economic meltdown before, more recently, the gravest cost of living crisis since the 1970s.
Despite delivering just three Budgets – which is three more, incidentally, than Javid – Sunak has already made a profound impression on British politics. Indeed, he was almost omni-present during the Covid crisis and introduced everything from the popular (but probably counter-productive) ‘Eat out to help out’ initiative to some highly successful but hugely expensive job retention schemes. Consequently, as the Institute for Fiscal Studies (IfS) has pointed out, Sunak (a self-proclaimed low tax Conservative) has felt it necessary to announce bigger tax increases in his two years at 11 Downing Street than Labour’s Gordon Brown managed in a full decade. To the annoyance of countless employers and many of Sunak’s own Conservative colleagues, they include some major (and pledge-breaking) increases in corporation tax – the first since Denis Healey’s traumatic spell at the Treasury in the 1970s.
The comparison with Healey is surely not one that Sunak would welcome. Healey’s period as Chancellor was plagued by many of the same problems – especially squeezed living standards, sluggish growth and persistent inflation (‘stagflation’) – that Sunak is now desperately seeking to tackle. Ultimately, Healey’s solutions proved ineffective, colleagues were alienated by some of his key decisions (especially breaching agreed manifesto policies) and the party’s leadership eluded him so, for Sunak, the precedent is hardly encouraging.
In one respect, however, the comparison with Healey is not only fair to Sunak but personally flattering. Just as Healey was never fazed by a challenge – whether during his wartime service, in government (as Chancellor and Defence Secretary) or in Opposition (as deputy Labour leader) – Sunak has consistently showed astonishing composure and resilience in the face of successive crises. Although his critics argue that he’s sometimes ‘behind the curve’ when responding to fast-deteriorating economic predicaments, it’s also noticeable that he’s happy to revisit earlier decisions and, if necessary, take steps that go completely against Treasury orthodoxies, his party’s previous stances and his own political instincts.
We may see, today, more of the same as the Chancellor considers whether his previous package on energy costs – announced only last month (although it seems much longer ago) – remains tenable when inflation and energy prices seem set to remain ‘higher for longer’ than anyone had expected. Expect ‘friendly fire’ from Conservatives who want fuel taxes to be sharply cut and the upcoming National Insurance increase to be deferred. Meanwhile, many criticisms from Labour frontbenchers are likely to be framed in personalised terms as they seek to blame the ‘cost of living crisis’ on the Chancellor and his decisions, as far as possible, rather than on worldwide events. It might not feel like it to Sunak but it’s a political compliment – reflecting the Opposition’s desire to remove some of the post-Covid sheen from someone they regard as the most likely successor to the Prime Minister (despite the Foreign Secretary’s rising standing) if the ‘partygate’ scandal, or any other, ultimately claims his scalp.
In some respects, we’re likely to see ‘more of the same’ from the Chancellor today in the form of the seriousness, courtesy and calmness that we’ve come to expect over the past two years, despite their constant crisis mode, which have ensured that – unlike Dalton, Howe or Healey – Rishi Sunak is still well-placed to make the move from Number 11 to Number 10. Is it a role that he wants? Only he will know for certain. But three things do seem different when compared with his Budget, back in October. First, since then, the Chancellor has successfully put some distance between himself and the Prime Minister – making it clear that he disagreed with No 10’s ‘partygate’ culture, as well as with some of his boss’s recent language. Secondly, the communications operation surrounding the Chancellor has become more restrained and less heavily ‘Rishi’-branded, which had become a source of irritation to some colleagues. Finally, and similarly, the Spring Statement has been preceded by a period of comparative silence from the Chancellor’s team, after its pre-Budget briefings were widely considered excessive. True, the Spring Statement is less significant than the annual Budget and events are moving so fast than any pre-briefing could soon unravel. But these are also signs of a seriousness of purpose that seems well-aligned with the increasingly difficult times in which we’re now living.
It’s clearly impossible to predict what the Spring Statement will actually say. There will, presumably, be fresh measures to help people (particularly lower earners) with their energy bills; changes to National Insurance (perhaps its threshold) might reduce the impact of the planned increase in NI rates themselves; and benefits could be index-linked differently, or more regularly, to reduce the huge gap between next month’s planned increase (3.1%) and real-world, real-time inflation.
One thing does seem certain, however. As the IfS has argued, “Sunak can smooth, delay and ameliorate the pain. But he can’t make it go away.” Quite simply, the pressure on living standards is greater than at any time for nearly 50 years. For the Chancellor, two years into his tenure, the crisis mode shows absolutely no sign of ending.
To discuss the Spring Statement and what it means for you please contact IWilton@gkstrategy.com
Trade and Cooperation Agreement: impact and implications
In December 2020, the United Kingdom (UK) and the European Union (EU) signed a Trade and Cooperation Agreement (TCA), delineating the new trade rules between the bloc and the UK after Britain’s decision to exit (‘Brexit’) the EU.
While for other aspects of trade (such as goods) the Agreement and its implications are clear, the TCA does not contain specific rules around financial services between the UK and the EU. Instead, the TCA contains some more general requirements:
Furthermore, the general rules around financial services have a so-called ‘prudential carve-out’, which allows each entity to adopt prudential rules – for example, to protect investors or ensure the integrity and stability of their financial systems. Another key aspect of the TCA is that both the UK and the EU have the ability to revoke equivalence decisions around financial services without consulting each other.
While this is potentially a positive aspect for the UK, as it permits regulatory divergence on financial services, it also represents a form of risk as the EU is not obliged to give British investors the same rights that they enjoyed when the UK was a member state.
Overall, the rules on financial services in the TCA provide for freer EU/UK access in financial services than would have applied under a ‘no deal’ scenario. However, access still falls far short of what businesses had previously enjoyed across the European single market.
Joint Declaration and Memorandum of Understanding
As the TCA does not set out specific rules around the regulatory aspects of financial services, the UK and the EU also signed a Joint Declaration, on 24th December 2020. Under the Declaration, the two entities agreed to work towards the establishment of structured regulatory cooperation on financial services. This would allow for exchanges of views and analysis relating to regulatory initiatives and other issues of shared interest. Such cooperation would also facilitate more transparency and easier dialogue over (for example) adopting, suspending, and withdrawing equivalence decisions – as well as enhanced coordination with international bodies.
The Joint Declaration also committed the UK and the EU to work towards agreeing a Memorandum of Understanding (MoU) by the end of March 2021 to establish a firmer framework for cooperation, including equivalence determinations. The UK Government confirmed at the end of March 2021 that the MoU had, in its view, been agreed in principle and needed only to be formally signed.
Among its other provisions, the MoU aims to establish what was called a ‘Joint UK-EU Financial Regulatory Forum’ to serve as a platform for dialogue on financial services issues. The MoU also focuses on non-legally binding cooperation but does not address the politically contentious issue of single market access for UK financial services. Reports have highlighted that the MoU has yet to be signed or, therefore, put into force.
This has potentially negative consequences for the UK financial services market, as it is simply reliant on equivalence decisions made by the EU. While the UK has published its own equivalence assessment, the EU has yet to make equivalence decisions for the UK (except for two temporary decisions granted at the end of the transition period – one of which expired at the end of June 2021). This means that UK firms’ access to EU markets depends on the rules which each member state applies to third country businesses.
As substantial equivalence decisions from the EU seem unlikely, the UK Government has indicated that it will change the UK’s financial services regulatory regime in the hope of delivering a so-called ‘Brexit dividend’.
Impact on financial services
It will obviously take time to determine the full impact of the Brexit deal on the UK’s financial services sector. Nonetheless, there have been some early indications of the effects of both Brexit and the TCA’s implementation.
In particular, there has been a shift of certain trading operations and staff from the UK to the EU/European Economic Area, with London losing out to cities such as Frankfurt and Amsterdam. This has been most notable in the cases of share trading, euro-denominated derivatives and asset management, although the scale of the lost business and employment is lower than some experts had predicted.
Britain has also lost its ‘passporting’ permissions which has, for instance, necessitated the restructuring of many UK firms’ European businesses. When the UK was part of the EU, firms could export products and services to each member state without the need for a specific licence as a result of the financial ‘passport’ system. Now, due to the absence of equivalence decisions by the EU, UK firms have had to either cease conducting regulated business in the EU, open authorised European subsidiaries or restructure their European businesses to ensure they remain outside of the relevant member state’s regulatory perimeter.
Indeed, the Financial Times (FT) reported that 2021’s first trading day saw €6 billion of EU share trading shift from London to EU marketplaces such as Madrid, Frankfurt and Paris. While share trading is not the most lucrative business within the financial services sector, the FT noted that the shift would still mean lower tax receipts for the UK Government. In addition, the newspaper subsequently reported, in February 2021, that Amsterdam had become Europe’s largest share trading centre after a range of EU-based financial institutions had moved away from trading in London due to the failed equivalence decisions. According to the think-tank New Financial, about 7,500 jobs have moved from the UK to the EU since the 2016 Brexit referendum, while banks and asset managers have transferred more than $1 trillion in assets – about a tenth of the total value. Finally, City A.M. reported in June 2021 that, according to data from EY (Ernst & Young), two in five financial services firms have moved or plan to move some UK operations and/or staff to EU member states. However, many employees would reportedly rather quit their jobs than be relocated. The financial services sector will also be affected by the TCA’s mobility provisions, which allow firms to send employees to deliver services in the EU, subject to conditions, with the exact rules varying between each member state.
UK domestic policy-making – financial services
In July 2021, the Chancellor of the Exchequer (Rt Hon Rishi Sunak MP) used his set-piece Mansion House speech to outline his vision for the sector. It included commitments to implement at least parts of two Government-commissioned reviews: first, Lord Hill’s review of the UK’s companies listing regime and, second, the Kalifa financial technology (fintech) review.
The British Government hopes that reforming financial services regulation will help firms trial technological innovations and scale up new products – helping the UK carve out a ‘first mover’ advantage by quickly developing new regulatory regimes that encourage firms to launch advanced products and innovate more quickly than other countries. It also hopes that such reforms could drive the financial sector to help deliver the UK’s net zero environmental ambitions.
The Treasury duly opened two consultations on the ‘Financial Services Future Regulatory Framework Review’, to gather views on the proposals for reforming some aspects of the financial sector’s reguation. Such reforms offer the opportunity to ensure that the UK maintains a coherent, agile, and international approach.
The first consultation was a proposal to define a clear allocation of responsibilities between Parliament, the Treasury and the financial sector. Other proposals included Government and Parliament to be responsible for setting the policy framework for the financial sector. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) should be responsible for designing and implementing the relevant regulatory standards. The PRA and FCA should also be subjected to transparency requirements around activity – specific policy framework legislation.
In November 2020, Parliament’s all-party Treasury Committee also launched an inquiry into the future of UK financial services in order to examine how regulations should be set by Parliament and the Government once EU-based rules had ceased to govern the sector. As part of its inquiry, the Committee responded to the Treasury’s consultation with a series of recommendations. On the one hand, for example, the Committee agreed with the Treasury that the EU financial services rules that were on-shored – in short, the process of amending the legislation and regulatory framework, so that they can work in a UK-only context, while the UK was leaving the EU – should be moved into the regulators’ rule books. In contrast, the Committee does not believe there is compelling evidence to allow Ministers the absolute right to see regulators’ policy proposals before they are published for consultation. Regulators must be free, in the Committee’s view, to choose what they share with the Treasury. The Committee also believes there may be a role for the Government to use ‘activity-based’ principles to instruct regulators’ approach to specific business sectors, but it recommended that the Government should be sparing in their use. In addition, the Committee believes that there should be a targeted approach to effectively scrutinise regulatory proposals. Under the future Financial Services Regulatory Framework, the Committee suggested that proposals made by the FCA or the PRA should be put out into consultation. This means that industry stakeholders would have an opportunity to put forward their views before the proposal is integrated within the regulation.
As a response to the Treasury Committee and as a subsequent proposal on the Financial Services Future Regulatory Framework Review, the Treasury expanded on the previous consultation. This recently closed, on 9th February 2022. The Government intends to provide for a greater focus on the financial services sector’s growth and competitiveness by introducing new statutory secondary objectives for both the PRA and the FCA. More specifically, Ministers are hoping to amend the existing regulatory principles – especially those introduced as a result of EU regulation – to ensure faster but sustainable growth. The Treasury is also looking to create a new regulatory framework using primary legislation, moving the EU-derived rules into UK regulators’ rulebooks and, finally, allowing regulators to make changes to the regulatory framework as they feel appropriate.
Lastly, the House of Lords’ European Affairs Committee launched, in February 2022, another inquiry into UK-EU relationships in financial services. It will examine: Brexit’s impact, so far, on the UK’s financial services sector; the impact of the absence of a functioning framework for UK/EU regulatory cooperation; the future of cross-border financial services in the absence of equivalence; and the impact of regulatory divergence and agreements with third countries on UK/EU financial services trade.
Conclusion
It is clearly still an uncertain period for financial services. The failure to sign the MoU by March 2021, as planned, and the EU’s unwillingness to make an equivalence decision have encouraged the UK Government to push harder for a divergent regulatory framework for financial services.
Its decision to create a different regulatory framework from the EU may have both benefits and costs for the UK. In terms of benefits, its financial services sector enjoys a comparative strength that allows the UK to possibly diverge and expand its reach in non-EU countries. On the other hand, regulatory differences can trigger disputes, especially around the rules implemented by the TCA.
What is certain is that the UK Government seems willing to move towards a divergent financial services regulatory framework. It will take some time to see how various consultations, inquiries and future legislative proposals will affect this sector, and their true impacts might become apparent only in the longer term.
Piece by Lavinia Troiani. To discuss the outlook for financial services, please email lavinia@gkstrategy.com
Please find enclosed a new weekly update from GK Strategy on the latest developments from the Russia Ukraine conflict including economic, diplomatic and political impacts of the war. Read here: GK Strategy Russia Ukraine Bulletin 17.03.22
The government has today announced its (very!) long awaited response to the Augar Review on post 18 education finance. The announcement will be eclipsed by the dramatic news of Russia’s invasion of Ukraine, but it is of importance for the long-term outlook for post 18 education.
The Augar Review was originally inspired by Theresa May’s desire as PM to offer a reduction in student tuition fees, after this became a major issue in the 2017 General Election.
It is believed that May wanted fees cut to £7,000 or £7,500 – perhaps with higher government grants to protect the more “expensive to deliver” courses. There was also a strong desire to shift financial resources away from “low value” Level 6 HE courses, towards Level 4/5 provision in subject areas of greater relevance to skills shortages and the labour market.
Today’s news indicates how far the government has moved from the initial May/Augar vision. Tuition fees will remain at £9,250 for the rest of this Parliament, and quite possibly beyond. Labour has also, under Keir Starmer, moved away from prioritising lower tuition fees. Instead, policy makers will allow inflation to gradually eat away at the real value of fees, which will over time put greater pressure on university finances.
Not only will students be stuck with £9,250 fees, but future students will be expected to start repaying their loans at a much lower level of real incomes – £25,000, instead of over £27,000 at present. The government and the Treasury have decided that students must pay back a lot more towards their loans, rather than allowing taxpayers to take the strain. As well as repayments starting earlier, payments for many will last much longer – for 40 years (before write-off), rather than the existing 30 years. However, in one piece of good news for students, the interest rate on student loans will be cut, so that it is limited to the RPI measure of inflation.
Overall, the changes to student repayments are regressive – lower earning students will pay a higher proportion of income, while higher earners gain from the lower interest rates. The strongly progressive structure put in place by the Coalition government is being watered down.
Where the conclusions of the review do still follow some of the Augar agenda are around the more generous Lifelong Loan Entitlement for both HE and other technical post 18 courses, at Levels 4/5/6. And the two consultations on minimum entry grades for post 18 study and around student numbers control are very important shifts towards potentially restricting access to university courses to those with higher attainment, and to courses with higher labour market returns. This is another major shift away from Coalition policy, which allowed for sector and student led increases in HE places.
The reviews will be controversial, and could make a major difference to the final policy proposals. Disadvantaged students could be big losers from any attempt to restrict university places to those with higher grades, while those delivering courses that lead to typically lower paying jobs will worry that they could face new restrictions on student places. By establishing reviews into both these issues, the government is accepting that change is highly controversial and needs much further thought.
If you would like to discuss the landscape for education policy in the UK, please email louise@gkstrategy.com