The financial services sector is again at a crossroads as we wait to see whether government policy will help or hinder the sector’s long road to recovery following the triple shocks of the financial crisis, EU exit and the pandemic.
The reappointment of Lucy Rigby as Economic Secretary to the Treasury and City Minister is a positive signal and brings welcome continuity for the sector. This demonstrates that she is trusted to deliver and the new elevated mandate as Minister of State means she will have additional powers delegated from the Chancellor.
There are a number of issues that will be high on the new government’s agenda that could impact the sector. Across many cross-cutting themes, bespoke sector taxes are back to the fore as the central pressure point. The Bank Levy and Bank Surcharge could still be an easy lever for the new Chancellor to use, and no love will be lost from the general public on a narrative that bankers are again paying their fair share.
The Industrial Strategy and the wider regulatory reform agenda inherited from the Starmer and Conservative governments will likely continue on their existing course. The underlying tensions between the growth elements and consumer protection/financial stability in policy are likely to play out on an issue-by-issue basis rather than through any wholesale change of direction of strategy.
For domestic-focused firms, the way in which financial services help consumers and SMEs, especially in priority regions, will be central to the government’s framing of the sector. This is something that was already being reflected in decision making previously, given the Economic Secretary’s pro-consumer instincts. For the wholesale sector, international competitiveness will remain the top priority. Firms can continue to expect government, via the Office of Investment: Financial Services, to court international firms. However, there will be a cautious approach to resetting international partnerships in the face of continued geopolitical tensions, meaning incremental progress on the recognition of overseas regimes.
Cross cutting themes
Independent of any single sub-sector in financial services, there are a number of issues that set the backdrop for the more specific domestic and international policy agendas the government and regulators are delivering.
The central factor in all of them is the recurring tension between appetite for growth, consumer protection and financial stability. While this government has not yet stated its aims as clearly as under Starmer/Reeves, it is becoming evident that issues will no longer be solely seen through the growth lens. This means that policy tensions will likely be resolved on an issue-by-issue basis rather than through any wholesale change in strategic direction on regulation.
The key issues are:
- Tax: The industry is understandably nervous and is deploying significant effort to persuade the Chancellor not to raise sector taxes via changes to either the Bank Levy or the Bank Surcharge. Nonetheless, both remain an easy lever for the Chancellor should the public finances need to be balanced. We therefore expect this to be a continuing tension internally in the Treasury as policy teams responsible for growth and those responsible for tax look at what adjustments could be made without undermining the sector’s competitiveness.
- The Financial Services Growth & Competitiveness Strategy: The sector strategy, which is part of the Industrial Strategy, is likely to continue broadly on its current course. The Chancellor is being advised to deliver on the plan set out by his predecessor, Rachel Reeves. That plan positions the sector as an enabler of other sectors – fitting neatly with the Burnham government’s wider agenda – and as a growth sector in its own right.
- Regulatory architecture: The Chancellor is expected to reissue the remit letters to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), last updated by Rachel Reeves in November 2024, restating the government’s priorities for the regulators. We expect the Chancellor to recommit to measures already provided for in the current Financial Services Bill, including ring-fencing reform and reform of the Senior Managers and Certification Regime (SMCR). Expect continued pressure on the regulators to evidence the growth impact of their work, this time viewed through a regional lens.
- Pensions: The Pension Schemes Act 2026 now provides for the consolidation of defined contribution schemes into fewer, larger “megafunds” and for the pooling of Local Government Pension Scheme (LGPS) assets into a smaller number of pools. We also expect continued momentum behind the Mansion House Accord, under which many of the UK’s largest pension providers have committed to allocate more capital to unlisted UK assets, with the power to mandate further allocations kept in reserve rather than exercised in the near term. Torsten Bell MP’s retention in post as Pensions Minister is a further indication that this agenda will be maintained, given his role in shaping the Pensions Investment Review and his personal commitment to using pension capital as a lever for growth.
- Green and sustainable finance: Transition finance and the UK’s ambition to be a global hub for green capital remain on the agenda as part of the Industrial Strategy, though with lower salience than under the previous government given Burnham’s rhetoric on the issue. Some of this agenda may now be carried forward by Ed Miliband in his role as Foreign Secretary. He has already indicated that he will use his new position as UK Governor on the board of the World Bank to drive forward the climate agenda.
- AI and operational resilience: While not a priority for the government, AI and operational resilience will attract greater regulatory attention with the role of critical third parties and AI adoption in financial services under particular scrutiny. This is a largely technical, regulatory workstream that represents no change from the previous government’s approach, which was already working through these issues methodically.
Domestic financial services
On the domestic side, the agenda will be shaped much more by politics than it will be by policy. As the government delivers for consumers and for the regions, it will also have to deliver a set of more technical workstreams inherited from the previous administrations.
- Consumer protection & Financial Inclusion: Expect renewed government attention on bank branch closures, support for vulnerable customers and financial inclusion, a year on from the launch of HM Treasury’s Financial Inclusion Strategy. The Strategy is due its first formal progress review in 2027. The Treasury Committee has already criticised it for lacking clear targets and accountability, giving the Chancellor and Economic Secretary reason to show real progress in the interim. On branch closures and access to cash, we expect continued momentum behind the banking hub rollout and the findings of the Lloyd Review into Access to Banking.
- SMEs: Lending has shifted away from smaller firms towards larger ones since the financial crisis. Rachel Reeves expanded the Growth Guarantee Scheme at Mansion House – a first step towards encouraging more lending to SMEs. We expect the Chancellor and the wider Burnham government to push this agenda further as part of their growth-in-every-postcode framing. The closure of bank branches is also seen by some policymakers as a contributing factor to the stalling of SME lending, meaning there could also be a push to restore in-person lending relationships and relationship managers.
- Regional agenda: Expect a renewed push on financial services hubs outside London – in Manchester, Leeds and Edinburgh – as part of the wider growth-in-every-postcode framing. Regional clusters within the Industrial Strategy will be central to delivering this.
- Fraud and economic crime: Fraud and economic crime remain live consumer-facing issues. Authorised Push Payment (APP) fraud reimbursement and the Economic Crime Levy are likely to feature alongside financial inclusion, though we do not expect any change in policy direction from the previous government.
- Domestic insurers: Solvency UK reforms should free up further capital for insurers to invest in infrastructure and other growth assets, aligning with the wider growth agenda. We expect there to be an opportunity to make the case for further loosening of the regime, even though the PRA appears, on the surface, hesitant to revisit changes already agreed.
- Domestic digital agenda: The rollout of Open Banking and Open Finance will continue, but we expect the digital pound – the UK’s proposed central bank digital currency – to be quietly dropped from the agenda, in the same way as digital ID has been parked. Open Finance is likely to be framed from a consumer protection perspective rather than as an industry-enabling initiative.
International financial services
Internationally, the overriding preoccupation remains the City’s competitive position relative to other global financial centres, with the government balancing continuity in established relationships against the need to be seen courting new sources of capital and business.
- Competitiveness: International competitiveness remains the central issue, particularly the City’s ability to attract firms to base themselves in London as a global hub. On newer frontiers, expect continued momentum on digitalisation, digital assets and payments, driven both by sovereignty considerations and by the need to modernise a system the UK was an early mover on almost twenty years ago. The UK is expected to continue courting international firms, though – in contrast to other elements of the Burnham agenda – the government is unlikely to prioritise British financial services firms that have been out-competed by overseas rivals since 2008, particularly in asset management, investment banking and private credit. Instead, the government’s priority will once more shift back to domestic retail firms.
- Overseas Recognition Regimes: On the Overseas Fund Regime and the broader global equivalence agenda, we expect incremental extensions, rather than a single big-bang Swiss MRA-style announcement, which will be enough to keep London competitive to cross-border business, noting the UK is already the most open financial services market in the world.
- UK-EU relationship: The Chancellor and the Economic Secretary to the Treasury will continue to want to reset the UK-EU relationship in financial services. However, as others in the sector have pointed out, this remains a sensitive topic for the EU, whose institutions are uncomfortable with the fact that the bloc’s largest financial centre sits outside its regulatory sphere. While the onshoring agenda in the EU has slipped down the list of priorities amid other international pressures, the UK should not expect equivalence decisions or enhanced cooperation in the near term.
- US-UK relationship: The most important and currently geopolitically fraught of the UK’s international relationships, responsible for a third of all UK financial services trade. The flagship initiative of recent years, the Trans-Atlantic Taskforce for Markets of the Future may have appeared, on the surface, to be a Reeves-Bessent-led initiative, but in reality it forms a small part of the long-established UK-US Financial Regulatory Working Group (FRWG). We expect this work to continue, with the Chancellor recommitting to the agreed workstreams and potentially announcing further cooperation when he travels to the IMF meetings in the Autumn for his first in-person bilateral with Treasury Secretary Bessent.
- UK and the rest of world: Relationships with the rest of the world are becoming more important as other jurisdictions close the competitiveness gap with UK markets. Expect renewed focus on collaboration with the Middle East as a financial centre, with Ministers viewing London as well placed to capture business given ongoing geopolitical uncertainty elsewhere. China and access to its growing middle-class wealth will also be an important area of growth for UK asset managers and therefore will also remain high on the government agenda. Latin America and Africa will continue to be a watching brief rather than a near-term priority.
Impact on firms
Taken together, these themes point to a financial services agenda that continues along its existing direction of travel rather than resetting overall. The clearest breaks with the recent past are tonal and regional rather than substantive.
For financial services firms, the practical implication is that the direction of individual policy areas is unlikely to change materially in the near term, but how policy changes are framed and sequenced will change substantially.
Tax will remain the largest source of uncertainty up until the next General Election, even if the sector narrowly escapes another tax hike in the Autumn Budget; the fiscal uncertainty projected for the remainder of the Parliament will mean that the Sword of Damocles will hang over the sector for the foreseeable future.
