As Liz Truss departs, banks are frustrated by U-turns in UK government

Truss will be replaced by the end of next week, having already caved on the prospect of a substantial tax rise for the sector to fill a budget hole

Jamie Dimon makes a point of introducing himself to new chancellors of the exchequer in the UK, where JPMorgan Chase & Co, the bank he runs, has a large presence. It’s a task that’s keeping him busy lately.

Dimon spoke with Kwasi Kwarteng during the latter’s five-week stint in charge of Britain’s purse strings, when he was told the government would prioritise the growth of financial firms. Next week, the American executive is due to pick up the phone to Kwarteng’s successor, Jeremy Hunt, for a different conversation about the threat of a tax hike.

The political maelstrom of the past few months has left a number of financial leaders with a feeling of whiplash about their position in the UK. Prime Minister Liz Truss said during this summer’s leadership campaign that the financial sector was the “jewel in the crown” of the economy. She will be replaced by the end of next week, having already caved on the prospect of a substantial tax rise for the sector to fill a budget hole. Regulatory changes may also be slowed or abandoned as a new government is formed.

While some finance firms would welcome a rethink on reforms, the additional uncertainty has stirred up frustration and focused attention on what the Labour Party might do if it gains office, according to various City of London figures. Even if a Labour government ultimately means higher taxes, that may be more acceptable than the current chaos, one of those people said.

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“We need the political machinations to stop and for the government to outline a credible fiscal plan,” said Iain Anderson, founder of Cicero, a communications firm spanning Westminster and the City. Hunt has said he will announce that plan on Oct 31, though the timing and content is a matter for whoever succeeds Truss. Doing that “is as important -- if not more important -- right now than the next occupant of No. 10,” according to Anderson.

Trussonomics abandoned

Hunt’s abandonment of Trussonomics, as the outgoing leader’s low-tax vision was known, received a warm welcome in the markets. But a nasty sting has emerged for banks.

There was widespread expectation that Hunt would bring down an 8 per cent surcharge tax on banks’ profits, following a plan laid out by Rishi Sunak, who was chancellor until July and now a potential leadership candidate once more. A reduction would help to soften the blow of a rise in corporation tax for all sectors from 19 per cent to 25 per cent in April.

The Treasury has been silent on the issue when firms tried to make enquiries, and Hunt has told the House of Commons he was “not against the principle of taxing profits that are genuine windfalls.” He was talking about energy companies, but it was enough to send chills through the banking sector.

If Hunt does not make any further changes, banks will pay a 33 per cent tax rate -- higher than financial centers such as Frankfurt and New York.

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The reason is two-fold. Hunt is scouring the economy for ways to balance the books, following vast spending commitments during Covid-19 and the European energy crisis. Meanwhile, UK banks are about to report large quarterly rises in profit and revenue next week thanks to soaring interest rates that improve their margins while heaping pain onto millions of borrowers, making the firms appear an easy target for tax hikes.

“Even if the surcharge stays at 8 per cent -- giving a effective tax rate of 33 per cent -- this would be highly manageable,” said Jonathan Pierce, a banks analyst at Numis. Advantageous changes in banks’ funding costs and hedging would offset the tax increase in 2023 and 2024, Pierce added.

Competitiveness hit

Even if banks can swallow tax rises, it could hinder their ability to compete globally. This has been a core consideration of the Truss government and a broad aim in politics and business after the UK’s departure from the European Union.

“We urge the government to consider the surcharge very carefully and not put at risk the competitiveness of the UK’s banking and finance industry,” said David Postings, chief executive officer of industry lobby group UK Finance. He pointed out “the banking and finance industry is the engine of the economy, providing jobs and investment up and down the country,” with two thirds of its roles outside London.

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William Wright, managing director of think tank New Financial, described the frustration that firms are feeling. “The government is promising reforms in the name of ‘international competitiveness’ that most of the industry has not been asking for -- such as scrapping the bonus cap -- while not giving the industry what it would really like or what it thinks would really move the dial -- such as changes to the taxation of banks,” he said.

One bright spot is the Financial Services and Market Bill, a major piece of legislation that despite politics is moving through parliament to create a post-Brexit framework for banks, insurers and asset managers. For many executives, the hope is that the bill continues on its journey to become law next year.

The law could make the UK’s listing rules more attractive to international companies and free up insurers’ capital to invest in infrastructure projects. Another significant but controversial change could force regulators to consider competitiveness when making decisions, alongside a possible new power allowing ministers to overrule regulators.

Andrew Griffith, appointed by Truss as City minister, has been canvassing executives for ideas to add more ballast to the bill. Griffith’s plans are at an advanced stage, but there is uncertainty about whether they will go ahead.

It is important not to let the reform agenda fall away, according to Barney Reynolds, global head of the financial services industry group at law firm Shearman & Sterling. “We must use this opportunity to tailor Britain’s rules for its global and domestic markets. This is critical to boosting competitiveness and growth,” Reynolds said.

For executives, the most important objectives are clarity and consistency -- and a focus on tax. Giving regulators a duty to consider competitiveness is “unhelpful if you take away with the second hand on taxation,” said Miles Celic, chief executive of TheCityUK, a lobby group. “You should be looking at streamlining tax, not making it more complicated.”