Key Takeaways
The new UK Prime Minister, Liz Truss, has hinted at de-regulation of the UK’s financial sector. … [+]
Almost two months to the day since UK Prime Minister Boris Johnson resigned from his position, the country now has a new one. In a race that came down to Liz Truss and former chancellor Rishi Sunak, the UK now has their 3rd female Prime Minister, with Liz Truss running away with victory.
The political system in the UK means that this change can happen without the need for a general election, with the Conservative party members able to elect their new leader, who then becomes the new Prime Minister.
The result will come as a surprise to many, even in the UK, who are unlikely to have heard much of Liz Truss before she emerged as a front runner for the party leadership.
Truss ran her campaign on a platform of tax cuts and government assistance for issues such as the sky high energy prices currently plaguing the country. She’s expected to announce measures in the coming days, but it’s her stance on the UK’s financial sector that has the attention of analysts.
Truss has hinted at plans to merge the country’s two main financial regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), in a move that some suggest could wind back financial regulation to pre-2008 financial crisis levels.
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Truss has been in politics since 2010 where she remained relatively unknown to the general public until her appointment as Foreign Secretary (the UK equivalent of the Secretary of State) in late 2021.
Her time in politics has been possibly most notable for her change of opinions. As a student at Oxford University, she was a member of the centrist Liberal Democrats before defecting to the Conservatives in 1996.
On the controversial issue of Brexit she was a strong proponent of the UK remaining in the EU, a position which she has now made a complete about turn on, becoming a strong advocate for leaving the Union.
Looking forward, she’s painted a much more optimistic vision for the future, one that would see tax cuts march in step with increased government spending, a view that has raised some eyebrows from her colleagues.
Before 2013, the UK’s entire financial services sector was regulated by the Financial Services Authority, which took a fairly light-touch approach to their mandate. One of the outcomes from the post-2008 financial crisis fallout was to split the body into two, in an aim to improve the overall regulation of the system.
This change created the FCA and the PRA, but Truss is now reported to be considering merging them back into one. It could create a move back to the lighter-touch regulatory approach to the City, the UK’s equivalent to Wall Street.
Less regulation would mean that bankers are able to maximize their profit generation, but some have raised concerns that this could see a move back to the types of unsustainable business practices that led to the 2008 financial crisis.
So far there is no confirmation that Truss will implement these measures, but many have been reading in between the lines of the multiple debates and interviews she has given over the past two months.
Less regulation means a number of different things for investment banks and wealth management firms. The first direct impact would likely be a reduction in costs. By only having to report to and liaise with a single government body, it could mean fewer processes to be followed and potentially a lower headcount in compliance departments.
Longer term, it may allow banks to become more self-regulating in terms of the types of investments and loans that they approve.
In many ways, less regulation could be a positive for shareholders in these financial companies, at least in the short term. Leading up to the 2008 financial crisis, banks and investment firms were making exorbitant profits. As we all now know, these can become unsustainable.
While there have no doubt been lessons learned in the City and Wall Street boardrooms, it’s also easy to see how the past could be forgotten when chasing quarterly profits.
With that said, there is almost surely a sustainable middle ground. The level of risk the banks were taking on prior to the financial crisis was obviously too high, but it’s possible that the pendulum has swung too far in the other direction.
A lessening of the regulatory strings, without letting things go completely loose, could allow UK firms to expand their offerings and attack new profit centers.
It could help deliver one of the many promises of Brexit, in unleashing the potential of London’s financial sector, which already jostles New York City for top spot globally.
While it’s easy for US investors to focus only on the US market, there are plenty of major companies that are listed in other areas of the world. American stocks have performed incredibly well in recent years, but at different periods over past decades they’ve been outperformed by other markets.
One of the key lessons here for investors is the importance of a diversified, global approach to their portfolio. If the UK market takes off in coming years, you want to have at least some skin in the game.
We’ve recognised that this is a common blind spot for investors, which is why we created the Global Trends Kit. This Investment Kit takes a global approach to investing, not only looking at stock markets globally but also assets like oil, government and corporate debt, real estate, commodities and currencies
The kit still has a sizable exposure to US stocks, both small cap and large cap, so you’re not missing out on gains on home soil.
Having diversified holdings in a wide range of assets not only gives inventors access to new and potentially outperforming investments, it also has the potential to reduce volatility as well.
If you’re worried about the potential downside of an investment portfolio, you can also add Portfolio Protection to the Global Trends Kit. This implements sophistacting AI-powered hedging strategies that helps protect your portfolio during market volatility.
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