UK election: What the next government's agenda could mean for banks

Pledges that major parties in the UK election race have made suggest competitiveness, inclusivity, sustainability and open finance will likely be the next administration's top priorities when it comes to banks.

With no planned tax hikes for banks and a broad alignment on other sector policies by the historically dominant leading parties in the race, analysts expect little change for the industry as a new Cabinet moves into 10 Downing Street after the July 4 vote. Changes further down the line cannot be ruled out, however, given that the new government would operate on a tight budget and could find itself needing to raise money, according to some experts.

The opposition Labour Party is the front-runner in the latest polls, with 42% of average votes and a 21-point lead over the ruling Conservative Party, which has 21% of average votes, BBC poll tracker data shows. Future policies outlined by Labour for financial services are seen as business friendly and aimed at maintaining stability, rather than seeking radical reform after 14 years of Conservative leadership.

"Labour has been courting the City for some time to reassure the markets that it will be business as usual," Russ Mould, investment director at AJ Bell, told S&P Global Market Intelligence.

Taxation, tiering

Labour has eased one of the banking sector's key concerns by pledging to cap corporation tax at the current level of 25%, to keep the existing banking surcharge at 3% and to not introduce a windfall tax on bank profits. This "business-friendly approach" to policies "implies limited changes to the status quo for UK banks" with sector performance outlook remaining positive, JPMorgan analysts wrote in a May 23 note.

While surging bank profitability amid rising interest rates has been "a hot-button point" in recent years, political parties would likely avoid hiking taxes on banks as they will be focusing on driving more lending and credit flow to "what remains a fairly torpid economy," Mould said.

UK bank taxation is already high, with the total tax rate for corporate and investment banks here expected to surpass the rates in other major financial centers such as New York and Frankfurt, Deutsche Bank analysts wrote in a June 12 note.

Also good news for banks is that Labour has ruled out making a change to the Bank of England's reserve remuneration — whereby the central bank makes interest payments to commercial banks for cash reserves held with it — by introducing a tiering system. If the BoE were to pay out on only a portion of the reserves, it could make savings of up to £5 billion, according to an Oxford Economics estimate cited in the Financial Times.

The right-wing Reform UK party, led by Brexit campaigner Nigel Farage and currently third in polls, has pledged to remove the BoE interest payments entirely, saying this could save up to £40 billion per year.

Interest on reserves earned by some of the largest UK banks jumped 135% in 2023 because of recent rate hikes, a parliamentary committee found. Higher central banks base rates have also supercharged UK banks' revenues from lending and overall profits, which totaled nearly £50 billion in 2023.

While both direct taxation and tiering are off the table for now, they cannot be ruled out completely as they "may eventually prove too appealing for a future government facing difficult fiscal decisions," the Deutsche Bank analysts said in the June 12 note.

Competitiveness

Both the Conservative and Labour parties have vowed to boost the global competitiveness of UK financial services through regulatory reforms with a focus on growth and innovation. The Conservatives aim to complete Mansion House reforms that would increase investments in high-growth companies and simplify the financial rulebook to ensure regulation supports a growth agenda. The party has also pledged to uphold the "highest standards of consumer protection and prudential regulation."

Labour has made similar promises about enhancing competitiveness by "streamlining the regulatory rulebook in line with the Consumer Duty," but has also pledged to seek "a more collaborative relationship with the EU" in a move to strengthen the UK's international engagement in financial services.

Labour's plan to establish a Regulatory Innovation Office is "a notable reform" as this new body would play a key role in holding UK financial regulatory authorities to account on meeting the party's secondary objective for regulatory reforms to achieve growth and competitiveness, Matthew Gregory, financial services partner at global law firm Norton Rose Fulbright, told Market Intelligence.

Regulatory innovation would almost certainly result in new rules being introduced to ensure compliance, which could range from stricter disclosure requirements to tighter risk management, Haseeb Haque, managing partner at Fieldfisher Capital, the advisory arm of global law firm Fieldfisher, told Market Intelligence.

The jury is still out on what a potential collaboration with the EU would look like for financial services, but from a current standpoint a new Labour government would not be opposed to steering the UK closer to the EU-based regime, Norton Rose Fulbright's global head of financial services, Jonathan Herbst, told Market Intelligence.

Openness and inclusivity

Election pledges made by both the Conservative and Labour parties include plans to expand open finance and enhance the regionalization of banking to boost access to finance across the UK, especially for small and medium-sized enterprises.

The Conservatives have further pledged to ensure that the final Basel III bank capital rules, to be implemented from 2025, would not hinder lending to small and medium-sized enterprises. Labour has emphasized expanding open banking; embracing new technologies such as AI, securities tokenization and central bank digital currencies; and creating a national financial inclusion strategy.

After some delays in delivering the necessary reforms to catalyze open finance, Labour's pledge to prioritize this area would be well received by the financial services industry, Norton Rose Fulbright's Gregory said.

The outcome of the general election could have profound implications, influencing the long-term evolution of open banking and related technologies, UK-based software provider Yapily wrote in a blog post.

In the run-up to the election, both the Digital, Payments and Data Integrity Bill, designed to solidify the legal framework for open banking, as well as an amendment to payment services regulations to allow banks to delay payments under certain conditions to combat fraud, have been put on hold, Yapily wrote.

Sustainability

The Conservative Party has promised continued support for international climate finance if it remains in office. The party is expected to finalize its 2023 Green Finance Strategy, including introducing a green taxonomy and climate-related disclosures for listed and large private companies, Norton Rose Fulbright said in an analysis of election manifestos. The strategy aims to make the UK the world's first net-zero aligned financial center.

Labour has vowed to mandate all UK-regulated financial institutions, including banks, asset managers and insurance companies, "to develop and implement credible transition plans" that align with net-zero carbon emissions goal set in the Paris Agreement on climate change.

The focus on green banking is positive as the UK is behind the EU in terms of significant contributions to meeting the Paris goal, Fieldfisher Capital's Haque said. Any new government aiming to enhance the UK's status as global financial center should ensure domestic financial institutions play a key role in achieving this global climate target, Haque said.