Chancellor Rachel Reeves and Bank of England governor Andrew Bailey have joined forces to call for Britain to rebuild ties with the EU, amid fears of a possible transatlantic trade war with US president-elect Donald Trump.
In a highly unusual move, both Reeves and Bailey used keynote speeches at the annual Mansion House dinner on Thursday to warn of the economic damage caused by Brexit and the need to improve trade links with the EU.
“We face structural challenges, including those which have come from Brexit,” Reeves told City of London grandees. “We will not be reversing Brexit or re-entering the single market or customs union but we must reset our relationship.”
The BoE governor emphasised the drag on the UK’s potential growth from the trade barriers with the EU created by Brexit.
“The impact on trade seems to be more in goods than services,” he said. “But it underlines why we must be alert to and welcome opportunities to rebuild relations while respecting the decision of the British people.”
Bailey did not directly mention Trump, but said: “The picture is now clouded by the impact of geopolitical shocks and the broader fragmentation of the world economy.”
The joint intervention comes as Sir Keir Starmer, the prime minister, prepares to negotiate improved UK trade terms with the EU next year, including a veterinary deal to improve flows of food, and mutual recognition of professional qualifications.
Reeves hopes Trump will not see through his threat of a US global tariff on trading partners and said she would continue to endorse “free and open trade”.
But the prospect of Britain simultaneously facing impeded trade with the EU and the US would be a serious setback.
The chancellor called the US “our single most important destination for financial services trade” and said that there was “so much potential for us to deepen our economic relationship on areas such as emerging technologies”.
Meanwhile, Reeves told City regulators to dial up the risk in the UK financial services sector, claiming that rules drawn up after the 2008 banking crash had “gone too far” and were stifling growth.
She said she wanted financial services to drive growth and sent a clear message to watchdogs: “The UK has been regulating for risk, but not regulating for growth.”
After suffering fierce criticism from UK business in the wake of her £40bn tax-raising Budget, the chancellor sought to reassure executives that she had a growth strategy. Her speech included a series of financial services reforms, notably in the pensions sector.
Reeves on Thursday sent “remit” letters to the five main City regulators telling them to focus on growth.
She argued that while the UK would continue to uphold high standards, the regulatory system’s efforts to eliminate risk were holding back the economy.
“That has gone too far and, in places, has had unintended consequences which we must now address,” she said. Trump’s successful election pitch also included a promise of deregulation in the US.
Reeves’ allies insisted UK financial services were in a much stronger position than before the 2008 crash and that the chancellor was “up for more risk taking”.
She has specific concerns about the burdens imposed by the regulatory certification regime for bank staff below senior management level.
Under the regime, banks are required to carry out checks on large numbers of staff in risk-taking positions to ensure they are suitable for their roles and to record them in a public register.
The chancellor said the government would consult on a new system with “a more proportionate approach that reduces costs so that businesses are freed up to focus on growth”.
Lawyers expect the regime to be narrowed to include fewer people with lighter reporting requirements.
Regulators at the Financial Conduct Authority and the BoE’s Prudential Regulation Authority have already responded to political calls to support growth by scaling back several post-2008 rules, scrapping the cap on bankers’ bonuses and watering down the Basel capital requirement rules for the sector.
Some regulatory experts argue that political pressure on watchdogs to promote growth carries the danger of clashing with their primary objective to preserve a safe and stable financial system.
Romin Dabir, a financial regulation partner at law firm Reed Smith, said watchdogs risked being “stuck between a rock and a hard place”.
Dabir added there was a possibility that when the next financial scandal hit, politicians would criticise regulators “for being asleep at the wheel”.
Reeves also announced other reforms, including the creation of digital gilts, a modernisation of consumer redress in the financial services sector, and a consultation on a new framework for captive insurance companies, entities created by businesses to underwrite their own risks.
The chancellor also promised a “financial services growth and competitiveness strategy” next year focused on five key areas: fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets.
Additional reporting by Ian Smith in London
