Happy Hunting? Reviewing the Chancellor’s Mansion House speech
Chancellor of the Exchequer Jeremy Hunt has set out his vision for taming inflation and rescuing Britain’s economy. Audley’s Rolf Merchant analyses the policies and more in yesterday’s Mansion House speech.
The full transcript of the speech can be read here.
Jeremy Hunt, the Chancellor of the Exchequer, delivered a well-trailed speech at the Mansion House on 10 July.
It comes at a troublesome time for the British economy and for the fortunes of the governing Conservative Party. The UK is battling stubborn inflation (currently 8.7% against a target of 2%) and anaemic growth. Nor are the public finances in great shape, with government borrowing more than £40bn a year and public sector debt now over 100% of GDP.
All of this is leading to higher prices, higher mortgages, and higher rents – and only a glimmer of hope of the situation easing in the coming months. This in turn is feeding into the public perception of the government’s performance, opinion polls are suggesting the Conservatives will lose the next general election and Labour are starting to be seen as more trustworthy on the economy.
Mr Hunt began his speech by emphasising that his number one priority is to get inflation under control. As the Chancellor put it, economic growth and debt reduction won’t happen until inflation is tamed. The Bank of England has received considerable criticism for not reacting fast enough to bring inflation down, but Mr Hunt naturally presented a united front with a reaffirmation of the close working relationship between the Bank and the Treasury.
The Chancellor then turned to the longer term, setting out what he described as his vision for how the financial services sector will help make the UK “the world’s next Silicon Valley and a science superpower.”
Pensions
Mr Hunt described the two key deficiencies in UK pensions: 1) that British pension funds are not investing as much in UK high-growth companies as their international counterparts, and 2) some defined contribution (DC) schemes are not providing the returns their pension fund holders expect or need.
To respond to this, the Chancellor announced six new policies.
Mansion House Compact: commits the UK’s biggest DC funds, representing around two-thirds of the UK’s entire DC market, to allocating at least 5% of their default funds to unlisted equities by 2030. This is estimated to unlock up to £50bn of investment capital into high growth companies. The Compact was widely expected and is the biggest pensions announcement that the Chancellor gave.
DC consolidation: the government will facilitate a programme of consolidation to ensure that funds are able to maintain a diverse portfolio of bonds, equity and unlisted assets and deliver the best possible returns for savers.
Access to investment vehicles: the government will work to ensure pension schemes have access to a wide range of investment vehicles that enable them to invest quickly and effectively in unlisted high growth companies. This will include exploring the case for government to play a greater role in establishing investment vehicles.
Defined benefit (DB) scheme reform: technical changes to regulation of DB schemes, including plans to introduce a permanent superfund regulatory regime to provide sponsoring employers and trustees with a new scaled-up way of managing DB liabilities. The government is also going to launch a call for evidence on the role of the Pension Protection Fund and DB schemes in productive investment.
Reviewing the culture of investment decisions: a call for evidence on how to overcome barriers to good pension saver outcomes by improving the understanding of pension trustees’ fiduciary duty across both DB and DC schemes.
Consolidation of Local Government Pension Scheme (LGPS) assets: consultations on accelerating the LGPS consolidation and ensuring greater transparency on investments, and increasing fund allocation in private equity to 10%.
Mr Hunt said that all final decisions will be made ahead of the Autumn Statement, likely to be in November, and would stick to the principles of ensuring the best outcomes for savers and strengthening Britain’s competitiveness in financial services.
Summarising, the Chancellor said that together the reforms could increase an average earner’s pension pot by 12% giving £1,000 more a year in retirement. The reforms also give the potential to unlock £75bn of growth capital for scale-up businesses in the UK by 2030, which he hopes will deliver the investment innovative companies need to reach their full potential.
Listings
Changes to UK rules for IPOs made up a smaller part of the Chancellor’s speech. London’s decline as a venue for listings for domestic companies and its inability to attract a significant number of new, innovative companies to go public has generated intense debate in recent years.
The government has made a number of changes to listings rules already, but Mr Hunt announced further pushes in his speech:
Prospectus reforms: Lord Hill’s review into UK listings rules, published in March 2021, included a recommendation to reform the prospectus regime. The government consulted on this to explore how to simplify regulation in this area, making it more agile as well as facilitating wider participation in the ownership of public companies and improving the quality of information investors receive. Mr Hunt announced legislation will be tabled to enact these changes.
Investment research changes: the government will enact all of the recommendations of Rachel Kent’s recent review in this area, which will see the removal of certain elements of EU regulation (MiFID II).
Intermittent trading venue: in what Mr Hunt described as a global first, the UK will establish a pioneering new “intermittent trading venue” that will improve private companies access to capital markets before they publicly list.
Smart regulation
In the final section of his speech, the Chancellor touched on regulatory changes that the UK has and will enact, including the Financial Services and Markets Act. Mr Hunt touched on building new partnerships with the EU, including the recent signing of the UK-EU financial services Memorandum of Understanding.
The main announcement was the launch of an independent review into the future of payments, led by Joe Garner, former CEO of Nationwide. Mr Hunt explained the review will “help deliver the next generation of world class retail payments.” He added that new legislation is coming to “give regulators the powers they need to reform rules on innovative payments and fintech services.”
Conclusion
Mr Hunt’s aim is to deliver a more competitive financial services sector and a more innovative economy. These are undoubtedly critical for the future of the UK economy. It is also clear the Chancellor wants to make these changes as quickly as possible, only consulting where necessary and doing so with a short window.
The extent to which these reforms will generate the kind of change and long-term growth in the UK remains to be seen. Many commentators and financial services sector analysts welcome the reforms as sensible and measured and will help target issues such as London’s decline as a listings venue and Britain’s lack of growth capital.
However, this was not an especially bold speech, it was more technocratic. Mr Hunt did not say much about his long-term vision for the UK economy or how the government intended to achieve the improved economic growth the country needs. It had a distinct “end of term in office” feel about it.
Nevertheless, it is a signal that the government is prepared to address what are regarded as core deficiencies in the UK’s financial services offer and sees them as a priority. It also shows an area in which the UK is beginning to unwind EU regulation of financial services, something which it has been slow to do thus far.
The government will be releasing numerous consultations, which gives the private sector a good opportunity to engage and get its point of view across.
Payments and fintech companies will be especially interesting in Joe Garner’s review as this could result in a new round of regulatory and legislative changes to boost financial services innovation.
It is also entirely possible that the reforms Mr Hunt spelled out and recommendations that come from various calls for evidence and consultations will survive into a Labour government in 2024.
