What impact might a Labour Government have on the Banking and Financial Services Industry?

The Banking and Financial Services industry in the UK accounts for over 2.5 million jobs, 8% of GDP, and contributes to over £100 billion in tax each year, so, the effect of the upcoming general election on this industry is not just something that those of us working in this sector have to think about, but something that should be considered by all.

With Rishi Sunak’s recent announcement of a 2024 July General Election, many may be questioning the impact that a change in government may have on the banking and financial services industry. What impact might Keir Starmer and his Labour Government have, and what might their plans entail? Obviously, until a party manifesto is revealed, we will not know anything concrete, yet we can take this opportunity to look at the past actions of Labour governments, and the impact that they have had.

First, let’s break this down into a few sections: regulation, taxation, market sentiment, and broader economic policies. Here is how each of these sections might be impacted…

Regulatory Environment:

An Increased Compliance Workload:

Labour governments often implement stricter regulations and oversight, which may result in a greater focus on compliance. Firms may need to spend more time ensuring their practices adhere to new regulatory requirements, which could involve additional training and procedural adjustments.

Enhanced Risk Management:

An introduction of tighter risk management standards could necessitate more rigorous internal controls and risk assessment processes. This could lead to more jobs in risk management and compliance, but might also increase the workload for existing employees leading to capacity constraints and the need to increase resourcing support.

Taxation and Compensation:

Higher Personal Taxes:

Professionals in Banking and Asset Management, who often earn higher salaries, might face increased personal income taxes if Labour implements higher tax rates for high earners. This could affect their net take-home pay. However, the tax burden is already set to rise to historic post-war highs over the next few years after the recent increase by the Conservative government (as can be seen in this OBR article https://obr.uk/box/the-uks-tax-burden-in-historical-and-international-context/), so there is uncertainty as to whether or not these would be raised further by the Labour Party. This increase in taxes could also have the potential to drive skilled resources overseas to lower-tax jurisdictions such as the Gulf States (as discussed in my previous article regarding IR35 and contracting).

Bonus Restrictions:

The cap on bankers’ bonuses has only recently been lifted in Oct ‘23, yet these could be reimplemented, similar to those seen in other jurisdictions following the financial crisis. This might lead to changes in compensation structures, potentially shifting from variable (performance-based) to more fixed (salary-based) compensation.

Job Market and Employment:

Job Security and Opportunities:

If the financial sector contracts due to increased regulation and taxation, there could be job cuts, particularly in roles deemed non-essential. However, new opportunities might arise in compliance, risk management, and corporate social responsibility (CSR) functions.

A Shift to Ethical and Sustainable Finance:

Overall growth in ESG investment is set to fall by as much as 70% (according to this article in The Corporate Governance Institute https://www.thecorporategovernanceinstitute.com/insights/news-analysis/is-esg-investing-falling-away/#:~:text=Additionally%2C%20overall%20growth%20in%20ESG,top%20%2440%20trillion%20by%202030 ), yet Labour’s focus on ethical and sustainable finance could create new job opportunities in areas like green finance, impact investing, and ESG (environmental, social, and governance) analysis, and will remain a core part of their policy.

Increased Reporting Requirements:

Enhanced regulatory requirements may lead to more extensive reporting and documentation, impacting the workload of analysts, fund managers, and administrative staff.

Operational Changes:

The impact on employees day to day running of the business may be altered as they try to manage increased volumes of change, that may come from a new government keen to make its mark. The organisations that manage this the best will be those that are prepared with capacity already in their forecasts, and access to a pool of suitably-skilled talent.

Investment Strategy:

Investment professionals might need to adjust their strategies to align with new regulations and tax regimes. This could involve a greater focus on sustainable investments or shifts away from certain high-risk or high-tax sectors.

Market Sentiment and Performance:

Market Volatility:

Initial market reactions to a Labour government could be volatile, potentially affecting asset values and investment returns. Professionals might need to manage client expectations and navigate short-term market turbulence. However, as the polls currently stand, Labour are very much on the path to winning this election which decreases the volatility dramatically. Perhaps a hung parliament would cause the most unrest?

Long-Term Strategic Adjustments:

Depending on Labour’s policies, there could be long-term shifts in market dynamics. Asset managers and investment professionals may need to adapt their strategies to new economic conditions, focusing on sectors favoured by Labour policies (e.g., green energy, infrastructure).

Corporate Culture and Ethics:

Focus on Corporate Responsibility:

A Labour government may encourage a greater focus on corporate ethics and social responsibility. Banking and investment firms might adopt more robust CSR initiatives, impacting corporate culture and employee engagement.

Talent Attraction and Retention:

The financial sector may need to adjust its strategies for attracting and retaining talent, particularly if compensation becomes less competitive. Emphasising work-life balance, career development, and ethical business practices could become more important.

While some professionals might face challenges such as increased compliance burdens and higher personal taxes, others could find new opportunities in emerging sectors like sustainable finance and risk management. However, the overall impact will depend on the specific policies implemented by Labour and the financial sector’s adaptability to these changes. At this point in time, all we can do is wait for a manifesto, which is likely to be launched between the 5th and 16th of June (18-29 days prior to the election date).