Chancellor John Healey has written to Bank of England governor Andrew Bailey, urging the Financial Policy Committee (FPC) to relax banking regulation 'as quickly as possible' following the government's decision to raise taxes on the sector in the Budget.
In his annual letter to the FPC, Healey said the regulatory framework must be 'internationally competitive, promotes competition and acts to support, rather than unduly constrain, investment in the UK economy.' He called for accelerated changes to bank capital rules, the removal of overlapping regulations, and a relaxation of borrowing caps to boost mortgage lending. 'I look forward to the committee delivering these reforms as quickly as possible,' he wrote, adding that he expects the next stage of the review to deliver further proposals addressing overlaps in capital requirements related to domestic exposures.
The letter, a statutory requirement setting out the government's economic policy and remit for the committee, also stresses that the FPC does not have the capacity to exercise its functions in a way that, in its opinion, would be likely to have a significant adverse effect on the financial sector's capacity to contribute to UK growth in the medium or long term.
The move follows Wednesday's Budget, in which Healey doubled the UK banking surcharge to six per cent, a measure expected to raise an additional £1.5bn. The tax hike will last 15 months and set banks' effective corporation tax rate at 31 per cent. The tax increase has drawn criticism from parts of the banking sector. JP Morgan said the move 'singles out' the industry and 'lacks principle', while Lloyds finance chief William Chalmers called the additional taxes 'unhelpful to achieving… UK growth or international competitiveness'.
The Office for Budget Responsibility (OBR) warned the tax hike will lose around £190m in receipts as some banks are assumed to move profits out of the UK in response, adding that the total consequence is 'uncertain'. Revenue from the tax has been earmarked to fund a plan to pay 20 million households £100 to help with energy bills.
The FPC is due to release its Financial Stability Report in November, which will serve as a primary catalyst for driving structural updates to UK banking regulation.
Analysis
Why This Matters
- The letter signals a potential shift in UK banking regulation, which could affect lending, mortgage availability, and the competitiveness of the UK financial sector.
- The tax hike and deregulation push come at a time when the government is using bank levies to fund household energy support, tying banking policy to broader economic and social priorities.
- The outcome of these reforms will influence how banks operate in the UK, potentially impacting consumers through changes in borrowing costs and access to credit.
Background
In the UK, the Chancellor is required to write annually to the Financial Policy Committee to set out the government's economic policy and issue a formal remit. This letter follows the Budget, where Healey doubled the banking surcharge, sparking criticism from some banks and warnings from the OBR about potential profit shifting and reduced tax receipts. The letter directs the FPC to balance its stability mandate with support for economic growth.
Key Perspectives
- Chancellor John Healey: argues that regulation should be internationally competitive, promote competition, and support investment, and calls for faster reform of capital rules and borrowing caps.
- JP Morgan: says the tax increase 'singles out' the industry and 'lacks principle'.
- Lloyds finance chief William Chalmers: calls the additional taxes 'unhelpful to achieving UK growth or international competitiveness'.
- Office for Budget Responsibility: warns the tax hike could lose around £190m in receipts as some banks move profits out of the UK.
What to Watch
- The FPC's Financial Stability Report in November, which is expected to outline specific regulatory changes.
- Any further reaction from banks and industry groups to the tax increase and the Chancellor's deregulation push.
- Whether the OBR's concerns about profit shifting and lost receipts materialise, affecting the expected £1.5bn revenue.
Checked
12 claims in this story checked against 1 source: 11 supported.
Show each claim
- SupportedHeadline: Healey told the Bank of England to loosen banking rules after the tax hike.City AM: “Healey tells Bailey to loosen UK banking regulation after tax hike.”
- SupportedHealey urged the FPC to make changes “as quickly as possible”.City AM: “John Healey has told Bank of England governor Andrew Bailey to loosen banking regulation “as quickly as possible” after the government raised taxes on the sector in the Budget.”
- SupportedHealey described the regulatory framework as needing to be internationally competitive, promote competition and support investment in the UK economy.City AM: ““It is crucial that our regulatory framework is internationally competitive, promotes competition and acts to support, rather than unduly constrain, investment in the UK economy,” Healey wrote.”
- SupportedHealey said he looked forward to the committee delivering reforms quickly and expected the next review stage to propose addressing overlaps in capital requirements related to domestic exposures.City AM: ““I look forward to the committee delivering these reforms as quickly as possible, and I expect the next stage of the review to deliver further proposals, in particular to address overlaps identified in capital requirements related to domestic exposures,” Healey said.”
- Partly supportedThe annual letter is a statutory requirement.City AM: “The Chancellor is required to write to the FPC every year to define the government’s economic policy and issue formal remit and recommendations.”
- SupportedThe government doubled the UK banking surcharge to six per cent in the Budget.City AM: “It comes after Healey doubled the UK banking surcharge in Wednesday’s Budget to six per cent”
- SupportedThe surcharge increase is expected to raise an additional £1.5bn.City AM: “which is expected to raise an additional £1.5bn from the sector.”
- SupportedThe tax hike will last 15 months.City AM: “The tax hike will last 15 months”
- SupportedThe tax hike will set banks’ effective corporation tax rate at 31 per cent.City AM: “and will set banks’ effective corporation tax rate at 31 per cent.”
- SupportedJP Morgan said the move “singles out” the industry and “lacks principle”.City AM: “JP Morgan said the move “singles out” the industry and “ lacks principle ”.”
- SupportedLloyds finance chief William Chalmers called the additional taxes “unhelpful to achieving… UK growth or international competitiveness”.City AM: “Lloyds finance chief William Chalmers said following the bank’s third-quarter update that additional taxes were “unhelpful to achieving… UK growth or international competitiveness”.”
- SupportedThe OBR warned the tax hike could reduce receipts by around £190m as some banks are assumed to move profits out of the UK, and said the total consequence is uncertain.City AM: “The Office for Budget Responsibility (OBR) warned the tax hike will lose around £190m in receipts with some banks assumed to move profits out of the UK in response to the higher rate. The watchdog added the total consequence is “uncertain”.”