Battered by the financial crisis and pandemic, Britain has lost its culture of risk-taking. In the fourth and final part of a special election series, The Telegraph examines how this has affected the economy and whether Labour can bring swashbuckling back to the City.
Not long ago, Sir Keir Starmer campaigned on a manifesto that had little good to say about big business.
“The big polluters, financial speculators and corporate tax-dodgers have had a free ride for too long,” Labour’s 2019 manifesto read.
While small companies may have cheered this sentiment, anyone too large stood to be hammered.
“The upper echelons of corporate Britain have been corrupted by a culture in which the long-term health of a company is sacrificed for a quick buck for a few,” the party thundered under Jeremy Corbyn’s leadership.
Sir Keir has sought to distance himself from that language and reassure the City he can be trusted.
It has proven tricky. Put on the spot in TV debates, the leader of the opposition awkwardly said that Mr Corbyn would have been a better prime minister than Boris Johnson.
Labour’s manifesto this time around is a lot warmer towards the City of London.
“Financial services are one of Britain’s greatest success stories,” Labour now claims.
It is part of a campaign to show the party is no longer hostile to the wealth-generating, tax-paying industries on which workers, the wider economy and public finances all rely.
Shadow ministers have hosted breakfast meetings with bosses. Labour has appointed financial luminaries such as Mark Carney to work out how to harness the City of London’s firepower to the party’s ends. And both shadow chancellor Rachel Reeves and Sir Keir have sought to channel the spirit of New Labour when it comes to wealth creation.
Executives appreciate the effort – they are grateful to have at least some familiarity with the key players in the likely next government.
But the key question is whether a friendlier atmosphere will turn into the kind of policy changes that could unleash investment and risk-taking, which in turn power the economic growth Labour so sorely wants and needs.
“In private conversations I get the impression regulators think they’re going to get an easier ride under Labour,” says one leading voice in the City.
“I think they are both right and wrong. Labour does have it hard-wired into their DNA to focus on consumer and retail issues. So I think they will back the regulators on that.
“But where I think the regulators are mistaken is if they think that Labour will go easier on them on competitiveness and economic growth. Because I think Labour will come in and will drive as hard as it can for growth.”
But is the lawyerly Sir Keir really the leader Britain needs to bring back swashbuckling in the City?
Reviving risk taking would certainly be popular in the Square Mile. Much as the Conservatives trade on their historic position as the party of business, the executive class have had plenty to complain about after the last 14 years, first under the Coalition then the Tories alone.
What began with a “red tape challenge” to slash the regulatory burden has become something quite different.
The Tories have in fact overseen a blizzard of new rules: from bank capital requirements to unnecessary form filling and a proliferation of quangos and quasi-governmental bodies.
Painful new taxes came in under the Conservatives. The bank levy rakes in around £1.5bn per year for the Exchequer. The bank surcharge, introduced to stop lenders benefitting from cuts to corporation tax, brought in £2.5bn in 2022-23, though that haul is falling now that corporation tax has been whacked back up again.
Matthew Lesh at the Institute of Economic Affairs says this all pushes up the cost of capital in the City, which hits the real economy.
“The result you are going to have is less economic growth, lower productivity, lower wages and higher prices,” he says.
Labour promises in its manifesto to “create the conditions to support innovation and growth in the sector, through supporting new technology, including Open Banking and Open Finance and ensuring a pro-innovation regulatory framework”.
It certainly sounds optimistic. Yet cutting red tape has not been the party’s natural preference historically, so the question is whether or not warm words will be matched with action.
Many believe Labour does want to stir things up but will struggle.
The Telegraph has spoken to a dozen people who have met party officials over the past couple of years, as well as other leading City voices. They collectively believe that those who are hoping for a sea change under Labour are likely to be disappointed.
Lord O’Neill, who has served as a Treasury minister and advised Labour on its start-ups strategy, warns that the government cannot legislate for growth.
“Anything that tries to force investors to artificially do something that the fundamentals don’t support could create a new performance problem,” he says.
Labour is “very definitely” listening, adds Lord O’Neill, even though the party may not have the financial firepower to match some of its bold ideas.
Cutting red tape ... while dreaming up more
One of Labour’s ideas is to give the British Business Bank a bigger role in investment and open access to government contracts to small and medium-sized businesses.
It has also promised to speed up planning for gigafactories, digital infrastructure and laboratories – examples of the real world assets which the City wants to finance, if only the rules would let businesses get building.
Yet there are also big promises for more regulation, including on ESG, the environmental, social and governance campaigns beloved of political activists.
“Labour will make the UK the green finance capital of the world, mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5C goal of the Paris Agreement,” the party says.
Lesh warns: “This is another huge regulatory cost on institutions.”
Other industries face more red tape too, with a pledge for “much tougher regulation” of energy.
A policy to “work with the private sector, including banks and building societies, to provide further private finance to accelerate home upgrades and low carbon heating” sounds like a new plan to tell banks what to do.
The party also wants to create a new Regulatory Innovation Office, which will “help regulators update regulation, speed up approval timelines, and co-ordinate issues that span existing boundaries,” the party has pledged.
While this may help to streamline rules, a department called “Regulatory Innovation” may well find itself dreaming up new red tape.
Lesh adds: “Regulators themselves are constantly pumping out codes of conduct and guidance and consultations. It is really very heavy handed.”
Civil service enablers
Some warn that the UK’s safety-first culture is embedded at the heart of Whitehall. It means that Labour’s traditional instincts to regulate could be enabled by civil servants keen to draw up new rules.
“The civil service is designed to eliminate the risk of the Government having a mishap that ends up in the press,” says the leader of one private sector company who works with civil servants each week. “And that is a fundamental problem. The majority want to make the country better, but we’ve slipped into a system where everybody just worries about ministers putting their foot in it.”
James Palmer, a senior partner at Herbert Smith Freehills, suggests a big Labour majority may at least usher in more stability, which would be beneficial for the City. He says: “The ministerial churn we have had in recent years has been a disaster for long term thinking.”
Anne Glover, chief executive at Amadeus Capital Partners, a venture capital business that has invested in close to 200 companies, believes Labour is listening.
Glover, who was one of 10 City advisers on the party’s review of the Square Mile, says: “[There is an] intellectual understanding of the importance of entrepreneurship from growth, absolutely.”
However, Glover is more disappointed with the party’s desire to close what it has branded a “carried interest tax loophole”.
Under current rules, instead of receiving a salary or bonus, private equity executives and venture capital investors can take a stake in the funds they manage. This allows private equity fund managers to pay only 28pc tax on their income because any profits are treated as capital gains instead of income.
Labour claims this is a loophole and wants to bring the taxation into line with income tax.
Glover says the reward reflects the risk these managers take over an extended period of time.
Labour believes it will raise more than £500m extra per year by the end of the decade from around 2,000 people who benefit from current legislation.
But Glover warns the policy is likely to cost the Exchequer by deterring investment, leaving no money to pay for the mental health staff the money was supposed to fund.
“I would predict they would lose as much in lost activity because the private equity guys can move. They function globally, they’ll just go live somewhere else.”
Glover herself says the policy would damage her business in a different way. As her focus is on UK start-ups, she wouldn’t be able to move jurisdiction. However, the crackdown would lead the venture capitalists of the future to make their money doing something else, she warns. That would mean less funding for innovative businesses.
“It’s a long-term consequence, not a short-term one. You’ll just attract less talent into the business,” she says.
Labour needs to do more to show it really wants to let financial services boost growth.
Yet when asked to put forward a shadow cabinet minister to explain why Sir Keir, a leader with a background in the law and the public sector rather than business, is the right candidate to free the City to grow again, the party declined.
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