UK's Financial Services Sector Needs a Comprehensive Strategy to Regain its Competitive Edge

The UK's financial services sector, known as the City of London, has seen output decline since the millennium, particularly after Brexit. The industry is struggling to compete with other global financial centers. Chancellor Rachel Reeves has the opportunity to unveil a comprehensive strategy to foster growth and competitiveness. The plan should address the City's strengths and weaknesses, such as the high regulatory burden, and capitalize on its reputation as a trusted intermediary.

The UK's financial services sector, often referred to as the City of London, has experienced a decline in output since the millennium, with a significant drop following Brexit. The industry, once the crown jewel of the UK economy, is now struggling to compete with other global financial centers. Chancellor Rachel Reeves has the opportunity to unveil a comprehensive strategy to foster growth and competitiveness, addressing the City's strengths and weaknesses.

The City of London has traditionally been a leading global intermediary in wholesale finance, managing international capital flows and dispensing advice. However, the uncertainty engendered by Brexit and geopolitical tensions has led to a slow decline in its dominance. According to Reuters Breakingviews [1], the City has seen a shift in jobs, with many new positions in wholesale finance being created in other capitals. The UK's financial services sector now accounts for more than 12% of total UK tax receipts, highlighting the need for a strategic overhaul [1].

The regulatory burden on the City is one of the primary challenges. The Financial Conduct Authority (FCA) recognizes the issue and is working to reduce regulatory complexity and the administrative burden in wholesale markets. However, there is a need for a more nuanced approach that distinguishes between safeguards for domestic consumers and rules governing international activity [1]. The FCA has also been providing extra support for firms seeking approval to set up in the UK, particularly in the areas of wholesale, payments, and crypto assets [1].

Chancellor Reeves must also address the public's expectation of 100% protection from financial failures. It is crucial to set a clear tone that the public should not expect complete protection when things go wrong, and to provide unambiguous guidance to regulators about the degree of risk appetite acceptable in international and wholesale finance [1].

The UK should also consider a more standards-based regulatory approach, focusing on outputs rather than binary rules. This approach has proven effective in areas such as fixed income markets and the hedge fund industry, and could be beneficial in new areas such as artificial intelligence, green finance, and cryptocurrencies [1].

Moreover, the UK must ensure it remains attractive to the talented individuals required in a leading international financial center. The abolition of tax breaks for non-domiciled residents has led to many highly paid individuals leaving the UK. The government is reconsidering its decision to make these individuals' worldwide assets subject to inheritance tax, which could help retain talent [1].

The UK-EU relationship is also a critical factor. With the relationship undergoing a reset, the UK should explore opportunities for closer alignment in financial services. Both sides want to strengthen their capital markets and encourage productive investment by life insurance companies and pension funds. Dynamic alignment with EU standards could benefit both parties, despite potential accusations of squandering Brexit opportunities [1].

The latest figures from the Office for National Statistics (ONS) indicate that the economy shrank for the second month in a row, further emphasizing the need for a bold strategy. Financial services leaders are confident that Reeves' strategy will boost growth and attract foreign investment, with over 80% of leaders expressing confidence in the government's plans [2].

In conclusion, Chancellor Reeves has a pivotal opportunity to revitalize the City of London. A comprehensive strategy that addresses the regulatory burden, promotes a standards-based approach, retains talent, and explores EU alignment could help the UK's financial services sector regain its competitive edge. The success of this strategy will be crucial in steering the economy towards growth and maintaining the UK's influence in global finance.

References:
[1] https://www.reuters.com/commentary/breakingviews/guest-view-city-london-requires-strategy-2025-07-14/
[2] https://www.cityam.com/reeves-urged-for-bold-choices-at-mansion-house-as-growth-stalls/