Cover feature: What financial services needs from the new government

The principle, ‘First do no harm,’ falsely identified as the Hippocratic Oath, has long been a key tenet of the medical profession. But these days it seems to apply to politics as well.

This could be nostalgia clouding the memory, but it feels like there was a time when we had high expectations of government — not just to manage things competently but also to effect meaningful change in our lives.

But the past few years have taken an axe to that root. Brexit, Partygate and the catastrophic Mini-Budget of 2022, among other things, have collapsed faith in politicians whose reputation was already in the dustbin after the 2009 expenses scandal.

The appetite within the financial services sector is for a steady hand on the tiller — a ‘period of calm and consistency’, as numerous advisers have told me

Nowhere was this more apparent than in the 2024 general election campaign, now thankfully concluded. More than anything, it revealed a widespread distrust in the political process and a lack of enthusiasm in the party leaders.

In short, no one believes what anyone says and no one thinks anyone has the answers.

In such circumstances, we come back to the ‘do no harm’ principle. Instead of grandiose projects or constant chopping and changing, the appetite within the financial services sector is for a steady hand on the tiller — a ‘period of calm and consistency’, as numerous advisers have told me.

In that spirit, we’ve picked four areas that would most benefit from reform: regulation, tax, Isas and pensions. We have spoken to experts in each case and identified the low-hanging fruit that is ripe for picking. Then we have put forward some proposals that should be on the shopping list of the new government.

To quote former PM John Major, it is time to go back to basics.

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REGULATION

Momodou Musa Touray

Regulation is the lifeblood of the UK financial services industry. It ensures the safety of the financial system, promotes growth and competition, and protects consumers.

“The City and the financial services industry can cope with regulation,” says Steve Webb, a former pensions minister who is now a consultant at Lane Clark & Peacock.

We need to relax the rules. There is so much we could do to help people get better outcomes, short of advice

“[The industry] expects regulation. What it struggles with is uncertainty, unpredictability and lack of notice.”

Webb regards artificial intelligence (AI) as one of the key regulatory challenges for the next government. This is because regulators tend to be too slow to keep up with the fast-changing pace of technology.

“If I think about my experience as a minister, it takes about three years to get a law through from consulting to parliament,” says Webb. “AI will have changed beyond recognition in that timetable.

“So, how do you have regulation that’s up to speed with today’s and tomorrow’s technology development, where regulators themselves just don’t work to those timetables?

The next government has a once-in-a-lifetime opportunity to fundamentally change how we deal with the advice gap

“Also, to be honest, the best people in AI are not going to go and work for a regulator.”

For its part, Labour has pledged better regulation of financial services. It says it would cut some “excessively procedural rules” in the Financial Conduct Authority’s 10,000-page regulatory handbook.

It would also scrap overlapping rules set by the FCA, the Bank of England and the Competition & Markets Authority.

Speaking at a conference in June, shadow chancellor Rachel Reeves told City bosses: “It is important to have a proper review to make sure that the rules and regulations we’ve got are fit for purpose and don’t cut across each other.

At the moment, people are not getting the help they need

“It’s about having smart and sensible regulation that works for consumers and also works for the sector.”

Labour has also pledged to create a Regulatory Innovation Office, which would “improve accountability and promote innovation in regulation across sectors”. However, the party will need time to turn its pledges into workable policies.

The reason for this, according to Webb, is that “opposition parties have almost no capacity to develop detailed policy. When you’re in opposition, your single focus is getting elected”.

On top of this, politicians usually underestimate the costs and challenges facing a new government.

[The industry] expects regulation. What it struggles with is uncertainty, unpredictability and lack of notice

“It does cost a lot to change things, to change IT [systems], to respond to regulatory change,” adds Webb. “The more the new government can give a clear sense of direction and strategy, and one it doesn’t keep mucking about with, the better.”

Proposal:

Abrdn head of savings policy Alastair Black says whoever forms the next government has “a once-in-a-lifetime opportunity to fundamentally change how we deal with the advice gap”.

He wants to see concrete actions in terms of legislation around the Advice Guidance Boundary Review, on which the FCA and the Treasury consulted the sector in February, receiving feedback on their landmark review.

How do you have regulation that’s up to speed with today’s and tomorrow’s technology development?

“At the moment, people are not getting the help they need,” says Black. “And that discussion paper was a big step forward in terms of both targeted support and simplified advice.

“The call [to the FCA and the Treasury, under the new government] would be, ‘You have come up with some good ideas and you have had the feedback, so let’s just get it to the next stage.’”

Webb agrees: “We need to relax the rules because there is so much we could do to help people get better outcomes, short of advice, and providers are just not willing to go there because it’s too risky.”

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IHT and CGT

Dan Cooper

As US Founding Father Benjamin Franklin famously wrote in a letter to French scientist Jean-Baptiste Le Roy in 1789: “In this world, nothing can be said to be certain, except death and taxes.”

This rather sombre message still holds true today, of course, but how different could UK taxation look under the new government?

A fairer and less complicated system would be to raise the nil-rate band to £500,000

The build-up to the general election was dominated by speculation about two controversial and often divisive taxes: inheritance tax (IHT) and capital gains tax (CGT).

IHT is a topic that seems to be on everyone’s lips. There is clearly an opportunity for reform, with speculation growing over the past 12 months that it could be abolished.

However, given it is such a money spinner for the Treasury — last year the government body collected a record £7.5bn in IHT receipts alone — such a bold move seems unlikely. Indeed, that figure is predicted to rise to £9.5bn by the end of 2028/29 as ‘Babyboomer’ wealth is passed down the generations.

So far, Labour has not committed to any changes, but Quilter Cheviot chartered financial planner Rosie Hooper thinks something needs to be done to “change what is a creaking system”.

She suggests that lowering the IHT tax rate from 40% to 30% could help alleviate the tax burden.

With an ageing population and increasing childlessness, the RNRB’s exclusionary nature becomes ever more problematic

According to the Institute for Fiscal Studies (IFS), “There is near-universal agreement that inheritance tax in its current form needs reform, but no consensus about what that reform should be.”

Another form of taxation that has been subject to much scrutiny in recent months is CGT. There has long been debate as to whether CGT rates should be closer to or aligned with income tax.

Evelyn Partners managing director of corporate affairs Jason Hollands says: “Capital gains are irregular, unpredictable and involve the commitment of capital and the taking of risks.

“This is why, historically, capital gains have been taxed at lower rates than income.”

Something needs to be done to change what is a creaking system

Hollands says high rates of CGT could be a threat to overall levels of investment in the economy.

“Even the threat could see more small and medium-sized business owners rush to sell up to avoid paying big CGT bills on the disposal of their assets. Higher CGT can act as a disincentive to invest, since the taxman will take more of the returns while the investor takes all the risk.”

Proposal:

A good starting point for IHT would be to look at the residence nil-rate band (RNRB).

Quilter tax and financial planning expert Shaun Moore describes the RNRB, currently set at £175,000, as “fiendishly complicated”.

“While a well-meaning policy, [it] excludes a significant demographic, especially the growing number of elderly individuals with children.

“With an ageing population and increasing childlessness, the RNRB’s exclusionary nature becomes ever more problematic.”

A “fairer and less complicated system”, he says, would be to raise the nil-rate band — which has been set at £325,000 since 2009 and is currently frozen until 2028 — to £500,000. His view is shared by the IFS.

Capital gains are irregular, unpredictable and involve the commitment of capital and the taking of risks

“This would be better aligned with the changing demographics and social structures of the country,” adds Moore.

In terms of first steps, increasing the annual gifting allowance from £3,000 could help incentivise people to gift larger sums of money during their lifetime, while lowering the IHT tax rate from 40% to 30% could help alleviate the tax burden, as proposed by Hooper.

CGT rates, meanwhile, should either be kept unchanged or even be cut to encourage continued investment in UK markets.

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ISAS

Tom Browne

Everyone knows the joke about the traveller in Ireland who stops to ask a farmer for directions to Carrickfergus. After pondering the request for a while, the farmer replies, “Well, if I were you, I wouldn’t be starting from here.”

Welcome to the world of Isas.

Since their introduction in 1999, individual savings accounts (Isas) have been a neat, tax-efficient way for individuals to save and invest. Such has been their popularity that they have spawned numerous variants over the years.

It is better to broaden the Isa market than to add complexities

We’ve seen the emergence of Cash Isas, Stocks and Shares Isas, Innovative Finance Isas, Lifetime Isas, Junior Isas and Help to Buy Isas. This culminated in last year’s proposed UK Isa, a widely reviled concept that seems to have gone rotten before it could ripen.

Advisers will be familiar with the features of these different Isas. But the ever-expanding menu is overwhelming for investors.

“Behavioural economics and our own survey results show that too much choice disengages people,” says AJ Bell’s Tom Selby.

The result is that potential investors avoid making a decision altogether.

To address this problem, the industry has long advocated some form of simplification. But can we get there from here?

One of the causes of Isa proliferation has been a tendency to align them with broader economic goals. The UK Isa is a case in point. As Selby points out, the Conservative government, while theoretically on board with simplification, seized on the concept of the UK Isa in its “desperation to boost investment”.

We should have clear disclosures on all products, showing how much is invested in the UK

Such an approach is doubly misguided. First, says Selby, such initiatives won’t lead to the desired growth — rather, they are attempts to “achieve policy goals without much money”, instead of long-term investment strategies. Second, the UK Isa serves to further complicate the Isa landscape, which deters investors.

Of course, no government intended this complexity. It’s a bit like a 12-storey building that has been constructed floor by floor over time — tinkering with the foundations now is fraught with danger.

Aegon’s Steven Cameron draws a parallel with pensions.

“The problem with pensions is piecemeal changes and new rules. It’s the same with Isas. Every new variant makes it harder to simplify because changes cause some people to suffer while others gain. This creates a web of regulation that’s hard to untangle.”

Cameron suggests a simple reform such as increasing the overall Isa allowance from £20,000 to £25,000, rather than just adding £5,000 to UK Isas for domestic investment.

“Additionally,” he says, “we should have clear disclosures on all products, showing how much is invested in the UK. For example, an indicator showing if it is 10% or 25% of your money.”

If we were starting from scratch, no one would design the current system

Selby goes a step further, advocating a merger of all existing Isas into a single product. This would allow people to choose their investments within one Isa wrapper, returning them to their “original, simple rules”.

Such a system, Selby points out, would be like pension products, where individuals can invest in various assets under a single account. This approach would make transitioning between different types of investments easier and more intuitive.

Selby acknowledges that the Lifetime Isa, given its unique features, may have to be exempted from this process until a comprehensive solution is found. But that’s no reason for inaction.

As Cameron says, if the goal is to promote economic growth and drive an investment culture, “it is better to broaden the Isa market than to add complexities”.

Proposal:

There is a clear opportunity for the new government to commit to comprehensive reform, something both major political parties have previously supported.

Behavioural economics and our own survey results show that too much choice disengages people

Consolidating the different Isas and equalising the allowance limit could remove barriers to long-term investment and foster a healthier economic environment.

In short, simplification is not only possible but necessary.

“If we were starting from scratch, no one would design the current system,” Selby concludes.

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Pensions

Lois Vallely

The UK pensions landscape is an intricate web of legacy government policies and reforms.

As the new government moves into Downing Street, many questions still hang over the sector. How do we get more pension money invested in the UK economy? Is the state-pension triple lock sustainable? Will pensions dashboards arrive in 2026, and what exactly will they look like? How do we get people saving more into their pension pots?

The triple lock was never intended as a long-term thing. Nobody set a plan or ambition

The trouble is that previous governments have made a series of tactical interventions with no long-term view.

One of the big challenges, says Royal London director of policy and communications Jamie Jenkins, is getting pension funds to invest in the UK.

Former administrations have introduced measures to encourage them to do this. These include the long-term asset fund, the removal of performance fees from the charge cap to incentivise illiquid investments, and the Mansion House Compact — a voluntary agreement by providers to commit 5% to unlisted equities.

“But,” says Jenkins, “what we haven’t had is a strategy and a roadmap for how, over the long term, we square this circle. How do we make this work for members and the economy?”

I would be keen for dashboards to be prioritised. We’re now so far advanced that success is in sight

There are also concerns that citizens are not saving enough to fund their retirement. In the ongoing cost-of-living crisis, saving for the future does not necessarily take priority.

Auto-enrolment, which was introduced in 2012, is widely regarded as a success. After all, 79% of all UK employees now contribute to a workplace pension — an increase of 47%.

However, there is a danger that the mechanism can cause employees to disengage from their pension because they assume that the amount they automatically pay in is enough.

Currently, the minimum auto-enrolment contribution is 8%. Phoenix Group retirement savings director Mike Ambery wants to see this increased to 12%.

A 2017 auto-enrolment review by the then Conservative government recommended that the minimum age of participants should be reduced to 18 from its existing level of 22, and that the low qualifying earnings threshold should be removed, but these have yet to be implemented.

It is not just private pensions that need to be looked at. Questions still hang over the state-pension triple lock, and whether it is sustainable in the long term — a contentious question that previous governments have ignored.

“The triple lock was never intended as a long-term thing,” says Jenkins. “It was intended as a mechanism that would ratchet up the state pension to something more compatible with [those of] our international peers, but with no target.

What we haven’t had is a strategy and a roadmap for how, over the long term, we square this circle

“Nobody set a plan or ambition, and that’s the bit that’s been missing. Instead, we’ve had this annual debate about the triple lock.”

Then there are the pensions ‘dashboards’. Originally planned to launch in 2019, the programme has been pushed back time and again, and is now set for 2026.

So, what should the new government do to improve the pensions space?

Proposal:

As a first step, the new government needs to liaise with the pensions industry to fully understand the remaining challenges and work out how to address them.

The consensus is that we need an in-depth review of the entire pensions landscape. The stability of a new, five-year parliamentary term should enable this.

A review is something Labour set out in its manifesto, but details on how it would be conducted and what it would include were scant. Committing to keep the timeline for pensions dashboards on its current trajectory would be a good place to start.

One of the big challenges is getting pension funds to invest in the UK

“We’re now so far advanced that success is in sight. Let’s not lose that,” says Aegon UK public affairs director Steven Cameron.

“I would be keen for dashboards to be prioritised.”

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A version of this article featured in the July/August 2024 edition of Money Marketing. 

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