Reeves Looks to Woo Bankers Wary of a Labour UK Takeover

(Bloomberg) -- Jeremy Hunt is due to use a high-profile speech to the financial community on July 11 to unveil a raft of City reforms to stem the flow of home-grown tech and fintech talent from listing overseas. But if opinion polls are correct, that Mansion House speech is now likely to be given by Rachel Reeves, expected to be Hunt’s successor as UK chancellor, if the opposition Labour Party wins the July 4 election.

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What she tells that audience could define the relationship between an incoming Labour government and the finance sector — which contributes 12% to economic output — for some time to come.

Reeves spent Tuesday reassuring business leaders that a Labour government represented economic “stability” and ruled out any new tax rises beyond those already announced. Earlier 121 business leaders and investors — though none from the UK's biggest companies — had signed a letter published in The Times newspaper backing the party led by Keir Starmer.

While many in business have abandoned their virulent dislike of Labour under its previous left-wing leader, Jeremy Corbyn, whose 2019 election promises included a commitment to nationalize large parts of the energy and railway industries, some remain suspicious. Despite denials from Labour, some executives fear the party may feel it has no choice but to impose windfall taxes on their businesses and measures to cut their personal wealth in order to raise revenues and fund public services.

There is also concern about how the first Labour government in 14 years — the party sits more than 20 points ahead in polling — might be received by the all-powerful bond markets, especially if Starmer doesn’t emerge as expected with an authoritative victory, leaving him vulnerable to pressure from his left-wing.

“The legacy of the past 14 years will weigh heavily on the next government,” said Benny Higgins, former chief executive of Tesco Bank and a signatory of the letter supporting Labour. “It will demand surefooted prioritizations and careful navigation. Keir Starmer and Labour are the only credible choice to pursue such a path.”

Many in the City remain angry with the Conservative Party over its role in Brexit, the political turmoil of having three prime ministers in two years and the blow to stability from former leader Liz Truss’s disastrous 2022 mini-Budget which caused chaos in the markets and damaged the UK’s reputation. Labour has capitalized by avoiding anything that might spook investors. Reeves, shadow chancellor since 2021, is central to that effort to woo the City.

If elected, however, there could be early flash points. Any indication that Labour is prepared to go further than the Conservatives in the City reforms under consideration that would force savers to put some of their money into UK assets, could provoke an early clash. Prime Minister Rishi Sunak backed away from the measure due to misgivings about directing where people invest, but supporters think it would be a powerful tool in boosting the UK stock market.

“I don’t think there will be an adverse market reaction if Labour wins,” said Howard Davies, former chairman of NatWest Group PLC who believes Labour will be given an opportunity to set out its strategy. “Markets will give them time. The first Budget will be key.”

Read More: Labour Not Looking at New Tax Raid on Banks to Balance Budget

Some executives who have helped Labour say the party is scrambling to get its policies ready, with some detailed work being done by consultancies. It’s a rapid learning curve for Labour, said one who worked on its financial services paper delivered in January.

Comparisons with 1997, when Labour swept to power in a landslide victory under Tony Blair, have multiplied in recent months. But Blair inherited a strong economy. If Labour wins in 2024, Starmer will take over a country saddled with a debt burden close to 100% of gross domestic product, high interest rates and low growth. Paul Johnson, director of the Institute for Fiscal Studies, has warned that whoever wins the election faces the greatest fiscal challenge of any UK government in 70 years, having to decide between spending cuts, tax rises or more borrowing.

Brief Honeymoon

That may cut short any honeymoon period for a new government. Reeves, who would be the first female UK chancellor, is likely to face intense pressure, one financier said. And if Labour sets out plans to borrow more money to invest, as some expect given its promise not to raise any additional taxes, then the bond markets could test Reeves, the person added, through higher yields fueled by fears of spiraling national debt.

How investors respond will be determined by the hard numbers in Labour’s plans, but also by how credible its ideas are for a fresh approach to public-private partnership. There is skepticism around its planned sovereign wealth fund — the National Wealth Fund — given how little public money is available to seed it. But several senior financiers including Amanda Blanc, chief executive officer of Aviva, the insurance group, are helping to model the fund. Others — such as FTSE 100 chairs Nigel Higgins at Barclays PLC, John Kingman at Legal & General Group PLC and Shriti Vadera at Prudential PLC advised on Labour’s financial services paper in January laying out six priorities, from international competitiveness to making the UK a hub for investment in green energy.

Labour is also considering reforms to state-owned entities including the British Business Bank, which was identified in a 2022 report for the party by former Goldman Sachs economist Jim O'Neill as having the potential to play a key role in helping UK start-ups grow.

Starmer and Reeves angered some in the City when they abandoned its £28 billion green investment pledge in February but that tension has subsided as investors judge that the party is serious about the environment.

Reeves’ message of “securonomics” — making economic strength the priority, which she first set out on a visit to Washington last year — has gone down well in the City, according to Simon French, chief economist at investment bank Panmure Gordon. But Reeves’ approach is only really a “baseline,” he added, Labour will need more ambitious ideas to address the country’s challenges.

The party’s commitment to the rights of workers is less of a worry for the finance industry than other sectors which might fear higher wages and a crack down on zero hours contracts. What did animate the sector was Labour’s plan to tax more of the profits known as carried interest that private equity dealmakers take from successful investments. Some estimates suggest the rate could rise from 28% to as high as 45%, reviving warnings about the potential impact of Labour’s policies, something which has dogged its relationship with business and finance in the past.

Those warnings are balanced with a view that alternatives to the UK are not that compelling, as London retains the best financial eco-system in Europe. Labour's signaling of its policy on carried interest has also given the private sector time to get used to it. Similarly with taxes in the UK at their highest level since 1948, Conservative attacks on Labour’s tax policies have been some what blunted.

Yet, despite assurances from Labour some executives still believe a windfall tax on banks remains a possibility, either as a one-off levy, or by cutting interest paid on reserves held at the Bank of England, they said. Labour sought to play down that risk this week, saying such measures were not on the cards.

Balancing the Books

Reeves scored a win with bankers earlier this year when she said she would not reintroduce a cap on their bonuses. But banks now want more changes to pay, including shortening the seven-year deferral of compensation for senior managers that was introduced after the financial crisis to reduce risk. That has been discussed with regulators and the Treasury, bankers said, but could be a pro-City pay measure too far for Labour.

Hunt’s desire to keep home-grown tech and fintech talent listed in the UK is largely echoed by Labour, providing some continuity.

But the Conservatives struggled over whether to force pension funds and the planned British ISA to put a slice of their savings into UK assets. The move could help boost liquidity and company valuations in London, but it would also narrow people’s choices. Labour might be more open to linking the tax benefits people receive in pensions and ISAs with an obligation to put a share of the money into UK assets, French said.

To help navigate these tricky questions, some financiers want Labour to bring in more business people as advisers and to ministerial roles, just as Blair and his successor Gordon Brown did. A number have identified the investment minister role as key. The shadow minister responsible for investment is the London MP, Rushanara Ali. But a heavyweight City figure could also be added by appointing them to the Lords. Labour didn’t comment on whether it has any plans to appoint anyone else to the role.

“Investors are crying out for predictability and clear channels of communication. A strong focus on investment right at the heart of government is an absolute necessity,” said Gerry Grimstone, a UK board veteran who fulfilled the investment minister role for former Prime Minister Boris Johnson. That person will be needed to help Labour navigate difficult issues, such as how to tread the line between attracting investment from areas such as the Gulf, while taking account of concerns about undue influence from countries such as China, he said.

If Starmer wins, Labour will inherit a country set on a new post-Brexit path, raising questions about what type of economy the UK wants to be in the long term, how to arrange democratic oversight of regulators and how to balance consumer protection and growth.

Under the Conservatives, a battle has been raging around these topics, with ministers pushing for a pro-competitiveness agenda while regulators have wanted to use independence from the European Union to raise safety standards over lending and insurance capitalization. After a series of clashes a truce has been declared.

As part of that ending of hostilities the UK’s Prudential Regulation Authority — which oversees the UK's biggest banks and insurers — was set to unveil a final set of post-financial crisis Basel capital standards for UK banks. It was expected to break from years of capital raising to emphasize appropriate risk-taking and growth, but has now been delayed. It will be for Labour to decide what to do if elected, along with making a call on whether to go ahead with Hunt's planned sale of about £2 billion of NatWest shares to the public, a move that was welcomed as a pro-investment measure.

Some in the City think Reeves may want to wait before stepping out in front of a City audience just seven days after the election, to give time for a full briefing from Treasury officials of how things look behind the scenes. But the dinner in the Lord Mayor's grand lodgings of the Mansion House might be a powerful way to show Labour means that it wants to do business with the City.

--With assistance from Swetha Gopinath, Loukia Gyftopoulou and William Shaw.

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