All change: What will a Labour government mean for financial services?

Putting on our best BBC newsreader voice: the votes have been counted and verified and we can now reveal that Labour have won the UK general election. Downing Street will soon welcome Sir Keir Starmer, but will this arrival be a welcome sight for those in the financial services, pensions and accounting sectors and what does it mean for directors and officers? We look below at what a Labour government might mean for the industry.

It's been 19 years since Labour last won a general election, but we can't imagine it will be a surprise to anyone that Labour have won this time around – ever since the general election was announced on that rainy day in May, the Conservatives have been trailing behind in the polls. But what impact are we likely to see and what changes can we expect?  We look below at Labour's plans in respect of: (1) Financial Services regulation; (2) responsibilities for directors and officers; (3) impact on pensions; and (4) potential audit reform.

Financial Services regulation

It would seem that certain areas of the industry are going to be less of a focus for Labour than others. For example, there is lots of discussion in respect of accountants and pensions (perhaps because pensions attract headlines / win votes), but the plans for regulation of the financial services sector are somewhat vague. Perhaps with the implementation of the FCA's Consumer Duty last year, the new government consider there's enough to be getting on with already. 

Just because widespread legislative change isn’t expected, it doesn’t mean there won't be any changes at all. It's likely that one of the biggest focuses will be on climate change. Not something that the average individual would consider would be massively relevant to the regulation of the financial services sector, but it's clear that the new government considers that the financial services industry has a "major role" to play in mobilising private capital to act against climate change. Indeed, the FCA has already implemented the anti-greenwashing rule, which requires firms to ensure their sustainability claims are fair, clear and not mis-leading. The rule will be extended to portfolio managers later this year, to ensure that portfolios will have a specific sustainability objective included. 

With these existing plans in place, Labour's aim to make the UK the green finance capital of the world, may not be as bold a statement as you'd initially think. Banks, asset managers, pension funds and insurers will all be expected to develop and implement credible plans to align with the 1.5 degrees goal from the Paris Agreement. Impacted FCA regulated entities will need to be ready for such changes – it's not clear what penalties may apply for failure to comply but given it's a clear direction of travel for the new government, it's better to be prepared. 
Labour has already indicated its support for the FCA's proposal to "name and shame" those under investigation (relevant to D&Os are well) and so we may see more in this area.

Of course, as mentioned above, it is clear the FCA's Consumer Duty is the biggest overhaul of financial services in years and perhaps, at least initially, most of the focus should rightly be on ensuring that the duty works effectively. The Consumer Duty will be coming into force for closed products from 31 July 2024 and if you thought the first year of the Consumer Duty was busy, it shows no signs of slowing into its second. 

Pensions

Labour's manifesto is light when it comes to its ambitions for the pension industry. Instead, Labour promises to undertake a "review of the pension landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets".  But what can we learn from what Labour does say in its manifesto and also what it has talked about but is not referred to in its manifesto.    

Labour has committed to retaining the Conservative's triple lock on the State Pension. This means that publicly funded pensions will continue to increase by the level of earnings, inflation or 2.5% - whichever is highest. The triple lock has become increasingly expensive to fund in recent years.  With inflation at its lowest level for 3 years, Labour's plan seems uncontroversial in the immediate period. However, if inflation begins to rise again, the plans will likely come under scrutiny.

Reform of the industry has also been suggested, however what this entails is unclear. The manifesto does provide a clear commitment to "act to increase investment from pension funds in UK markets" and to adopt the Conservative reforms for consolidation in the pension market.  There is also a reference in the context of climate change for pension funds (as well as banks, asset managers and insurers) to "develop and implement credible transition plans that align with the 15C goal of the Paris Agreement" (as already noted above) – and so perhaps an onus on 'green' investments for pension funds as well – but the manifesto sets out no plan for how that is to be achieved.

Outside of the Triple Lock, the manifesto does commit to implementing the Select Committee's 2021 recommendation to return the 'Investment Reserve Fund' back to the members of the Mineworker's Pension Scheme.  However, the manifesto is silent on whether it plans on compensating the WASPI Women following the UK Parliamentary and Health Service Ombudsman's landmark decision earlier this year calling for compensation for women affected by changes to state pension age.  It is also silent on the taxation of pensions including the lifetime allowance where Labour appear to have backed away from re-implementing the lifetime allowance.

The manifesto makes no suggestion of a fundamental shake-up of the pensions industry – whether tax or otherwise – the onus is on pension fund investments to stimulate growth and potentially assist in meeting 'green' targets – but a lot will depend on the review Labour intend to undertake and there is no timescale for that.

Labour's manifesto pledges are certainly diluted compared to some of the specific published commitments for the pension sector earlier this year; the manifesto is silent on Auto-Enrolment (albeit there may be a knock-on impact dependent on what Labour does more broadly with workers rights), the lifetime allowance, the pensions dashboard (with connection due in 2027) and the Mansion House reforms (save for endorsing investment in UK industries).  The fact the manifesto does not propose radical change is likely to be welcomed by the pension industry which has seen in the last 10 years the pension freedoms, changes to the tax system and the Pension Schemes Act 2021, coupled with large-scale corporate failures impacting pensions – Carillion and BHS.  If pensions take a "back burner" whilst Labour focuses elsewhere that might not be a bad thing.

Directors and Officers 

The Labour Government will no doubt try to change the current upwards trend in corporate insolvencies and director disqualifications with its promise to "kickstart economic growth". The Insolvency Service's recently published statistics identified high levels of corporate insolvencies for construction companies in particular so directors of these types of companies may welcome Labour's promise to "reform our planning rules" to build more "railways, roads, labs and 1.5 million homes".

We also expect that the new government may be influenced by public opinion regarding "corporate scandals" with the ongoing investigation into the workings at the Post Office and the recent successful wrongful trading claim against the former directors of BHS. This may lead to greater scrutiny of D&Os decision-making processes resulting in more onerous requirements than currently set out in the FRC's Corporate Governance Code Guidance. Labour has previously supported the FCA's plans to ‘name and shame’ those firms that are under investigation by the regulator at an early stage. Again, this may be an indication that D&Os will face increased regulatory scrutiny.

Labour's manifesto indicated that it wants to invest in green energy and to "invest in the industries for the future". A potentially more environmentally conscious Government may result in legislative changes that bring into focus D&Os' ESG considerations at board level. However, absent a fundamental change to the Companies Act it seems likely that derivative actions against D&Os for allegedly failing to adopt environmental policies will face the same hurdles as ClientEarth came up against in their unsuccessful claim against Shell.

The Labour manifesto also identified that it wanted to "grasp the opportunities of new technologies, with an AI sector plan…" D&Os will need to ensure that they carefully monitor the reliance they place on AI and technology for decision-making processes. D&Os also need to be mindful of falling into the trap of potential "AI-washing" type claims if they are seen to be overselling their company's technology credentials.

Auditors

 Following the high-profile collapses of businesses such as Thomas Cook, Carillion and Patisserie Valerie, there's been a long-standing desire for reform of the audit industry. Indeed, significant reforms, including the introduction of a new watchdog with enhanced powers, the Audit, Reporting and Governance Authority (ARGA), have been anticipated for a number of years now.  However, it became apparent late last year that these changes would not be implemented prior to a general election, much to the frustration of many in the industry. Now Labour has such a strong mandate, will they press ahead with audit reform, and if so in what form and on what timescale?  

There's a clear desire from Labour to improve transparency and accountability in the audit industry, and we anticipate that they will take forward significant reform measures. Labour's plans, as set out in its manifesto, include reforming "auditing and accounting standards to address conflicts of interest", to ensure that "audits provide a true and fair view of the company’s financial health". 

In the run up to the election, Labour made clear that audit will be amongst their priorities for a first term of government, and that the introduction of ARGA will be part of their plans.  This could see the dominance of the 'Big Four' eroded, with ARGA having a mandate to promote greater competition in the audit market, including by providing for 'challenger' accounting firms, outside the big four, to undertake part of the work on audits of the largest companies.  ARGA will also likely be given enhanced powers to promote and enforce audit standards and quality. 

The question is precisely when such reform will take place.  There appeared to be significant impetus for the introduction of ARGA in 2022, and indeed the Financial Reporting Council recruited heavily in anticipation of its transition to ARGA.  However, two years later, the reforms are still not in place, as they have been pushed aside by other priorities.  While Labour has indicated that audit reform will be among its priorities for a first term, this area will no doubt need to compete for parliamentary time with a great deal of other urgent priorities. Therefore, the precise timing of any reforms, and exactly what those reforms will look like, remains unclear for the moment.