The embattled UK government is expected to go faster and further with reforms to the financial sector in a Big Bang 2.0, after a bruising reaction to its first ‘mini’ Budget, in a bid to deliver on its promised 2.5% annual growth target over the next five years.

One large potential source of investment capital identified by the government post-Brexit is held by insurance companies under EU-originating Solvency II rules. A Treasury consultation, closed on 21 July, proposed Solvency II reform that could result in a release of 10-15% of the capital held by life insurers. It proposed reducing the risk margin for long term life insurers by 60-70%.

The Treasury is also considering the case for reform to the fundamental spread (FS) used to calculate the matching adjustment (MA) used by insurers and reinsurers to represent the expected cost of default and downgrade of assets which back providers’ annuity business, and that firms are therefore exposed to.

Growth Plan 2022 also promised to repeal EU law for financial services, replacing it with “rules tailor-made for the UK” including “scrapping” Solvency II to “free up billions of pounds for investment”.

Meanwhile, the government announced on 12 October a new, never previously combined post: minister for pensions and growth. Pegging growth policy to pensions may mean that reforms and regulatory changes to pension scheme investment rules are on their way.

The September Budget already stated an intention to relax the auto-enrolment default fund charge cap where defined contribution pension investments within the default fund come with a ‘well-designed’ performance fee.

In this case, pension savers may benefit from higher potential investment returns in hitherto prohibitively expensive investments, while, according to the Growth Plan, “providing clarity for institutional investors to help unlock investment into the UK's most innovative businesses and productive assets”.

Fintech could be another preferred target for Big Bang 2.0 investment. In April 2021, then Chancellor Rishi Sunak said his plan was to boost growing fintechs and push the boundaries of digital finance to “cement the UK’s position as the world’s pre-eminent financial centre”. The frenetic personnel and policy change in the 18 months since these statements doesn’t necessarily detract from their future validity.

However, amid the disastrous fallout from the September Budget, some have suggested the government is in no position to see through these lightning reforms. Whether all or any of the mooted financial services reforms are achievable fast enough to impact the government’s 2.5% a year growth target ‘over the medium term’, assumed to be five years, is highly questionable.

Politically a Truss government may not survive that long. In any case, the target is highly ambitious given the outlook. Britain’s economy shrank by 0.3% in August from July. In March, the Office for Budget Responsibility forecast growth of 3.8% for 2022 and 1.8% for 2023, while Bank of England forecasts suggest the economy is already in a recession.

Thomas Pugh, economist at RSM UK said it will be “extremely difficult” to raise trend growth. Simon Fitzpatrick, head of public affairs at consultancy Cicero Group, had an even more brutal assessment: “The 2.5% growth target set by the chancellor feels a distant prospect after the economic turmoil of the mini Budget,” he said. “Whether a now-politically damaged Kwarteng has the scope to unleash a truly radical reform package for financial services is dubious."

Chancellor Kwasi Kwarteng’s Growth Plan 2022 unveiled on 23 September, although lacking in detail, stated that the financial services sector will be “at the heart of the government’s programme for driving growth across the whole economy”.

Market watchers expect this will mean accelerating and expanding on reforms already underway with the Financial Services and Market Bill, which is currently moving through Parliament. The Bill provides a mechanism to replace EU regulations and a new directive to force British regulators to consider the City’s growth and competitiveness.

But they warn that a radical programme of financial services regulation could leave the government at loggerheads with the European Union, at risk of laying the foundations of a future financial crisis – and still fall far short of the changes necessary to hit the 2.5% annual growth target.

“There are clear benefits to lighter and particularly smarter regulation,” says Professor Evarist Stoja, Professor of Finance at the University of Bristol. “However, smart regulation is notoriously challenging and getting it right is a very subtle trade-off between companies being uncompetitive, and undermining the long-term health of the industry.”