And so it begins. On the 4th of July, the UK electorate cast their votes, which will almost certainly end the Conservative Party’s 14 years in government. Sir Keir Starmer and a Labour Party remade in his image will likely assume power after several tumultuous years in the political wilderness. With such a likely scenario of a Labour victory, it is worth examining how this could come about and what is at stake for the wider financial services and insurance industries.
Our Forecast
As previously alluded, our current base case scenario – a month ahead of the poll – is a Labour 70-seat majority. The forecast is underpinned by the overwhelming dissatisfaction with the Conservatives and Prime Minister Rishi Sunak but a less-than-ideal turnout of would-be Labour voters who are more motivated by kicking the Conservatives out rather than welcoming Starmer’s premiership.
Starmer is unlikely to have to worry about a hung parliament, but he will have to consider the left-wing camp inside the Labour party. This is a similar position the Conservative party was in following the Brexit vote, where a right-wing grouping had a significant role in the policy trajectory. A 70-seat majority would allow the left-wing camp to exert more influence over the more moderate Starmer, likely pushing policies away from the centre ground. Policy initiatives relating to the environment and social policy would certainly be flashpoints, but after over a decade out of government, much of these battles would be initially fought outside public view to prevent significant party breakdown.
Labour over-performance
We currently forecast that a best-case scenario for Labour grants the party an approximately 130-seat majority. This would be the second-largest majority of the 21st century. In this scenario, long-term conservative voters do not turn out due to chronic disenchantment with their party, support for the SNP collapses further, Starmer retakes the majority of so-called Red Wall seats, and constituencies in the commuter belt defect to Labour. This would let Starmer pursue his policies with little resistance. We find several of these factors relatively unlikely, largely due to demographic shifts in the Red Wall and other former Labour seats.
Conservative over-performance
Our least likely scenario is a Labour 40-seat majority, which would see the Conservatives significantly over-perform current polling and focus group data. In this scenario, low turnout, stronger-than-expected partisan tribalism, and the effects of new constituency boundaries would see Starmer stuck between a gloomy fiscal outlook and an empowered Labour Left.
The City
UK plc chief executives have largely signalled that they welcome the election, especially now that it will come earlier than expected, cutting short policy uncertainty and general instability. Many firms have already priced in a leadership change and have prepared accordingly. Additionally, Starmer offers a moderate premiership and is not expected to propose radical reforms at the expense of the City’s bottom line.
Labour officials have offered some welcome policy initiatives targeting the London insurance market. Firstly, Labour has signalled a commitment to decreasing the regulatory burden placed upon the sector, pledging to review some regulations administered by the FCA. Specific policies include “measuring financial services regulators’ performance against a secondary objective on growth and competitiveness.” Secondly, Labour has stated that the London market is key to achieving its net zero goals and broader green transition strategy. This includes allowing insurance groups and other financial firms to use green-covered bonds to encourage private investment in green infrastructure. Finally, Labour has suggested it will attempt to reform regulations relating to the EU’s Solvency II, hoping to ease capital requirements so that they can be invested in venture capital and small-cap securities. Additional policies will likely include increased UK-EU financial services agreements, especially around green investing.
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