Following the conclusion of the parliamentary stage of the Conservative Party’s leadership election, we have pulled together the below briefing on what to expect over the summer. We have also included the likely implications of both a Truss and Sunak victory on investment managers. It’s also worth noting that Public First is tracking the policy commitments made by candidates in this helpful spreadsheet.
Briefing on the Conservative Party leadership contest
Following a feisty couple of weeks of campaigning, Conservative MPs have now arrived at their two preferred candidates to succeed Boris Johnson as Party Leader and Prime Minister – Rishi Sunak and Liz Truss. The result is due to be announced on 5 September and the winner will enter Downing Street the following day. The immediate priority will then be appointing their Cabinet and ministerial team.
The parliamentary part of the race was noticeably tighter than in recent contests, with only 24 votes separating to the top two candidates. Sunak secured backing from 137 MPs or 38% of the party while Truss received 113 or 32%, compared with Boris Johnson’s 51% in 2019 and Theresa May’s 61% in 2016.
The final decision now rests with Conservative Party members. According to the member polling, Liz Truss has the early edge with the YouGov poll released on the first day of the head to head campaign suggesting she’d win the contest 62% to 38%. However, those close to Sunak point to Truss’s perceived record of gaffes to suggest that it is still all to play for.
Political party member electorates by their very nature tend to be highly engaged and both candidates will be familiar to them. Ballot papers should begin dropping on doormats during the first week of August. Many are anticipated to vote early so expect much of the campaign to be frontloaded as both candidates scramble to win over undecided members.
The relentless schedule of 12 hustings across the UK may end up being largely irrelevant due to early voting. Interestingly though when the election rules were released it came to light members would be able to vote online and via post. They could even vote more than once with only their final vote counted, providing the opportunity for buyer’s remorse. The BBC will be hosting the two candidates for a debate on Monday and another is scheduled for 4 August on Sky News.
Following a bruising leadership contest, the winner is expected to attempt to appoint a balanced Cabinet reflecting the spectrum of political views from across the Party in an attempt to heal the inevitable campaign wounds. It is also expected that that the two standout performers from the leadership contest - Kemi Badenoch and Tom Tugendhat - will be offered roles. It is likely Penny Mordaunt, who was supported by more than 100 colleagues, will be offered a Cabinet position.
Both candidates have publicly ruled out a “snap election” which makes a lot of sense given the economic outlook, state of the polls and healthy Commons majority. From a policy perspective the campaign is likely to be dominated by the divergent fiscal views of the candidates on how to tackle the cost of living crisis and boost economic growth.
Rishi Sunak
Background
Rishi Sunak is the wealthy former hedge fund boss who attended one of England’s most exclusive fee-paying schools and is married to the heiress of a multi-billion dollar fortune. He is also, of course, keen to point out his upbringing as the son of small business owners.
His resignation as Chancellor helped precipitate Boris Johnson’s final downfall, and came after months of what many Johnson loyalists believe to be brazen leadership plotting. Unsurprisingly it is widely believed the current occupant of No.10 would rather anyone but Sunak replaces him.
When Sunak initially burst on to the national political scene, following his unexpected appointment as Chancellor, he gained plaudits for rapidly creating the furlough scheme and providing businesses with financial support to get them through the pandemic. In more recent times he has faced criticism as a result of the high levels of fraud and consequential tax rises to address the heightened levels of borrowing.
In addition to the tax rises, his reputation took a hit when it emerged his wife was a “non-dom” and that he had previously held on to his US Green Card even after being appointed as a minister.
Current political outlook
Sunak faces a number of political challenges. Even though he is the candidate who supported Leave in the referendum campaign, he is viewed as the Remain candidate and this is reflected in the makeup of the MPs who publicly supported him. The Conservative membership is split in the region of 80/20 in favour of Brexit which remains an important political dividing line. According to the latest YouGov polling the only segment of Conservative members he leads with are those who voted Remain.
Sunak was also the Chancellor who decided to raise the UK’s tax burden to its highest level in 70 years just as inflation started to climb. Many also question whether such a wealthy individual is able to appreciate the growing financial pressures felt by many across the country.
The former Chancellor, therefore, has found himself painted as the high tax, big state, pro-EU candidate of the Tory left. The perception he is a centrist, establishment figure with an inclination to take a technocratic approach to governing is unlikely to endear him to a significant number of Conservative members who have enjoyed Johnson’s more unorthodox style.
Sunak’s supporters point out he is a far stronger media performer than his opponent and the polling suggests he is better placed to beat Labour at the next election. This clearly weighed heavily on the minds of Conservative MPs, whose jobs are on the line. However, electability is likely to be less crucial to members who perhaps after years of centrist Coalition, “Cameroon” and big spending Johnson Governments would like to see a Prime Minister with a robustly right wing agenda in office. Unlike when Corbyn was Leader of the Opposition and the Conservative Party felt it needed to win the election to protect the UK, there is not the same heightened level of concern around a potential future Starmer Government.
Whilst his resignation as Chancellor may help to distinguish him from the likes of Liz Truss who remained loyal to Johnson, there is still a sizeable contingent of Conservative Party members who do not believe it was right for MPs to move against Johnson less than three years after delivering the Party an 80 seat majority. Sunak, of course, also received a Fixed Penalty Notice - due to his presence at what was later deemed to be an illegal gathering in Downing Street - which would mean Labour’s “Partygate” attack lines remain relevant post Johnson.
Sunak’s team will be acutely aware of the potential political value in dangling future tax cuts within sight of the Tory membership. It is understood he will shortly set out his plan to cut taxes in the “medium term,” once inflation begins to fall, and is planning an announcement on personal taxes which could see his planned income tax cut brought forward. Ultimately, Sunak is of the view that the best way to get the cost of living under control is to grow the economy by increasing productivity. Borrowing in order to fund tax cuts whilst inflation remains high is a clear dividing line between Sunak and Truss. Sunak pointedly described borrowing your way out of an inflationary spiral as a “fairytale”.
Key figures
Sunak will be looking to put people he rates and trusts in senior positions and these are likely to be colleagues who backed him early in the race to become Prime Minister. Oliver Dowden, Dominic Raab, Robert Jenrick, Grant Shapps and Steve Barclay are all tipped for Cabinet positions. The Treasury Select Committee Chair, Mel Stride, who kept track of Sunak’s backers in the leadership contest, would also likely be in line for a return to the Cabinet. He is also thought to be considering a return to the Cabinet for Jeremy Hunt who endorsed him after being eliminated from the leadership contest.
Sunak’s leadership campaign was supported by the “gang of five” former Chief Whips including Mark Harper and Gavin Williamson. Harper was one of the 2019 leadership candidates and his early and vocal support would likely be rewarded. The former long serving City Minister, John Glen, was also early to support Sunak and has been trusted to do supportive media. He could be rewarded with his first Cabinet role.
Other Sunak supporters who will be familiar to our industry and may be in line for their first ministerial position include Bim Afolami, Gareth Davies and Anthony Browne.
What a Rishi Sunak victory would mean for investment management
Although Rishi Sunak is not the “continuity Boris” candidate ironically much of the Government’s current agenda would remain in place in light of the strong influence he held when he was the Chancellor, including the Financial Services and Markets Bill and Net Zero commitments. Sunak and Johnson were known to have clashed over spending plans with the Prime Minister looking to take a looser approach to fiscal discipline, however, he was removed from Office before he was able to do so.
Monthly UK debt interest payments trebled to £19.4bn in June, the highest amount since records began by more than £10bn. Bringing inflation under control to permit tax cuts ahead of a 2024 election will likely be Sunak’s priority. He will be focused on raising business investment and productivity to boost economic growth. Further tax breaks to incentivise businesses investing are likely. There will be continued pressure on industry to bring the first Long Term Asset Funds (which he personally announced and has remained interested in) to market in order to facilitate higher levels of investment in UK firms.
Sunak has specifically committed to overhauling retained EU regulations “to trigger a Big Bang 2.0” for the City, with his team saying he would set a target “to make London once again the world’s leading financial centre by 2027”. He would task a Brexit minister and a new Brexit Delivery Department with reviewing all EU laws transferred over to the UK statute book with a first set of recommendations as to whether each law should be scrapped or reformed within the first 100 days of his leadership. He would also replace the EU-derived GDPR data laws with “the most dynamic data protection regime in the world”. “Radical reform” of the EU’s Solvency II insurance rules to “help investors and insurers put money into assets like infrastructure that stimulate growth" would also be prioritised.
It is also expected that he will take a less hawkish approach to the UK’s international relations than his rival, placing greater weight on the economic impact. Though he supports the Northern Ireland Protocol Bill, his election would at least provide the opportunity to reset relations with the EU as he has not previously been on the frontline of the negotiations.
Liz Truss
Background
Raised in Leeds and comprehensive school educated Liz Truss came to politics early, and has told interviewers that some of her first memories are attending CND rallies with her Labour-supporting mother. Her first taste of the national political scene was a now-famous speech at Lib Dem conference, where at 19 years old she called for the abolition of the monarchy.
Since then her journey has been steadily to the right. After her election in 2010 she was seen as a key member of David Cameron’s team, and was rewarded with her first ministerial job a few years later. She has served in the Cabinet since 2014 and is by some margin the longest serving cabinet member, testament to her work with Conservative leaders of all persuasions and ability to tackle multiple briefs. Her supporters point to this as a sign of her prime ministerial potential. She has long sought to cultivate this via opportunities for statesmanlike activity during her time as Foreign Secretary, notably through some dramatic photo ops and hawkish positions taken on China (both of which are likely to appeal to the membership).
Her sometimes wooden delivery style in major speeches – much mocked online – is said by those close to her to overshadow a personable and well-informed manner in more spontaneous events.
Current political outlook
Remain-campaigning Truss has become a leader for the Conservative Brexiteers, after spending several years championing trade deals as Trade Secretary and taking a hard line on issues, including the Northern Ireland Protocol, as Foreign Secretary.
This helped her to win the backing of crucial Brexiteers including Jacob Rees Mogg, seen as a crucial symbol to the largely leave backing membership of her credentials, and Boris Johnson has made no secret that she is his preferred successor.
Long seen as a potential front runner in the contest, Truss initially struggled to win over her parliamentary colleagues and trailed Penny Mordaunt until the final round. Some mutterings have focused on her apparent over-concentration on her career at the expense of building links across the party. Others point to her dramatic political journey as evidence that her views cannot be relied on.
These concerns have been brought into focus by a series of tweets by former Johnson adviser Dominic Cummings describing her – among much else – as “truly useless”. Truss’s team have hit back at this with suggestions that Cummings is close to Sunak, which given his low public standing is seen as wounding.
Personality differences aside, the major policy difference between Truss and her rival have emerged over tax levels and approaches to growth. In contrast to Sunak, Truss has promised immediate tax cuts which she maintains would boost growth and cap inflation.
This approach has been criticised by many economists, and the IFS have put a bill of £30bn a year on her tax cutting plans. Conventional economic orthodoxy would suggest that tax cuts would fuel inflation, although Truss points out that the current economic consensus has failed to produce or spread the proceeds of growth over the past 20 years. And although she promises to shrink the size of the state, she has been cautious in identifying specific cuts and continuing to do so may prove more tricky as the campaign develops. Truss is therefore likely to be looking at additional borrowing, as interest rates rise.
This approach was regularly cited as a concern among many Tory MPs, who see themselves as fiscally conservative, during the first phase of the contest. But as the campaign moves out to the party’s membership, the appeal of tax cuts and the promise of a fresh approach to the current economic malaise might have serious appeal. How this will play with voters at a general election is as yet untested.
In a poll carried out at the beginning of the campaign it suggested that only a third of the general public could recognise Truss. However, this freshness may prove an asset: after over a decade in power an apparently new face and approach may be a smart move.
Key figures
Truss attracted fewer Cabinet heavyweights to her campaign than Sunak, but still counts an array of respected figures as allies. Those tipped as her Chancellor include the current Business Secretary Kwasi Kwarteng, and Chief Secretary to the Treasury Simon Clarke, who both supported her early on.
Expecting a promotion too will be Work and Pensions Secretary Therese Coffey who has been a longstanding supporter of Truss. Trade Secretary Anne-Marie Trevelyan’s endorsement following Tom Tugendhat’s departure from the leadership race was also helpful in seeing off Kemi Badenoch’s challenge and could see her rewarded.
One dilemma for Truss’s team will be how to reward Jacob Rees-Mogg and Nadine Dorries. Their early backing bolstered her position as the lead Brexiteer. Both will likely be seeking high-profile positions, but may be seen as divisive with both the parliamentary party and the electorate.
What a Liz Truss victory would mean for investment management
Liz Truss is instinctively in favour of many factors supportive of our industry: the UK’s international competitiveness; the wider economic benefits of a strong City; and the value of free markets. During her time as Chief Secretary to the Treasury she was particularly supportive of the industry’s work to foster the next generation of talent through Investment20/20. She has also highlighted post-Brexit opportunities for the City, including the reform of Solvency II to “liberate more of our pension funds to be able to invest in high tech start-ups”.
Truss is seen as supportive of the key elements of the Financial Services and Markets Bill currently going through parliament, in particular the new secondary regulatory objective for Competitiveness and Growth.
However, oversight of regulators – and in particular the Bank of England – might be an area in which she seeks change. Speaking to the Daily Telegraph, Truss promised to “look again” at the Bank’s mandate, and promised to set a “clear direction of travel” on monetary policy. Although she has not fleshed out her thinking here, the idea suggests she believes Treasury should have a say in monetary policy (rather than the Bank’s day to day operational independence). Expect this to be an area financial journalists and commentators seek to dig into throughout the campaign. She has also committed to holding an emergency Budget in order to initiate her planned tax cuts and attempt to stimulate economic growth.
The View from Brussels
Within Europe, a Truss premiership is a more concerning prospect than a Sunak one. Truss is viewed by many within EU institutions as the continuity candidate and with trust at an all-time low between the UK and the EU, a Truss premiership is unlikely to improve matters. Whilst earning serious political support within the EU thanks to her views on Russia and Ukraine, many will also struggle to forget that as Foreign Secretary she was a vocal supporter of Boris Johnson’s plans for the UK to renege on its international obligations on Northern Ireland. For a grouping that relies on individual members upholding their international commitments, and as Europe struggles with a cost of living crisis and the prospect of Russian gas being shut off in the winter, many view a steady, pragmatic Sunak premiership as an opportunity to potentially reset the relationship and to work together more closely on economic issues.
However, whether Sunak will be free to be part of any reset is yet to be seen. As the contest moves to the wider Conservative Party membership, there is scant evidence that a candidate would be successful if they backed down on the UK’s core demands over the Northern Ireland Protocol. Recent efforts to renegotiate the Protocol have been widely supported by Tory MPs and the party faithful alike, with success over the Protocol negotiations key to future election narratives of having ‘got Brexit done’. The search for a solution on the Northern Ireland Protocol will be one of the more complex issues awaiting either Truss or Sunak. Neither will be a comfortable outcome as a new Prime Minister will be keen to make their mark with Europe.
For financial services specifically, the low levels of trust within EU institutions towards the UK leave little room for cooperation, with almost all engagement across the UK/EU relationship currently on hold. Both sides have dug themselves in on Northern Ireland, and whilst the EU has become more adamant about the benefits of ‘open strategic autonomy’ to address its perceived over-reliance on the UK for financial services, so too has the UK that only hardball tactics work. The EU thinks that it cannot move because the UK Government is so little trusted that any concession would be pocketed by the UK and it would come back for more. The prospects of an autumn “tunnel” where the two sides emerge from behind closed-door negotiations into the December sunlight with a deal on Northern Ireland looks remote – as does any chance of an MOU on financial services and deeper cooperation with our largest international market.