Good afternoon and welcome back to the State of Britain. I’m Martin Arnold, the FT’s financial regulation editor, and today I’m going to write about the government’s review of financial services regulation.
It has taken almost 20 years, but the virtues of slashing the regulatory burden on the City of London to bolster wider economic growth and prosperity are back in vogue.
This week, the chancellor Rachel Reeves announced a “radical action plan to cut red tape” to “free business from the shackles of regulation” and “boost investment, create jobs and put more money into working people’s pockets”.
To some, this sounds eerily familiar to the kinds of comments being made by ministers two decades ago. In 2006, Ed Balls gave a speech as City minister boasting how the UK’s “light-touch” financial regulation gave the City “a huge competitive advantage”.
A few years later, Balls apologised for his part in what he called a “global regulatory failure”, following the 2008 global financial crisis in which taxpayers in the UK and many other countries had been forced to spend billions of pounds to save their banks.
Reversing regulation
Many of the rules imposed to try to prevent such a costly crisis ever happening again are now being questioned in the name of reinvigorating increasingly sluggish economies — not only in the UK but also in the US and many other parts of the world.
There are worries that this deregulatory pressure from ministers will make the financial system more risky. “The apparent politicisation of some of these areas is troubling,” says Sir John Vickers, who chaired a commission on the UK banking sector after the 2008 crisis. “I fear that injecting politics back into all these issues could be very bad for investment incentives.”
Sir Keir Starmer’s government has zeroed in on regulation as a key target in its efforts to deliver on its promise to prioritise economic growth. Only last week, the prime minister announced plans to take on a “cottage industry of checkers and blockers”.
Financial services watchdogs have been centre stage in this clampdown. On Christmas Eve, they received letters from Starmer and his top ministers telling them to report back within weeks with a list of pro-growth proposals.
The bodies considered to be most troublesome are being axed — as with the Payment Systems Regulator — or are having their powers reviewed and their chief executive suddenly exit — as in the case of the Financial Ombudsman Service.
The UK’s two main financial regulators — the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority — have been put on the back foot by this onslaught. They are scrambling to come up with rules that can be eased or even scrapped.
To name only a few, they have proposed reducing limits on mortgage lending, winding back restrictions on bankers’ bonuses and diluting rules to make top executives more accountable under the senior managers and certification regime.
The £100 limit on contactless payments is likely to be lifted. The UK has delayed the introduction of the Basel rules on bank capital. The Bank of England even plans a concierge service to help foreign financial groups looking to expand in the UK.
The City sniffs an opportunity
Meanwhile, the City is emboldened by the backlash against regulators. Lobbyists sense a chance to finally get rid of many of their most hated policies, from bank-specific taxes to the ringfencing rules separating retail lenders from their investment banking operations.
David Postings, head of the main British bank trade body UK Finance, believes the shift has “created the space to consider bolder reforms”. He has presented the Treasury with a list of more than 60 ideas, many of which are already on track to be implemented.
Only last week, the FCA announced a U-turn on its plans to publicly identify more of the companies it investigates after a major City backlash against such “naming and shaming”.
Reeves believes the rules drawn up after the 2008 banking crash have “gone too far” and should be reversed to encourage more risk-taking. “The UK has been regulating for risk, but not regulating for growth,” she said in last year’s Mansion House speech.
But regulatory experts fear political pressure on watchdogs to promote growth will clash with their primary objective to preserve a safe and stable financial system.
Nikhil Rathi, head of the FCA, has warned more will “go wrong” if regulations are diluted. Giving the example of increased home repossessions that would result from laxer limits on mortgage lending, he called for politicians to define a “metric for tolerable failure”.
Consumer groups are sceptical that deregulating the City will boost economic growth. James Daley, head of consumer research group Fairer Finance, warns the plans to ease limits on mortgage lending “will be a little bit of petrol on the bonfire which will burn out in a few seconds”. He adds: “I continue to have grave concerns about the direction of travel.”
Vickers draws a distinction between streamlining regulation and weakening it. “What I’m against is the idea that there is just one lever that you move one way or another — regulation can be both stronger and simpler,” he says. “Less complexity need not mean more risk.”
The turmoil in 2023 that led to the collapse of several banks including Credit Suisse and Silicon Valley Bank shows the financial system is still risky, he says, adding that if overall capital levels were increased in banks then many of the rules could be removed safely.
“If someone is walking close to the cliff edge then you have to have lots of safeguards and warnings — but if they are hundreds of yards away from the edge then you don’t need all that,” Vickers says.
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Britain by numbers
One measure of strictness in a financial regulator is the size of fines they impose. By this measure, the Financial Conduct Authority might be seen as becoming softer.
This week, the FCA fined the London Metal Exchange £9.2mn for having inadequate controls during a week of chaotic trading in the nickel market three years ago — its first penalty against an exchange.
A few days earlier the watchdog announced plans to fine multi-millionaire hedge fund founder Crispin Odey £1.8mn for a “lack of integrity” in how he tried to frustrate his company’s attempts to investigate allegations of sexual harassment and assault against him.
Odey’s fine is still provisional as it is subject to a court challenge. But even including it, the FCA would have collected only £13mn in fines so far this year, which is running at an annualised rate of just over £50mn, the lowest for almost a decade.
The average fine it imposed this year is £2.8mn, its lowest level since 2016. It is down from £6.5mn last year and a record high of £56.8mn in 2021.
Sure, you might say that financial misconduct fines are lumpy. The figures are certainly skewed by the big penalties that followed the 2008 financial crisis, such as the £1.1bn of fines on a bunch of banks in 2014 for foreign exchange trading control failures.
The FCA might be tempted to argue that the lower level of fines reflect a recent improvement in financial conduct — but given how susceptible the sector is to wrongdoing it would be a brave regulator that does so.
The State of Britain is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.
