Pursuit of ‘competitive’ regulation makes unwelcome return in UK
Bad ideas don’t die. They merely hibernate.
That’s the lesson from the revival of the notion that regulators should have a specific objective to consider the competitiveness of the UK financial services industry internationally when setting rules.
This dud was put to bed after the financial crisis when the perils of having a regulator that was more cheerleader than disciplinarian for a high-risk sector that constitutes about 7 per cent of the UK economy became all too obvious.
The legislation that carved up the Financial Services Authority did away with the requirement for regulators to keep London competitive as a global financial centre. Out went “light touch” oversight and in came a regime focused on safety and soundness, under the Financial Conduct Authority and Prudential Regulation Authority.
But the mood has changed. As part of the post-Brexit regulatory overhaul, the government has proposed adding “competitiveness” back into the mix. It is in weakened form — as a secondary objective — and is joined by “growth” as a regulatory aim. Regardless, it remains a bad idea.
The obvious point is the one made in 2019 by Andrew Bailey, then head of the FCA and now governor of the Bank of England. We tried this and “it didn’t end well for anyone, including the FSA”.
Regulation, he added, should work in the public interest, rather than entrenching the position of the established industry of the day. It should also enable the provision of financial services to companies and households in a way that the risk inherent in the business isn’t ultimately borne by customers and taxpayers.
This was a point made by the post-crisis commission on banking, which argued that the wider economy was best served by having sound financial institutions and well-functioning markets: “The costs and consequences (including for taxation) of financial crises make countries that suffer them less attractive places for international businesses to locate.”
The industry’s suggestion that there need not be a trade-off between strong, effective regulation and competitiveness is arguably true — but entirely disingenuous in the telling. No one in the Square Mile has ever used the term “gold-plating” in an approving manner when it comes to regulation. Banks aren’t queueing up with ideas for tougher rules that can boost London’s standing.
There is an irony here that Brexit, with its huge hit to the competitiveness and global relevance of the City, has paved the way to resurrecting this particular regulatory aim.
Of course, post-Brexit regulation, which will in future have principles enshrined in law with detailed implementation left to regulators, should be tailored to the needs of the UK economy.
That doesn’t require a game of international one-upmanship (or downmanship as would likely be the case). Nor should regulators be co-opted into marketing London or courting business, as happened when rules were tweaked to accommodate the potential listing of Saudi Aramco.
At best, this proposal may be somewhat meaningless. The Financial Policy Committee, which oversees systemic risk, is already tasked with supporting the economic policies of the government. A secondary objective sounds suitably extraneous.
But adding complexity to the regulatory framework is itself unhelpful in a sector where the overriding priority should be crystal clear. The FCA already has three operational objectives alongside its main strategic goal of well-functioning markets. There is a temptation to keep adding stuff: consultation responses included calls for similar changes concerning innovation, climate change, proportionality and financial inclusion.
And the reality is that the industry has spent a decade lobbying to bring back the competitiveness objective precisely because it can be used as a stick for beating regulators.
In the new framework, more powers for financial regulators will rightly come with heightened parliamentary scrutiny. That gives ample opportunity for the financial sector to press its case that regulation is stifling its creativity and closing down opportunity, at a point where the pendulum is already swinging back from the post-crisis crackdown.
The reawakening of “competitiveness” risks sleepwalking into the mistakes of the past.