If the FCA is given a mandate for competitiveness, it could set us up for a 2008 re-run
The Financial Services and Markets Bill is set to be published this week, to reshape our future outside of the European Union. But even with newfound freedom, we must not forget the lessons of the financial crisis.
The UK has a chance to rethink the rules that shape our critical finance sector. In the face of multiplying financial pressures, ordinary people understandably want these changes to prioritise financial stability, consumer protection, and financial inclusion. It’s an important moment to enable our financial services to be an anchor in our society, helping support people and businesses through the cost-of-living crisis.
It is not acceptable, for example, that at the moment, small businesses face a £22bn funding gap, which disproportionately impacts those outside of London and the South East. The way we use money in modern Britain has changed dramatically, with contactless payments on trains and hundreds of card-only businesses. As many as eight million people would struggle to cope in a cashless society, which most people think is progressing too rapidly. In my constituency in North Yorkshire, more than 50 bank branches have disappeared. There are just 12 remaining.
The new bill offers a chance to put the right rules and safeguards in place to ensure the sector delivers for the wider market. They should, for example, be given responsibility promote financial inclusion, so no one has to struggle to access essential products such as cash or home insurance.
Exclusion and poverty are complex social problems, but no-one – not least the finance sector – is off the hook. Those responsible for overseeing the industry – the regulators – should have an objective to promote long-term economic growth across the UK.
Instead of objectives to promote inclusion and widening economic prosperity, the government’s flagship proposal is to compel regulators to promote the “international competitiveness” of the finance sector. This has met widespread criticism. As scores of leading economists told the Economic Select Committee, this has been tried before. It had devastating consequences.
The promotion of competition is already embedded within the FCA’s framework. But a “competitiveness objective” changes the nature of the game. It is about the state of the industry, rather than the market and will lead to laxer rules coming from the very body responsible for overseeing rule-breaking within the sector. From money laundering to mis-selling schemes, what we need now is a firm hand, not a light touch.
Prior to the global financial crisis of 2007/08 the main financial regulator (then the Financial Services Authority) was given a duty to advance the international competitiveness of industry. Once it was established that this had contributed to the disastrous crash, this objective was removed by the Treasury and Parliament, under George Osborne’s leadership. The Governor of the Bank of England, Andrew Bailey, summed the episode up in 2019: the regulator “was required to consider the UK’s competitiveness, and it didn’t end well, for anyone.”
Asking regulators to focus on competitiveness risks sowing the seeds of another financial crisis. This would hurt the industry itself, the wider economy, and ordinary people’s finances. By one estimate the global financial crisis cost British workers on average £800 per year in lost earnings.
The competitiveness proposal asks regulators to cheerlead for the sector when they should be independent referees making decisions in the public interest.
There is a danger that as memories of the financial crisis fade, its lessons are forgotten. We cannot let this happen. If new post-Brexit regulation is to see the finance sector make the greatest possible contribution to our economy and living standards, the government must abandon its misguided competitiveness proposals, and instead give the regulator objectives reflecting the clear priorities of our country today.