The financial regulator has been ordered to encourage more risk-taking across the City, raising concerns that the Labour government is in danger of watering down rules meant to avoid another financial crisis.
In an official “remit” letter addressed to Financial Conduct Authority (FCA) boss, Nikhil Rathi, the chancellor, Rachel Reeves, said regulations meant to protect consumers should not stand in the way of “sensible risk-taking” by investors and the wider financial sector, which includes banks, asset managers and insurers.
The remit letter, which is sent to regulators once a parliament to outline government priorities, explained that the FCA should be accelerating efforts to support the growth and competitiveness of City firms, as part of new responsibilities handed to watchdogs last year.
“I recognise that there are difficult trade-offs to make,” the chancellor’s letter said. “Ultimately we must trust in the systems that we have put in place to manage the impact when things do go wrong – so that problems with one firm don’t create wider risks, or lead to an over-correction in the future.”
As part of its response to the chancellor, the FCA said: “When it comes to growth, regulation is one part of the picture. We know there’s more to do but we are committed to playing our part.”
It came hours after Reeves told City bankers gathered for the annual Mansion House dinner that regulations put in place to protect the economy after the 2007-08 global financial crisis had “gone too far”, raising concerns among campaigners.
“A strong financial system is crucial for sustainable growth, but promoting the growth of the financial sector as an end in itself would be a mistake,” said Jesse Griffiths, the chief executive of the leading UK charity Finance Innovation Lab.
“There is ample evidence to show that this leads to a focus on the needs of international capital rather than domestic businesses. We must heed the lessons of the global financial crisis, which showed how dangerous a focus on financial deregulation can be for the economy,” Griffiths added.
Labour’s lax regulation of the City was blamed for contributing to the collapse of Royal Bank of Scotland in 2008, which exacerbated the global financial crisis. The government was forced spend tens of billions of pounds to bail out a string of banks, leading to years of recession and austerity across the UK.
EU and UK governments later tightened regulations, in order to rein in risk-taking and avoid another financial crisis.
But Tory ministers began dismantling some of those protections after the Covid-19 pandemic. That included reintroducing a competitiveness objective for regulators, which critics warned could create the same light-touch approach that led to the 2008 crisis.
The Labour government has continued tinkering with post-crisis reforms. That includes reforming banker bonus deferral rules, which could lead to bankers getting their payouts three years earlier, and replacing the certification regime that ensures City managers are fit and proper for the job.
The Treasury also plans to ease regulations on smaller banks by reforming ringfencing rules, which protect consumer deposits by separating lenders’ retail and investment banking operations.
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The economist Sir John Kay said the Labour government needed to ensure that reforms were not simply serving City bankers. “Our objective should be the financial sectors serves the needs of the non-financial economy, rather than the needs of the people in it,” Kay told the Guardian. “And these things seem to be confused and conflated in what is being talked about in, for example, the Mansion House speech last night.”
The Treasury said: “Robust regulatory standards are the cornerstone of the attractiveness of UK markets, and the stability and soundness of the UK’s financial system is an important priority for the government.
“The UK will remain a global leader in promoting high industry standards, while ensuring regulation supports growth so that everyone is better off.”
Alongside the new instructions to City regulators, the chancellor published an updated remit for the Bank of England’s monetary policy committee (MPC).
The inflation target remains unchanged at 2%, but Reeves – a former Bank economist herself – tweaked the description of the government’s economic policy, to encourage “broad based and resilient growth built on strong and secure foundations”.
The phrase “broad based” is likely to be a reference to the need to rebalance the UK economy so that growth is less concentrated in the south-east.