Cross-Cutting Issues

Every few years the government proposes a regulatory reset, often in reaction to some economic or operational development.  The FSA was split into the PRA/FCA in response to the financial crisis while the FCA promised to sharpen its performance after the London Capital & Finance fiasco. More recently the Tory government proposed the Edinburgh Reforms, a lukewarm package seeking to demonstrate the regulatory benefits of Brexit, while the Labour government has advanced the Leeds Reforms, aiming to stimulate economic development by tacking the complexity and burden of regulation.

The Leeds Reforms overlap the substance of the Edinburgh Reforms, but unlike their predecessors, are more likely to make an enduring difference because of the degree of political pressure backing them. This can be shown at three levels.

Policy foundations

First, they are supported by a coherent policy, with the four elements of unlocking retail investment, cutting red tape, freeing capital for investment, and promoting innovation. These are political aspirations, and each requires a clear transmission mechanism to convert into tangible change. This is clearest with the “red tape” target, with detailed consultations underway to reform the ambit of the Financial Ombudsman Service and plans to remove the requirement to certify staff at regulated firms.  There is also clarity over “freeing capital” with reforms underway or already completed for Basel 3.1, Solvency UK, the PRA’s simplification of small deposit taker regulation, and a promise to review the need for ring-fencing large banks.

Integration into regulatory processes

Second, this approach is baked into the regulatory policy-making process through the parallel adoption of the secondary international competitiveness and growth objective, which applies directly to the PRA and the FCA. This is a key support, and both regulators have stated that it will make a real difference to the way that they operate. The PRA says that, while it will never abandon strong and appropriate prudential standards, it will seek to operate effective regulatory processes and make rules attuned to UK needs while taking an open approach to risks and opportunities. The FCA says that it will seek reduce the regulatory burden, make it easier for firms to obtain authorisation and expand, and will make rules alert to the need to promote capital investment and accelerate digital innovation. This change in regulatory attitude, if it crystallises, will be what catalyses change.

Accountability mechanisms

Thirdly there is a clear accountability mechanism. In addition to the usual annual reports, ministerial catch-ups and Treasury Committee maulings, both regulators now attend six-monthly performance review meetings with the Treasury with the minutes published for public and political scrutiny. 

So far so good, but at this point some realism must be brought to bear. There are several reasons why we are not standing on the brink of a nirvana when firms’ regulatory shackles will fall away and economic growth will take off. The first is that economic growth depends on a wide range of factors, and issues such as general uncertainty and increased levels of taxation will tend to depress both investment in and the performance of the financial services sector. Next, London is alongside New York the world’s premier international financial centre. This limits scope for manoeuvre because nothing will destroy its reputation more quickly than lowering regulatory standards to allow weak, undercapitalised or disorganised firms to operate in the City. London must cleave to the best international standards to retain its standing as a global paragon. 

Third, there is an underlying concern on the part of the regulators that they are in a double bind – pressed by the government to loosen regulation but liable to be blamed when things go wrong. This is the very point repeatedly made by Nikhil Rathi, CEO of the FCA, to the Treasury Committee. What, he asked, were the metrics for acceptable failure? Would MPs accept double the number of repossessions if home-ownership were encouraged by lowering mortgage eligibility requirements? This notion makes the regulators cautious and, for all their pronouncements, the PRA will remain focused on the safety and soundness of banks and insurers, and the FCA continue to ensure that consumers get what it views as a fair deal.

Lastly, the UK has no shortage of other enemies of growth that this alone won’t fix. Brexit was a major shock, detaching the UK from its closest and largest single financial market. While the role of the Ombudsman as a quasi-regulator may have run its course, unpredictability generates uncertainty and deters investment. The most recent instance is the motor finance case, where the Supreme Court has effectively overturned regulatory consensus to result in a major and unforeseen redress programme. 

In conclusion

The Leeds Reforms will make a difference, in all likelihood greater than previous attempts at change. But political conservatism, regulatory caution and the reality of a volatile market will act as a drag on this initiative, hindering both substantive reforms and the intended economic growth.