Giving evidence to MPs on the Financial Services Bill Committee, Positive Money director Fran Boait said that current proposals for post-Brexit regulation of the financial sector fall short on environmental and social goals and risk handing over too much power to regulators, without accountability.
The Financial Services Bill, currently passing through parliament, aims to set the scene for financial regulation as we leave the European Union.
Our director, Fran Boait, was delighted to be invited to give evidence to the Bill Committee, alongside Jesse Griffiths, CEO of the Finance Innovation Lab, who we collaborated with to produce a briefing for MPs ahead of the session. As Fran told MPs:
“It is important to say at the outset that we are only 11 years on from a global financial crash that resulted from deep regulatory failures… Without a number of amendments to the Bill, it could pave the way for a repeat of that failure.”
Our response to this critical bill focused on three main areas:
1 – Accountability
A key part of the bill transfers important powers from the EU to UK-based regulators, including the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). However, it is deeply concerning that regulators could be left to develop regulation “behind closed doors”, without scrutiny or input from civil society. As Jesse told the committee:
“There is a potential problem of regulatory capture, where the regulators become very close to the people they are regulating, who have regular discussions and meetings with them. The more those decisions take place behind closed doors, the greater that risk becomes.”
Neither should private banks have undue powers to shape the future of finance in the UK. A race to deregulate would mean ‘taking back control’ from Brussels only to hand it over to the City of London. Banking lobbyists already have too much influence over the policymaking process due to the well-documented ‘revolving door’ between politics and finance.
For real accountability, the Bill should outline a transparent process for the transfer of regulatory authority, including proper parliamentary oversight, and opportunities for civil society and the wider public to scrutinise and influence decision-making.
2 – Competitiveness
The second area of concern is the Bill’s objective to align the regulators with the government’s aims on “growth, competition, and competitiveness”. The financial services industry has been lobbying for regulators to have an international competitiveness objective. But prioritising competitiveness at all costs would be a threat to high social and environmental standards. Not only this, but high standards are actually the best way of ensuring a ‘dynamic’ financial sector, as the new FCA chief recently confirmed. In Fran’s words:
“We have been a large financial sector in the world, and generally the Treasury would say that it has prioritised the international competitiveness of our financial sector in the global market. It has held that in greater reverence than domestic competition that serves the needs of the people—your constituents, your businesses and the productive UK economy.”
What we need is competition that works in the interests of the rest of the economy, not a ‘race to the bottom’ on standards and regulation.
3 – Environmental and social objectives
The third issue is the central purpose of financial regulation after Brexit. If regulation is ‘purpose-neutral’, it actually supports a broken status quo. That’s why it’s worrying that the Bill currently makes no mention of climate change or the environment.
Instead, Fran told the committee that ‘environmental, social and governance’ (ESG) factors should be at the heart of this Bill. In particular, MPs should see an opportunity to play a leading role in global efforts to green the financial system, ahead of the COP26 Climate Summit that the UK will host in 2021:
“It is worth noting that the UK’s financial institutions are among the worst culprits in Europe for fossil fuel financing. HSBC and Barclays alone have funnelled about £158 billion into fossil fuels since the signing of the Paris agreement. If the UK really wants to be a leader in green finance in a serious way, we need our regulators to be on board with that mission.”
Fran and Jesse both called on MPs to ensure that the Paris Agreement and net zero target should be central to the Bill, and hardwired into regulators’ mandates.
There are signs that the message is getting through. On Monday, Bank of England Governor Andrew Bailey told MPs on the Treasury Committee that a green objective should be added to the Bank’s mandate, and is ‘talking to the Treasury’ about making the change.
Now the government must follow Bailey’s lead and put accountability, the environment, and the real economy at the heart of the financial system. MPs have the power to do this now in two ways: by voting for amendments that support these changes, and by ensuring that future Bills make these factors a priority.
Further down the line there could be scope for additional amendments to help ensure our financial system serves society. One of the reasons most bank lending goes towards pushing up house prices rather than the real economy is that the current regulatory architecture is overly favourable to mortgage lending when it comes to banks’ capital and liquidity requirements. This Bill could be an opportunity to make sure regulators consider the impact new rules would have on encouraging productive rather than speculative investment