Remodelling finance in 2008’s image: Banks make a play for deregulation post-Brexit

February 17, 2022

The Treasury is considering giving the UK’s financial regulators a new objective to increase the ‘international competitiveness’ of the financial firms they regulate. This risks sowing the seeds of another financial crisis, undermining ‘levelling-up’, and complicates the role regulators will have to play in supporting the green transition.

Despite the City of London’s overwhelming preference for remaining in the European Single Market in the build-up to the Brexit referendum, the finance sector has never been one to miss an opportunity. With the UK’s exit from the European Union comes the chance to rewrite vital laws and regulations, so naturally private financial institutions are doing everything in their power to ensure that their profits take priority.

The government’s Future Regulatory Framework is being drawn up to decide how financial services will be supervised post-Brexit. As part of this, the Treasury is currently consulting on whether regulators — such as the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) — should have to consider the international ‘competitiveness’ of the financial firms they regulate when setting and enforcing the rules.

Our response to last week’s consultation stressed the perils of a ‘competitiveness’ objective, which would effectively accelerate a ‘race to the bottom’ between international regulators: each vying to be the most attractive destination to overseas investors by watering-down standards. We also highlight considerable evidence showing that an oversized financial sector is actually harmful to the rest of the economy. Unfortunately, civil society voices are often drowned out by the banks and insurers that flood these consultations with their own submissions, likely extolling the benefits of this secondary ‘competitiveness objective’.

The very fact that the Treasury is explicitly consulting on what private finance wants this time around (e.g. “Do you agree with the government’s approach to add new growth and international competitiveness secondary objectives for the PRA and the FCA?”) is a testament to the immense influence that these firms already have over their own governance.

A key driver of this close relationship is the ‘revolving door’ between financial regulators and the firms they regulate, which allows individuals to move freely between public and private sector jobs. Within this context, it’s not difficult to see why public policymakers would essentially advocate on banks’ behalf when they stand to directly benefit from the lax regulations they implemented once their term as a regulator is up. We’ll be exploring the full extent of the ‘revolving door’ between the finance sector and its overseers in a report this spring, but as a first step, we have recommended that former regulators wait at least a year from their departure before joining a firm they previously regulated.

What’s at stake?

The most noteworthy aspect of the proposed ‘competitiveness’ objective is that there’s nothing new about it. If implemented, the government would just be re-introducing an objective that was removed following the 2008 financial crisis. This lenient approach, and the behaviour it elicited from regulators, allowed the reckless and fraudulent practices responsible for the crash. Parliament itself acknowledged this connection in 2012, and in 2019 the current Governor of the Bank of England, Andrew Bailey (then CEO of the FCA) said the regulator “was required to consider the UK’s competitiveness, and it didn’t end well, for anyone.”

‘Competitiveness’ is a thinly veiled power grab from big finance, seeking to revive the deregulated conditions which enabled them to take huge risks that ultimately only cost the public. When given licence to pursue profits over all else, financial firms invest heavily in the ‘financial economy’, concerned with speculating over share prices, exchange rates and asset prices, and not in the ‘real economy’, which revolves around the flow of goods and services vital to everyday lives.

Amongst the areas of the ‘real economy’ at risk of being underfinanced is the transition to net zero, which has the potential to unlock millions of green jobs and end our dependence on the volatile fossil fuels currently driving the cost of living crisis. There is also a clear contradiction between unconstrained growth of the financial sector and staying within 1.5 degrees of global warming; Barclays alone poured $144 billion into fossil fuels between 2016 and 2020, and shows no sign of stopping. The government has proposed including a regulatory ‘principle’ for sustainable growth to incorporate its net zero target — this is a tokenistic gesture at best, and an opportunity for greenwash at worst. We recommend that regulators be given statutory objectives to ensure that the regulators bring the financial system in line with the net-zero transition.

As well as the threats of a new financial crisis and a failure to stay within 1.5 degrees, re-introducing the competitiveness objective undermines the levelling-up agenda by diverting money back to the City of London and away from the regions of the UK still waiting for their slice of the pie.

Pushing back against this regressive agenda is an ongoing process, with the head of the UK’s banking lobby and the Economic Secretary to the Treasury both publicly lauding ‘competitiveness’ and dismissing valid criticisms of it. We continue to apply pressure in public spaces as well as private ones. Refining the legislation that will define our finance sector will take years, so the fight to finance our future on this planet is far from over.