ourEconomy: Analysis

Back to the future: is Brexit Britain preparing to unleash Big Finance?

As powers move from Brussels to London, many fear the UK is unlearning crucial lessons from the global financial crisis.

Chaminda Jayanetti
1 April 2021, 8.55am
City of London skyline, London, England, United Kingdom
robertharding / Alamy Stock Photo

Former British chancellor George Osborne isn’t known for his love of constraining capitalism. But even he realised the banking free-for-all of the 2000s went too far, ultimately plunging the economy into crisis.

In 2012, the Osborne-led Treasury passed new laws tightening the regulation of Britain’s financial sector after the global financial crisis of 2008.

The old regulator, the Financial Services Authority (FSA) – which was seen as having failed to stand up to Big Finance in the run-up to the crash – was replaced with the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority.

Significantly, the 2012 reforms also abolished the ‘competitiveness’ duty on the regulators. The old law required the FSA to “have regard” to “the desirability of maintaining the competitive position of the United Kingdom” when making and enforcing regulations.

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Critics blamed this clause for encouraging the FSA to let the banks freewheel their way through the boom years instead of cracking down on risky activity. The government eventually agreed.

A consultation document published by the Treasury two months after the 2010 election said: “The case for making global competitiveness and innovation in financial services part of the responsibility of a regulator… needs to be reconsidered.

“There is a strong argument that one of the reasons for regulatory failure leading up to the crisis was excessive concern for competitiveness leading to a generalised acceptance of a ‘light-touch’ orthodoxy.”

Sure enough, the 2012 Financial Services Act did away with the competitiveness duty – in fact, the word ‘competitive’ does not appear anywhere in the 448 pages of the Act.

But that was 2012. This is 2021. Competitiveness is making a comeback.

‘A race to the bottom’

Brexit requires new laws and regulations as powers move from Brussels to London, and lobbying to restore the competitiveness duty is well underway.

The UK government has introduced a new Financial Services Bill, which has made its way through the Commons and is now going through the Lords, where debate started in late January with a group of peers pressing the case for a competitiveness duty. Of the six peers who did so, five have registered interests in the financial sector.

“I question any acceptance of the argument that an excessive concern for competitiveness contributed to the financial crisis,” said Viscount Trenchard, a Tory peer with numerous fund management roles listed on the register of interests.

“I believe that both regulators should have a clear, unqualified objective to promote the international competitiveness of financial markets,” he added.

Three ‘probing’ amendments – designed to focus debate on an issue rather than go to a vote – called for a new competitiveness duty. These were also proposed by peers with registered interests in the financial sector.

There is no suggestion that they and other peers are pushing this because they have a vested interest in doing so. Rather, they represent a line of thinking in parts of the financial sector that never accepted that the competitiveness duty led to the 2008 crisis. Indeed, many of the industry’s responses to the consultation for the 2012 Act backed keeping the competitiveness duty.

Those pushing for a return to the past insist it won’t lead to a race to the bottom. They argue their objective is removing unnecessary regulation, and for some the aim is to move away from a European-style rules-based regime and towards one based on principles and outcomes.

Trenchard did not respond to a request for comment, but Lord Bridges, a co-sponsor of one of the probing amendments, did.

A Remain voter with registered interests in Santander, Bridges says that working in the Brexit department under Theresa May convinced him of the need for an explicit competitiveness duty, but that even aside from Brexit, Britain needs to be alert to global rivals.

“We need to make sure that we remain a place that is attractive and competitive for financial services to do business when they could choose between here and New York and other places in the Far East,” he told openDemocracy.

“What we need to avoid is a situation in which our regulators are overly focused on stability. And that is something that I think increasing the focus on competitiveness in their remit would help to address.”

Bridges says he’s not after a wave of deregulation: “It is absolutely right that we should not forget the lessons from that [2008] crisis, but we just shouldn’t be consistently regulating via the rearview mirror of what was happening in 2007/8. We’ve got to be mindful of where we are in 2021 and make sure that we are competitive in that environment.”

‘A threat to financial stability’

Critics are not reassured. Liberal Democrat peer Baroness Kramer warned in the Lords debate: “When the change was made in 2012 … it was not done lightly. It was done because one could trace the impact that [the competitiveness duty] had had on regulatory decision-making and, indeed, some regulatory deference. It was removed because it was a threat to financial stability in the UK and to the role of the regulator.

“One of the most damning descriptions I ever heard of UK regulators … is that when a US regulator comes to an institution, that institution is in fear; when a UK regulator comes to an institution, people go and make tea.”

The UK government has so far refused to reintroduce the across-the-board competitiveness duty. But its Financial Services Bill does include a duty for regulators to “have regard” to “the likely effect of the rules on the relative standing of the United Kingdom as a place for … firms to be based or to carry on activities”. This applies when the regulators set rules governing two types of ‘firm’ – investment firms and credit institutions.

Unlike the pre-2012 laws, these clauses don’t refer to the ‘desirability’ of maintaining Britain’s competitiveness. Nevertheless, critics are worried.

“If we have this additional purpose that they have to have regard to the relative standing of the UK, then it becomes about the growth of the financial sector for its own sake,” says Jesse Griffiths, head of the Finance Innovation Lab, which is lobbying against any form of competitiveness duty.

Government frontbencher Earl Howe told the Lords these clauses were “entirely subordinate” to the regulators’ main objective of ensuring the safety of the system, and would not lead to “a regulatory race to the bottom”.

The FCA, whose head is against a competitiveness duty, recently toughened certain rules governing investment firms after deciding the Bill’s ‘relative standing’ clause was subservient to the need to raise regulatory standards – while opting for more tailored rules than the blanket approach of the EU in two other areas, including regulatory reporting.

Despite this somewhat balanced initial approach from the FCA, Bridges isn’t satisfied with the government’s clauses.

“So [the FCA have] looked at it and considered the regulation and the competitiveness factor,” he says. “Now in a sense, that’s good. This is exactly what I want. I’m delighted they’re doing this – I think that I want them to do this all the time. And I don’t know whether having ‘due regard’ for these factors is going to make sure that that happens all the time.

“I want this to be more of an objective and therefore not something secondary or tertiary that they come onto – it’s the first thing they think about.”

‘A battle over the purpose of regulation’

But the focus of all this lobbying is not the Financial Services Bill, but what comes after.

The current bill is just the starting gun of a long process of shifting financial sector regulation from Brussels to Britain. The government’s future regulatory framework review (FRF), which will determine how different parts of the financial sector are regulated post-Brexit, is expected to take several years. Earl Howe described FRF as “the right place to consider issues such as the regulators’ objectives”.

“That's where the competitiveness battle will really be fought,” says Griffiths. “We're expecting a whole series of bills like this. And so this discussion will be in each of those moments.

“I think that's why we saw this push in the House of Lords, because it's a preparatory push for the real opportunity to get a competitiveness objective.”

And the backdrop to FRF is not just the debate over the Financial Services Bill, but also Rishi Sunak’s claims in January that the financial sector was heading for “Big Bang 2.0” – a hark back to Margaret Thatcher’s ‘Big Bang’ deregulation which put rocket boosters under the City of London and neoliberalism.

Just this month, reports emerged that ministers were planning to loosen a host of rules in order to boost the City post-Brexit – even though some in the financial sector don’t see a need for wide deregulation.

“There's a battle going on about what is the purpose of regulation,” says Griffiths.

“And what kind of financial system do we want? Do we want one that is geared to grow into a big international financial sector, which I would argue creates less stability for the UK economy [and] doesn't focus on real objectives?

“Or do we want one that is geared to the real purpose of finance, which is to support the real economy, to help us do a just transition on climate, and to help us tackle social problems that we have?”

The Treasury did not respond to a request for comment.

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