Good regulation can support growth without increasing risk
The debate about regulation and growth has become stuck in an Animal Farm world of less regulation good; more regulation bad, or vice versa, depending on political persuasion. The more serious question is about quality, says Omar Salem
Dame Meg Hillier MP, chair of the influential Treasury Select Committee, has called for the government to set out “the risks that the government will allow its own regulators to take in the name of growth”. The instinct is understandable and has an unimpeachable logic: if the government wants regulators to take more risk in search of growth, then what that means should be open to public debate, and oversight by Dame Meg’s committee. The proposed solution, that the government-set “risk metrics” and the regulators operationalise them, appears to offer a tidy compromise between democratic accountability and regulatory independence.
Yet, reality does not always follow theory. For starters, how meaningful is this process going to be? I can’t see a Minister saying that three grannies being defrauded is too much but that two would be within their risk appetite.
That is not to mention the question of how helpful it would be to have abstract risk metrics separate from the cost benefit analysis that is already done by regulators for specific proposals. The exercise has the potential for becoming a bureaucratic quagmire that distracts from what is most important: high quality regulation supervised by high quality regulators.
Stepping back, the wider debate about regulation and growth has become unhelpfully binary. We are stuck in an Animal Farm world of less regulation good; more regulation bad, or vice versa, depending on political persuasion. It is a superficial argument about volume. The more serious question is about quality.
Effective regulation is predictable, proportionate and operationally competent. It reduces uncertainty and lowers friction for firms seeking to invest and scale. Poor regulation is slow, opaque and inconsistent. It deters entrants and entrenches incumbents. The size of the rulebook is less important than its functionality.
Trade-offs
While there can be a trade-off between risk and growth, there are also many steps the FCA could take to support growth without increasing risk. Some prime examples are the operational effectiveness of the FCA. Faster and more consistent authorisations would do more to signal that the UK is open for business than platitudes. Clear supervisory expectations, especially in fast-moving areas such as AI, as the Treasury Select Committee has recommended, would reduce the “regulatory tax” created by uncertainty. More rigorous, proposal-specific cost-benefit analysis would strengthen the regulation making process. None of these need to increase risk in the system.
The FCA is one of the world’s great regulators but it can be even better. One key area for this is the supervision it provides of firms. This depends on ensuring it has the right skilled and experienced staff with strong understanding of the markets they are overseeing. The FCA used to be attractive to experienced people from the private sector due to the FCA ‘deal’ of public service, improved work-life balance and better culture. Since then, pay has stagnated, the private sector has become better for work-life balance, and there have been concerns about the culture at the FCA. At the same time, there have arguably been cultural improvements in the City, ironically partly as a result of regulatory pressures. Attracting better staff may require increased funding from firms, but more skilled and experienced FCA staff would be widely welcomed by those they regulate.
Dame Meg is right to raise questions about growth and risk. However, civil servants’ risk metrics won’t resolve a tension that is, at its core, political and contextual. The City does not need a new bureaucratic overlay. It needs smarter regulation and a debate that moves beyond counting rules to improving how they work.
Omar Salem is a financial regulation partner at Fox Williams.