The most important segment of yesterday’s Queen’s Speech was the landmark Financial Services Bill. This piece of legislation was a major test for the government’s vision of a net-zero aligned financial system that drives sustainable economic growth across the UK and acts in the interest of all people and communities. Regrettably, it didn’t pass the test. To understand why requires getting to grips with the concept of competitiveness, distinguishing it from its sibling with which is often confused, competition.
Crucially, the government confirmed that the new bill will translate the Treasury’s Future Regulatory Framework into law. This will determine how post-Brexit financial services regulation is developed in this country for years to come.
The proposed framework includes a major delegation of powers to regulators, in particular the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The regulators will have to pursue their new powers in line with updated legal duties known as “statutory objectives”.
A heated debate has emerged over a flagship government proposal to introduce statutory objectives for the FCA and PRA to promote the “international competitiveness” of the sector. A major pitfall in this wrangle is a confusion between competition – in fact already a statutory objective of the UK’s world-leading financial regulators – and competitiveness.
Regulators already foster competition between firms, with the aim of driving better outcomes for consumers. There’s much more work to be done here – for example, to address the fact that up to 90 per cent of people pay over the odds for their bank account. But it’s true that healthy competition, properly regulated, can lead to greater choice, keener pricing, higher service quality, and innovation.
International competitiveness on the other hand refers to the ability of UK firms to compete overseas, and for the UK to remain an attractive location for global businesses. Making this the responsibility of regulators has been tried before, with devastating consequences.
Prior to the global financial crisis of 2008, the then Financial Services Authority was given a duty to advance the international competitiveness of the industry. It put UK regulators in a competition with regulators worldwide to water-down standards and facilitated a view that financial innovation should be supported at all costs. In 2012, the Treasury and Parliament found that it only contributed to the crisis.
As the Governor of the Bank of England, Andrew Bailey, reminded us in 2019, the regulator “was required to consider the UK’s competitiveness, and it didn’t end well, for anyone.”
In addition to making the system more crisis-prone, a competitiveness objective actually threatens to undermine the healthy competition we need to bring about. It effectively asks regulators to cheerlead for large international firms. There are many organisations whose job it is to promote financial services, including the City of London and industry associations – not to mention the firms themselves.
The regulator’s job, on the other hand, is to ensure financial services work in the public interest. Instead of simply tipping the playing field in favour of big finance, the government should address failing services for ordinary people at home. Communities aren’t just grappling with access to cash and scams. They face bank branch closures and new forms of exclusion from data-driven services. Small businesses face a £22bn funding gap. And, while the government works to achieve net zero, UK banks and asset managers have still much work to do to offset their annual carbon output in the UK .
Officials and industry lobbyists have stressed that they want to see the UK lead on high standards and green credentials. If this is the case, then they should directly focus on those laudable goals. They could strengthen integrity objectives, or introduce new statutory objectives to align the financial system with climate change and financial inclusion. In February, 37 public interest groups called on the government to do just this.
It is no wonder that a majority of the British public deem the flagship reforms as “out of touch and elitist”, according to polling by Finance Innovation Lab out this week. To uphold the success of British finance and demonstrate that it prioritises ordinary citizens, the government must ensure that regulators can act as independent referees making decisions in the public interest.