It’s hard to comprehend just how massive the UK financial sector is and the major role it plays in driving the climate crisis. Despite the UK population being a fraction of the size of the world’s largest countries, London vies with New York for the title of the world’s largest international financial centre.
UK banks and asset managers are responsible for nearly twice the annual carbon output of the entire UK population. This is why the government’s target of making the UK the world’s first net zero financial centre, set at the Glasgow climate talks last year, is so important.
The Government is also undertaking the biggest shake-up in the rules governing the UK financial sector since the 1980s. At the heart of this is the Financial Services Bill, set to be a centrepiece of the Queen’s Speech tomorrow (Tuesday). You would think that the climate would be a centrepiece of this Bill, but sadly, it seems that the Government is set to fail this first major test of its climate leadership and its seriousness about making the UK’s financial sector net zero.
At the centre of the Bill will be the legally binding goals – or “statutory objectives” – that the Government sets for the major actors that regulate our financial system, including the Bank of England and the Financial Conduct Authority (FCA).
Statutory objectives are the most important part of a regulator’s mandate. For the FCA, for example, these currently prioritise well-functioning markets, consumer protection, and financial stability and integrity. They shape absolutely everything regulators do, including what they prioritise and how they allocate resources, and set the rules that financial institutions must follow, the research they undertake, and the basis upon which they make their decisions and are held to account.
If regulators were given objectives to align finance with the UK’s climate and nature goals, it would empower them to actively advance innovative climate policies and drive through new climate-related regulation without having to wait for legislation. This would establish the UK’s climate leadership and accelerate the global trend towards aligning financial regulation with sustainability goals.
However, instead of statutory climate objectives, the government is merely proposing strengthening “regulatory principles”. As the Treasury itself points out, “the regulators are not required to act to advance their regulatory principles”, just to take them into account. The climate risks being relegated from the central feature of financial regulation to an ineffective afterthought.
If the Government is not prioritising the climate, what is it prioritising? It has shown willingness to introduce new statutory objectives, but with very different motivations and impacts. The new statutory objectives it proposes for regulators are the “long-term growth and international competitiveness of the UK economy, including the finance sector”.
“Competitiveness” is distinct from competition, which regulators already have a duty to promote. International competitiveness refers to the ability of UK firms to compete for business overseas, and for the UK to remain an attractive location for global finance. Prioritising this would be a huge mistake.
A duty to promote the competitiveness of industry risks putting UK regulators in a “race to the bottom” with regulators globally to water-down standards. Just a decade ago, Parliament removed competitiveness from the mandate of the financial regulator. In 2010, the Treasury found that one of the reasons for regulatory failure leading up to the global financial crisis of 2007/08 was “excessive concern for competitiveness”. The crash saw millions lose their savings, homes, businesses and jobs, and cost the UK an estimated £1.8 trillion in lost GDP.
As the climate crisis worsens and the UN warns we have just eight years to halve global greenhouse gas emissions, the Financial Services Bill presents the government with a choice: to promote truly effective and innovative climate action or to prioritise the interests of the City of London.
Now, more than ever, we need it to make the right choice.
Jesse Griffiths is CEO of the Finance Innovation Lab