IT was a relief to hear a loud and clear note of caution last week from the Treasury Committee on the UK Government’s pursuit of an “international competitiveness” objective for financial sector regulators following Brexit.
The cross-party committee issued a warning “against the danger of the lessons of the financial crisis being forgotten as memories of the crash fade”.
The House of Commons committee also made plain its view that “competitiveness should not become a primary objective of financial regulators”.
And it warned against “any inappropriate weakening of the UK’s strong regulatory standards”.
The committee also reaffirmed its “commitment to regulatory independence”.
And it declared it would “remain alert for any evidence that regulators are coming under undue pressure from the Treasury to inappropriately weaken standards”.
The Treasury, for its part, seemed at pains to bang that noisy, alarming Brexit drum when it published details of the Financial Services and Markets Bill on May 10.
It declared: “The bill will make the most of the opportunities of Brexit, by establishing a coherent, agile and internationally respected approach to financial services regulation that is right for the UK.”
There it was again – the “opportunities of Brexit”. Such opportunities remain conspicuous by their absence – while the damage of Brexit is plain to see on myriad fronts including skills and labour shortages and the choking effect on exports – but that does not stop the politicking.
Key elements of the bill, the Treasury noted, involve “revoking retained EU law on financial services and replacing it with an approach to regulation that is designed for the UK” and “updating the objectives of the financial services regulators to ensure a greater focus on growth and international competitiveness”.
The bill has prompted concerns over a weakening of regulation. And that worry is entirely understandable given the deregulatory passions of this Johnson administration and those who back it.
The Tories’ decision to make “international competitiveness” an objective of the Financial Conduct Authority and Bank of England’s Prudential Regulation Authority makes the Conservative finger-pointing (which you still see from time to time) about Labour having been responsible for the global financial crisis look even sillier.
The notion that the financial sector would have been regulated to a greater degree by the Conservatives than Labour is bizarre and incredible.
Commenting on the current Tory plans for the financial sector, the Treasury Committee says in its report published last week: “We recommend that there should be a secondary objective for both the Financial Conduct Authority and the Prudential Regulation Authority to promote long-term economic growth. The wording will be crucial: pursuing international competitiveness in the short term is unlikely to lead to economic growth or international competitiveness in the long term if it is achieved by weakening the UK’s strong regulatory standards. Weakening standards could reduce the financial resilience of the UK’s financial system and undermine international confidence in that system and the firms within it.”
It is indeed crucial that regulation must not be weakened in this way.
The committee declares in its report: “In designing the new secondary objective, there should also be some consideration for the ways in which financial services serve the ‘real economy’. The financial services industry can help deliver economic growth not simply by growing itself but also by facilitating economic growth by providing capital, credit, insurance and other services to firms in the ‘real economy’.”
This is another important point.
And the Treasury Committee warns: “The Treasury should continue to reject any calls for a growth and/or competitiveness objective to become a primary objective. This would increase any pressure on regulators to trade off competitiveness against resilience, and would undermine the regulators’ ability to deliver on their core functions. There is a danger that as memories of the financial crisis fade, its lessons are forgotten.”
Indeed there is such a danger.
Giving its views on the future overall direction of financial services regulation, the Treasury Committee interestingly observes that Brexit should not in itself be the cause of “instant” or “dramatic” changes.
This is absolutely the case, although you might be forgiven for thinking it was not given the Tories’ determination to make as much noise as possible about Brexit, even when they should (given it has been an unmitigated disaster) maybe just pipe down about it.
The Treasury Committee notes “the UK has historically exercised significant influence in the framing of EU regulations”. Indeed it has.
While giving its view that “there will be opportunities to tailor inherited EU regulations to the UK market, and to seek opportunities for simplification, while being mindful of continued compliance with global standards”, the committee adds: “The Treasury should respect the principle of regulatory independence, and must not pressure the regulators to weaken or water down regulatory standards, or to accept changes to the regulatory framework which could impede the regulators’ ability to achieve their primary objectives.”
SNP MP and Treasury Committee member Alison Thewliss seemed to sum up many people’s concerns around the Tory proposals well in an article in The Herald last month, writing: “Regulators should be independent watchdogs making decisions in the public interest, not in the interests of financial lobbyists, who already have practically unfettered access to policymakers. We need rigorous and focused regulation to ensure the finance sector continues to effectively contribute to our economy. Brexit is a problem made by the UK Government, and cannot be solved by a race to the bottom on standards which risks throwing us headlong into another financial crisis.”
It would surely be difficult to disagree with any of this.
The Treasury Committee also recommends the Financial Conduct Authority “should have regard for financial inclusion in its rule-making” and “should also consider how to improve its engagement with the poorest consumers, and seek data on the issues vulnerable consumers experience directly”.
These seem unlikely to be priorities for the Tories but they are very valuable suggestions.
What is absolutely crucial is that financial regulation and politics must be kept apart. And it is particularly important that the Tories’ febrile post-Brexit politics should be isolated completely from the serious, sober task of regulation. We should be wary indeed of those lobbying and campaigning for anything that would weaken regulation of the UK’s financial sector.
And we must ensure the lessons of the past are not forgotten, for the sake of the population at large, in these grim economic times.