Cutting City regulation risks another financial crash, say economists

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A group of 58 leading economists and politicians, including the former business minister Vince Cable, has written to the chancellor to say that scaling back City regulation will put the UK at risk of another financial crash.

The open letter, which has also been signed by the former Greek finance minister Yanis Varoufakis and Columbia University professor Adam Tooze, was sent in reaction to the Queen’s speech, which outlined Rishi Sunak’s plans to “cut red tape” through a financial services and markets bill.

“We wholeheartedly support the government’s aim to stimulate long-term UK economic growth, including through financial regulation,” the letter said. “Yet we believe that competitiveness is an inappropriate objective for regulators.”

News of the pending bill – which comes as the UK aims to replace EU regulations following Brexit – has stoked fears about a regulatory race to the bottom, with economists saying it could force watchdogs to act as “cheerleaders” for big city institutions.

They argued that competitiveness objectives could be a “recipe for excessive risk-taking”, and could create the same conditions that have since been blamed for the 2008 banking crash. “After the last global financial crisis, which cost the world economy some $10tn, it was accepted that a focus on competitiveness by the then Financial Services Authority (FSA) had helped cause the disaster,” the letter said.

They even pointed to a 2019 speech by Andrew Bailey – the Bank of England governor who formerly headed the FSA’s successor, the Financial Conduct Authority – in which he argued against reintroducing a competition objective for the City watchdog. “It didn’t end well for anyone, including the FSA,” Bailey said.

Cable said in a statement: “It is extraordinary that the lessons of the financial crisis are being forgotten already, despite the massive harm that was done. The new emphasis on ‘competitiveness’ rather than stability and safety is an ominous warning that those who forget their history are doomed to repeat it.”

The pending bill is part of the government’s response to pressure from lobby groups including UK Finance, TheCityUK and the City of London Corporation, which were broadly opposed to Brexit but have yet to see any of the benefits promised by pro-leave politicians.

City groups have, for example, been pushing for a review of capital requirements for insurers and banks that could help free up cash for new investments and loans, and make it cheaper to take riskier bets, since they would have to hold less capital to protect against potential losses.

That is on top of pushes to make changes to a wide-ranging package of regulations known as Mifid II. There are calls for firms to be allowed to bundle customer charges, and for the permanent removal of caps on “dark trading” – which obscure the size of planned trades but can give investors access to better market prices.

Some are calling for a review of UK-specific rules like ringfencing – which require banks to protect consumer deposits by separating their retail and investment banking operations – as well as reducing the time it takes to secure regulatory approval for company directors, and simplifying regulation for challenger banks.

The Treasury has not yet confirmed the main policies that will make up the financial services and markets bill, which is expected to be put to parliament in the coming months, but has pushed back against claims that it will result in a watering-down of regulation.

Miles Celic, chief executive of the TheCityUK, defended the reintroduction of competitiveness objectives for regulators, saying other countries like Hong Kong, Australia and Singapore had managed to strike a balance with other goals such as financial stability and consumer protection.

Celic said: “It is self-evident that high-quality, well-implemented and effective regulatory standards are clearly good for competitiveness and economic growth, and so there is no contradiction between an effective regulatory regime and the proposed new secondary competitiveness objective.”

A spokesperson for the Treasury said: “We want to ensure the financial services sector is delivering for businesses and consumers across the UK, while also cementing our position as a global leader and promoting high international standards.

“Now we have left the EU, it is right that the regulators’ objectives reflect financial services’ critical role in supporting the economy, making the UK an even more attractive place to invest and do business.”