Deregulation is in the air: will the government’s plan for financial services deliver growth

As you may have noticed, Reeves and Starmer would quite like to grow the economy. It fits into
a positive narrative around growing businesses, higher employment, and improving personal
and public finances. With growth in the government’s sights, deregulation is in the air, according
to the government 4% of GDP is supposedly lost because of red tape. Anti-bureaucratic
sentiment has entered the political mainstream as DOGE copy cats pop up in light blue councils
across the country.
Financial services is the primary battleground for deregulation for two reasons. Firstly its a major
modern industry and export, contributing to 12% of tax receipts, while also enabling growth in
other industries. Secondly, each transfer of power in the last fifty years has seen a regulatory
revamp for financial services, from Thatcherite self-regulation, to the New Labour Tripartite
framework and the existing FCA-PRA dual regulation system introduced by the Tories
post-financial crash.
So there is an incentive and a political norm to think big about financial services regulation. The
government and regulators are gearing towards growth, but the question remains as to whether
the programme as set out is enough to move the dial. The House of Lords Committee doesn’t
think so but, as I will set out below, the FCA’s five year plans and the Bank of England’s
Regulatory Initiatives grid are seriously focused on growth. If the regulators are able to meet
their own targets then we may well see the growth Starmer is hoping for.
The FCA published its 5 year plan in March, setting the goals for financial services regulation for
the rest of the decade, which nicely gives us some idea of what we can expect before the next
election.
The first of the four goals is a ‘Smarter Regulator’, less intensive supervision of good firms,
more direct contact and two-way intelligence sharing, investing in systems to simplify reporting,
authorisation and record-keeping. Secondly ‘Support Growth’, a tech-positive approach
improving productivity, widen retail access, and scrap out redundant rules. Thirdly ‘Help
Consumers’, ensuring good outcomes for retail customers, reviewing mortgage affordability
rules to help buyers. Lastly ‘Fight Crime’, preventing Fincrime destabilising markets, supporting
new tech for detection and prevention, and informing consumers to help protect themselves.
Supporting growth and helping consumers are presented as mutually beneficial. Firms grow
thanks to untapped retail investors, ordinary people enjoy the dividends of economic growth and
financial services firms grow by facilitating this investment.
A helpful example of regulators’ is the Advice Guidance Boundary Review, intended to see
financial advice firms broadening their customer base beyond the wealthy, which was lauded on
‘The Wealth Show’ by the FCA’s Head of Advisers, Wealth and Pensions. The review intends to
address the advice gap that means professional financial advice is used least by those that
need it most, the financially vulnerable. A policy statement is to be published in December and a
consultation paper in January, but with all this yet to come the question remains as to whether
this will close the gap. On the same podcast they celebrated the cutting of 70% of legal text in
the capital rules, which makes for a powerful image but again means little.
We can also see a new focus on self-reflection, with self-imposed targets e.g. increasing
financial exports, but also a larger critique of how the FCA approaches risk. Out with risk elimination
and in with informed risk-taking, rebalancing the weight of the risks of doing vs not
doing.
This is all a notable change in rhetoric but is just that for now, it’s not a radical shakeup of the
regulatory landscape. As with various areas of government policy there are some good signals
but its questionable whether they will deliver, but still it is encouraging to see the targets the
FCA are setting.
The Bank of England’s Regulatory Initiatives Grid was published in April and sets out the
timeline for the next two years’ initiatives, much more granular than the FCA five year plan.
In the interest of growth we have the following measures: reforming capital requirements,
simplifying mortgage rules, introducing a T+1 settlement cycle, removing the requirement for a
consumer duty board champion, and ending 90 initiatives. These are promising signs that
regulators are keen to cut bureaucracy.
But we should at this point remember the costs of growth. Both cryptoassets and ‘Buy Now, Pay
Later’ services are being brought under regulatory oversight and for good reason. Uninformed
consumers using these infamous fast-growing retail-accessible products would be disastrous if
normalised, and yet would appear to benefit the economy and firms. Perhaps the grid shows
that regulators are striking the right balance between regulating harmful products and loosening
restrictions on good firms.
The House of Lords Financial Services Regulation Committee report published in June heavily
criticises the regulatory approach. The message is a familiar one, the changes aren’t meeting
the challenge. The report agrees with the regulators’ admission that they are hampering growth
but goes much further in calling out the structural issues and recurring regulatory problems
including a culture of risk aversion, complex landscape, overlapping bodies, lack of
proportionality, lack of clarity, low financial literacy among consumers, and limited research into
how regulation can foster growth, which raises concerns about the costs and benefits of those
90 initiatives that have been cut by the Bank of England.
The committee’s rhetoric is a welcome antidote to the plucky optimism of the regulators. There’s
explicit concern whether regulators “can clearly set out how their interventions can support
growth in the wider economy” and the “inadequate guidance from the government as to how it
sees financial services regulation supporting its growth strategy”. This criticism chimes with
some of the issues we’ve seen with the regulators’ plans and the government should take this
advice seriously, they can go further in their reform of financial services regulation if they are
serious about delivering a growing economy.