The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are under pressure to reduce red tape in the financial sector. “We’ve told our regulators they need to regulate for growth, not just for risk,” the Chancellor Rachel Reeves has said. But the idea that tweaking regulations will somehow unlock growth is a fallacy.
The idea that tweaking regulations will somehow unlock growth is a fallacy
The problem is that these ungoverned and rogue regulators are manned by second-rate lawyers and special interest groups who present their ideas as mainstream. They have never facilitated growth and have created a labyrinth of rules that suffocate the UK’s financial services industry, serving their own interests rather than the nation’s. The FCA and PRA are nothing more than self-preserving, bureaucratic entities that have systematically strangled our capital markets. Despite their heavy-handed presence, there is little to show for their so-called “protection” of investors or the economy.
The track record of the Financial Services Authority (FSA) – the predecessor to the FCA and PRA – speaks volumes. Every major crisis and scandal since its inception has been met with the same predictable weak explanations: balance sheet anomalies were missed, systemic risks weren’t addressed in time and investors weren’t protected. The FSA was a monumental failure, and its replacement by the FCA and PRA after the 2008 financial crash has changed little. This legislation laid the foundation for a dysfunctional regulatory environment, preventing the growth of the UK’s capital markets while fostering a situation where our financial institutions are now at the mercy of foreign investors.
In fact, the Financial Services and Markets Act 2000 (FSMA) and its consequences, particularly the eradication by rules and guidance of “caveat emptor” and the obstruction of risk taking by investors and entrepreneurs, have directly contributed to the decline of the London Stock Exchange (LSE). UK companies are being swallowed up by foreign buyers at an unprecedented rate. Domestic insurance and pension funds, which once held nearly 50 per cent of UK-listed companies in 1997, now own less than 5 per cent. The damage began under Tony Blair and Gordon Brown, whose policies, like the 1997 removal of tax credits for pension funds, initiated the rot that has only deepened since. The result? The UK’s capital markets have been hollowed out, and our financial infrastructure is now more dependent on foreign capital than ever before.
The goals set out by the FCA, such as ensuring market functionality and maintaining international competitiveness, are contradictory and utterly ineffective. The FCA’s so-called “strategic objective” of improving market function is undermined by conflicting objectives that muddy the waters at every turn. Their operational aims — to protect consumers, enhance market integrity, and promote competition — are simply not aligned with their broader objective of economic growth. These constant contradictions have led to erratic, ineffective regulation, with more red tape but zero results.
The FCA’s failures are evident in high-profile cases, like the collapse of London Capital & Finance (LCF), when the FCA was warned years in advance but failed to act. With a budget of £750 million a year, the FCA has proven itself to be a regulatory juggernaut that spends far more time penalising businesses than actually preventing harm.
But perhaps the most troubling aspect of the FCA and PRA is their funding model. These regulators are funded by the very companies they regulate, meaning their financial success is tied to the continuous collection of fines and fees. Not only does this give the FCA and PRA too much operating independence from the Treasury but an obvious and perverse incentive to focus on raising revenue through penalties, rather than protecting investors, entrepreneurs and the integrity of the markets. They are financially self-serving machines, perhaps more interested in their own financial health than in investigating wrongdoing. The FCA, PRA and FSA before them are quangos operating with little effective oversight, free from the scrutiny that should have come from Parliament or the Treasury for almost 25 years.
The FCA’s recent proposal to introduce non-financial misconduct rules is further evidence of its dangerous overreach. These new rules were not passed by Parliament and have no clear legal backing. Yet the FCA has arrogated to itself the power to dictate moral behaviour in the financial services sector, undermining the basic principle of “innocent until proven guilty.” This new initiative puts businesses at risk of reputational damage and enormous legal costs, without any real evidence to back up the charges. It’s a legal Kafkaesque nightmare that turns basic democratic principles upside down.
Let’s be clear: the idea that regulators “fix” things is a dangerous delusion. Next up is the Government’s approach to regulating one of our remaining success stories, the Premier League, with its bizarre freedom to “redistribute funds”. Meddling with football will only further entrench the same toxic regulatory mindset that has already crippled the financial services sector. The message is clear: UK governments of any colour seems intent on destroying anything that works and has done since 1997.
What is needed is nothing short of a complete overhaul of the financial regulatory system. The solution is simple: malignant regulation, such as FSMA 2000, should be repealed immediately, and both the FCA and PRA disbanded. If we don’t act now, we risk watching the last vestiges of our once-great financial sector slip away entirely. The Reform Party will repeal all manner of over engineered, mainly Blairite, malignant legislations when it takes power in 2029. But we are fast running out of time in financial services as the expertise needed in this sector has been slipping away for years; it may have completely dissipated by the end of this Parliament. The Chancellor’s mantra of “regulation for growth” is simply an oxymoron which exposes her lack of experience.
Comments