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The UK’s push to deregulate its way to growth has got veterans of the last financial crisis worried that it’s sowing the seeds for another crash.

Labour, for decades the political party that favored taming the City of London, now wants to be its champion and help it to foster much-needed economic growth. Chancellor Rachel Reeves declared in November that the crackdown on the finance industry since the 2008 crisis had “gone too far.”

Ministers are due to hold their first gathering on Thursday with various regulators to discuss pro-growth proposals for the coming year, with subsequent sessions to include the City’s main watchdogs.

While it’s not yet clear which rules will be stripped away in this pursuit of an economic boost, the rhetoric from Reeves was an uncomfortable reminder for those who dealt with the financial crisis.

“The tone was troubling,” said John Vickers, a professor of economics at the University of Oxford who chaired the Independent Commission on Banking from 2010 to 2011. His recommendations led to the UK requiring retail banks to separate themselves from riskier investment banking operations, known as ring-fencing.

“What would bother me a lot is if they are going to water down capital requirements, or if they chisel away at the ring-fence. That would be a mistake,” Vickers said.

David Aikman, a 17-year veteran of the Bank of England who was involved in the response to the financial crisis and is now a professor at King’s Business School, said there was a sense that UK regulators feel “political pressure from the new government” to pull back on rules.

“I’m sure the signals she has already sent and had sent even before the election is enough to make regulators’ ears prick up,” he added. “If they were thinking about tightening any regulation any further from here I suspect that would be less on the agenda than it was previously.”

That’s a problem because “the world looks incredibly risky right now,” according to Aikman. “It’s not an implausible statement to say that there’s far greater risk now than we understood there to be in the years after the financial crisis.”

Risks Growing

The BOE has warned repeatedly about rising financial stability risks, particularly in non-banks such as hedge funds and pension providers, where it promised to act after a review last year found that major firms could be “underprepared” to deal with crises.

The Treasury has acknowledged that high regulatory standards are a “pre-requisite” for growth. In November, it on ways to make the finance sector more competitive globally.

“Growth and driving more investment in the UK is our number one mission, and the only way to sustainably raise living standards,” a Treasury spokesperson said. “The financial services sector is a key part of that mission and one of the eight growth-driving sectors in the government’s modern industrial strategy, financing investment and job creation across the country.”

City Minister Emma Reynolds, who was appointed after Tulip Siddiq’s resignation this week, will be familiar with the demands of finance firms. Before being elected to parliament last summer, she worked for the lobby group TheCityUK.

Political pressure on regulators to support businesses is not new. More than a decade ago, the coalition’s “war on red tape” targeted thousands of regulations that ministers said held back growth. Britain’s previous Conservative government signaled to watchdogs they should be doing more, presaging Donald Trump’s more dramatic promises to shake up antitrust enforcement and the central bank in the US.

The UK’s top financial regulators, including BOE Governor Andrew Bailey, the head of the BOE’s Prudential Regulation Authority Sam Woods and FCA Chief Executive Officer Nikhil Rathi, have all made comments about the dangers of forgetting the lessons of the crisis when relaxing the rulebooks.

“You might think you’ve done it in terms of you think you’ve got a lot of regulations in place but you’ve never ‘done it’ in terms of ‘the risk has gone away’,” Bailey said in October.

These remarks were as much for an international audience as a domestic one, as regulators across the world sense a collapse in political support for tough regulatory standards.

Privately, top regulators say Labour’s stance has so far not led to the kind of clashes that occurred when the last government pushed the BOE to loosen the rules on insurance capital.

More importantly, regulators say that the rhetoric has not yet prompted major policy changes. So far, initiatives include a plan to allow UK bankers to access their bonuses faster and new rules for individuals to buy investment funds. Both have been billed as a shift away from European Union rules following Brexit.

The UK also announced changes to soften the impact of global bank capital rules and reduce the frequency of bank stress tests — measures regulators said would not hurt financial stability. The PRA and FCA have a pipeline of growth-friendly initiatives to be announced early next year, but none are a major change from the agenda set before Labour took power, according to people familiar with the plans.

A review of ring-fencing was concluded last year, and further changes may come as officials look at ways to align the rules around ring—fencing and those on resolution. More broadly, there are still a raft of EU-era rules that could now be revised, which regulators at the central bank think will allow them to cut red tape without increasing risk.

The FCA, which regulates some 42,000 firms, has the extra challenge of protecting consumers across everything from funeral plan providers to big banks. The agency, which was founded in 2013 as part of a post financial-crisis overhaul, has already endured numerous scandals on its watch. About 18 months ago, it gave its firms a new “consumer duty” to act in the best interests of customers.

Senior officials have spent months asking the government to acknowledge that loosening the reins will lead to higher consumer losses, and that the FCA should not be hauled over the coals for this. The campaign will continue into 2025, a person familiar with the plans said, asking not to be named as the discussions aren’t public.

On the antitrust side, the Competition and Markets Authority will explore ways to avoid forced asset sales during company takeovers, Chief Executive Officer Sarah Cardell told a London gathering in November, in a speech that used the word “growth” .

One sign of the watchdog’s shift in approach was seen in December, when the CMA approved Vodafone Group Plc’s £15 billion ($18.2 billion) merger with CK Hutchison Holdings Ltd.’s UK unit Three.

The deal that will create the country’s largest mobile operator by revenue comes with commitments to invest £11 billion in upgrading the network and protect consumers against price rises.

“This outcome would have been unthinkable in the recent past and doubtless reflects a CMA concerned to ensure the potential benefits of mergers can be recognized,” Verity Egerton-Doyle, a partner at law firm Linklaters, said.

Still, the agency’s newfound focus on economic growth “has not yet made it into any of the CMA’s formal guidance,” said Veronica Roberts, a partner at law firm Herbert Smith Freehills. The CMA will still balance the pro-growth agenda with competition concerns and “it will not be a carte blanche for all merger plans,” she said.

The government’s renewed focus on growth gives “an opportunity for the CMA to drive the positive outcomes of effective competition,” the regulator’s spokesperson said.

Earlier this month, Cardell that “I wouldn’t say it is a radical change of approach, but I think it is about us taking a much more rounded, informed approach on how we are looking at particular deals.”

At the Margins

Banks have responded cautiously so far. Several senior finance executives, who asked not to be named discussing their interactions with government, said they welcomed officials’ engagement in the subject, but they had not yet seen anything that would make them want to put more resources into the UK.

While the planned relaxation of bonus rules is helpful at the margin, the real issue for investing in banks’ British operations is the core UK economy and its growth trajectory, which is uncertain, the executives said.

One person also drew attention to regulators actually toughening rules in some areas, for example pushing for higher standards as they implement the global Basel rules on bank capital next year.

Then there are questions about whether expanding the financial sector is the kind of growth that the UK needs.

A group of prominent economists including Noel laureate Joseph Stiglitz that unleashing banks could jeopardize its industrial strategy. “History has shown time and time again that beyond a certain point, the financial sector can only continue to grow by taking excessive risks and increasing the economy’s debt burden until the inevitable collapse.”

Photograph: The City of London. Photo credit: Betty Laura Zapata/Bloomberg

Topics Legislation Europe London