The financial sector should be a force for good in the world.
At the very least, it shouldn't worsen the environmental and social challenges we face. But we believe it should go further, and take a role in making things better for our planet and its people.
As the UK Government considers what financial regulation should look like post-Brexit, we’ve joined 36 other civil society organisations to sign a Joint Statement calling for regulatory reforms.
We’re urging it to strengthen its existing proposals, to consider the overall purpose of the financial system, and the democratic accountability needed to ensure it functions well.
The government is undertaking a huge review of financial regulation
The UK Government has been looking at how to adapt the regulatory framework for financial services following Brexit.
As part of this, it has been consulting the public on the proposals in its Future Regulatory Framework Review. This is an enormous undertaking transferring significant amounts of power from EU bodies to the UK’s HM Treasury (HMT) and financial regulators.
Under the proposals, the government is suggesting significant changes aimed at building a financial system that is Net Zero-aligned and that “acts in the interests of communities and citizens, creating jobs, supporting businesses, and powering growth across all of the UK”.
HMT also wants to bring in objectives for regulators to promote the international competitiveness and growth of financial services.
It plans to update the regulatory principle of “sustainable growth” to refer to climate change and a net-zero economy, and is also looking at what the transfer of scrutiny of this law-making from the EU to the UK will mean in practical terms.
This is especially important given the huge resource and time put into analysing each new line of financial regulation at an EU level.
Will a drive to competitiveness mean a race to the bottom for our planet and its people?
We’re concerned that by adding a new statutory objective of competitiveness, the government could be opening the door for rules being weakened to attract business.
Such a move could undermine the stability of the UK market, the very thing that makes it attractive: a focus on competitiveness has been widely recognised as a factor in the 2007/8 financial crisis.
Similarly: when it comes to the financial sector, growth for growth's sake is not desirable.
Extensive research suggests that there is an optimum size for a financial sector relative to the rest of an economy. The UK already far exceeds this point.
We agree that the regulators’ remit should refer to climate change and the net-zero economy. But we believe this should come in the form of a sustainability-related statutory objective related to the UK’s net-zero targets and carbon budgets. Not just a regulatory principle as currently laid out.
Sustainability is far more than just sustainable growth. And a statutory objective compels regulators to take action. Regulatory principles do not.
An increase in regulatory power must be twinned with increased transparency
We are also concerned about proposals to increase the powers of HMT and the regulators without similar increases to transparency and accountability.
As laid out in the Civil Society Joint Statement, we believe a new Parliamentary select committee should be set up to scrutinise the regulators. This must be supported by proper resources.
We welcome HMT’s expectation that the regulators will “commit to open and fair recruitment practices to ensure a diverse range of qualified candidates are appointed to panels”.
But our research and engagement work has indicated that a clear and transparent process is not sufficient on its own to address the imbalances between industry and civil society on issues of financial regulation.
Industry has always had a strong voice in how financial regulation is formed; those representing the interests of consumers and the public need an equally strong one.
We instead would support the call for HMT to require Financial Conduct Authority (FCA)’s and Prudential Regulation Authority (PRA)’s statutory panels to have at least 50 per cent members with experience of representing the interests of consumers or the wider public.
The UK Government needs to grasp this opportunity to lead
Finally, we support the recommendation from the Financial Inclusion Commission and Fair by Design to ensure the FCA must take account of financial inclusion across its work.
Financial markets do not currently meet the needs of those on low incomes or with disabilities.
The most vulnerable people are often unable to access necessary products or services, or pay extra. Too often they are not seen as desirable consumers to serve.
The government has a chance to change this.
With clear planning and direction, it could help tackle the massive social and environmental challenges we face.
It can set a bold vision for where we want to be and a clear path to get there.
This review offers a once-in-a-lifetime opportunity to shape a robust, purposeful financial system that would work in everyone's interests.
But currently, it lacks the boldness and ambition to do so.
We’re urging the government to shape a system of financial regulation that is sustainable, fair, transparent and accountable.