(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves said the UK’s crackdown on banks in the wake of the global financial crisis has gone too far and vowed to give the country’s watchdogs new marching orders to ensure they’re focused on growing the economy.
Regulators have spent much of the last decade trying to eliminate risk taking, which has hindered growth across the country, Reeves said in her inaugural Mansion House speech to the City of London on Thursday.
“The UK has been regulating for risk, but not regulating for growth,” Reeves said. “That has gone too far and, in places, it has had unintended consequences that we must now address.”
Reeves and Prime Minister Keir Starmer have spent months trying to curry favor with financiers and executives across the City as they seek to carry out their campaign pledge to rebuild Britain. That promise hinged on delivering growth by securing more outside investment to fix the country’s ailing public services.
To that end, Starmer used an investment summit last month to unveil £63 billion ($79.8 billion) of new and already-agreed investments.
Rolling Back Rules
Reeves continued the charm offensive during Thursday’s speech, calling the financial services sector the country’s “crown jewel,” noting it accounts for 9% of the UK’s economic output.
The government is going to consider replacing parts of the so-called Senior Managers and Certification Regime, which was introduced in the aftermath of the 2008 financial crisis to ensure executives at financial-services firms can be held to account for misconduct that occurs on their watch.
The rules that apply to staff below senior management level have become “overly costly” for some firms and Reeves said the Treasury, the Financial Conduct Authority and the Prudential Regulation Authority will consider removing the current certification regime from legislation after fielding feedback from the industry.
Increasingly, the government has been zeroing in on the need to overhaul the country’s pension system to secure the investment it needs to kickstart growth.
Reeves on Thursday confirmed she wants to introduce new legislation that will allow the UK to merge the 86 local government pension schemes in England and Wales into a handful of megafunds and consolidate the £800 billion of assets held by about 60 so-called multi-employer defined contribution schemes.
Doing so, Reeves says, would allow the UK replicate the Australian and Canadian pension models and release an extra £80 billion of private capital for infrastructure and start-up and scale-up businesses.
Reeves’s plan builds on a previous attempt by David Cameron’s Conservative government to consolidate local pensions to fund infrastructure, which fell short of its ambitions.
“It is great to see the government putting sensible risk taking back at the center of our economy,” Schroders Plc Chief Executive Officer Richard Oldfield said in a statement. “Firms like Schroders — working in partnership with pension schemes, regulators and the government — can unlock the potential of the UK for the benefit of all of us.”
Still, critics say creating larger pension funds is just the start of what’s needed. The country’s pension system has also pulled back from investing in British stocks — UK pension funds held just 1.6% of UK-listed stocks in 2022, down from about 32% in 1992, according to data from the Office for National Statistics.
The chancellor has been adamant that she will not compel pension funds to invest in the UK.
Regulatory Criticism
A growing chorus of executives from across the City have said it’s the UK’s regulatory regime preventing more investment into British stocks, especially finance firms — which make up one fifth of the country’s blue-chip FTSE 100 index.
“We need to reform attitude to risk within regulators and rethink our mindset,” Alastair King, the new Lord Mayor of the City of London, said in his own speech on Thursday. “Regulators will increasingly need to focus not just on preventing failure, but actively encouraging success.”
Take, for instance, the FCA’s long-running probe into practices in the motor finance industry. Earlier this week, analysts at Shore Capital Markets warned that many of the country’s biggest banks might have to limit their share repurchases and dividends in the coming quarters while the FCA considers expanding the scope of that inquiry.
Bank stocks have suffered in recent months as investors have kept a close eye on that FCA probe — as well as a pair of market-moving lawsuits tied to the matter going through the court system.
Reeves said she has sent remit letters to the FCA, the PRA Committee, the Financial Policy Committee and the Payment Systems Regulator ordering them to ensure their actions will be supportive of the country’s future growth.
In addition, Reeves said she sent a letter to the Bank of England’s rate-setting Monetary Policy Committee that directed the group to continue targeting a headline inflation rate of 2%, though she also “defines the government’s economic policy objective to restore broad-based and resilient growth,” according to a statement on the government’s website.
“We cannot take the UK’s status as a global financial centre for granted,” Reeves said. “In a highly competitive world, we need to earn that status and we need to work to keep it.”
The chancellor said the government will publish a “growth and competitiveness strategy” for financial services in the spring and will invite firms to contribute views. That work, which will be led by Economic Secretary Tulip Siddiq, could intensify lobbying by some firms for a more radical shake-up of regulators, with potential ideas including making competitiveness a primary objective and even breaking up the current structures to allow more focus on growth.
Payments Changes
Recent work by the Payment Systems Regulator to crack down on authorized-push-payment fraud — where victims are tricked into sending money to criminals — has also drawn criticism from a bevy of financial technology upstarts from across the City.
Under new rules introduced last month, customers will now be refunded in most cases of fraud, with the cost split between the financial firms used to send and receive the payment. Startups like Revolut Ltd. as well as large banks have argued that technology giants such as Meta Platforms Inc. should also be on the hook since the vast majority of these scams originate on their platforms.
Reeves said Thursday she’s written to players in the tech and telecommunication sectors and asked them to update her on the moves they’re taking to reduce fraud by March 2025.
In her wide-ranging speech, Reeves is also planning to reinstate climate change to the remit of the MPC, saying the committee must support the government’s efforts to transition to net zero.
A similar requirement was removed from the MPC remit in 2022. The last government also downgraded climate in the BOE’s Financial Policy Committee remit. Reeves has elevated sustainable finance to one of the FPC’s core secondary objectives.
Reeves said the UK will launch a pilot to begin issuing digital gilts. The Labour government has been striving to modernize financial markets, in this case by using blockchain technology to “tokenize” its government debt. The hope is that it will make gilt trading faster and cheaper.
Separately, the motor finance inquiry and the push to crackdown on authorized-push-payment fraud have thrown the UK’s Financial Ombudsman Service into the spotlight in recent years. The free service is meant to impartially settle complaints between consumers and financial companies, a role Reeves said she wants to modernize.
“I know that this sector is the crown jewel in our economy,” Reeves said. “It is one of the country’s largest and most productive sectors.”
--With assistance from Leonard Kehnscherper and Philip Aldrick.
(Updates with video in third paragraph, additional details about Reeves speech beginning in eighth paragraph.)