Cutting regulation won't stimulate growth and won't save firms money

If you’ve been reading my blogs or listening to our podcast over the past year, you’ll have a good sense of my mounting frustration at the Treasury’s pro-growth, deregulatory agenda.

Having waited 14 years for a Labour government, I’ve been working myself through the five stages of grief as I’ve come to terms with this insidious narrative which caught many people by surprise in the months after last year’s election.

At first, I told myself this just a temporary play to get the finance industry on side to drive through a few policy agenda items – more investment in UK plc, pensions reforms etc. But as the Government has doubled down on its rhetoric, my denial has morphed into anger.

No one I speak to really understands what the end game is here. Does the Government really believe that cutting back financial rules will unlock growth? If so, I’m fairly confident it will be disappointed. And it certainly won’t deliver any economic change that will be felt within this Parliament.

Or is this just a temporary ploy to get the industry on side – with a plan to pivot back to a more even narrative once they’ve achieved everything they were after? If so, they are underestimating the amount of damage they are doing in the meantime. The FCA has been forced to pivot its entire narrative over the last 12 months. From prioritising raising standards through the consumer duty, it now talks almost exclusively about its new objective to support economic growth.

Good regulation supports growth

What disappoints me most about the FCA’s response is that it is has not taken the opportunity to make the case that strong regulation and strong consumer protection are essential pre-conditions for strong sustainable economic growth. Regulation does not undermine growth, it supports it. Tearing up the rulebook will not unleash innovation and stimulate investment. Instead, it will create more change that firms have to respond to. And with all change, there is a cost.

Back in March, the Government set a target to cut regulation by 25% by the end of this parliament  - which has obviously been music to the ears of many in the finance lobby.

Many in the industry talk about the cost of regulation running into billions – and suggest that a cut in the rulebook will lead to enormous savings.

But this argument is bogus. While it may well be possible – even desirable over the longer-run – to cut back the rulebook by 25%, this won’t release billions of pounds back to the industry. While firms employ compliance teams to ensure that they abide by the rules, 25% less rules does not require 25% less people. Indeed, most of what we are doing is replacing prescription with principles – which require more thought, more human brainpower to comply with.

I’m in full support of cutting back rules where they are now superseded by the Consumer Duty. But we need to accept that rapid change in the rulebook and the legislative framework costs firms (not saves them) time and money in the short-term – as they adapt to the new world. And there is no need to rush into these changes, as many firms are still getting to grips with the fundamentals of Consumer Duty – which requires a shift in the way they approach compliance and culture. Many compliance officers I speak to just want a period of stability.

Secondly, even when this 25% bonfire is complete, it will not lead to a 25% reduction in compliance costs. Large firms invest in compliance to protect themselves from future liability. There’s nothing to stop banks and insurers from cutting their compliance teams by 25% today. But will boards still be able to assure themselves that their companies are delivering good outcomes?

Changing the narrative

Consumer protection has come such a long way over the last 25 years. Mis-selling scandals are far fewer, and the culture in many firms is transformed. Is the Government really saying that it wants firms to remove all the checks and balances that it has put in place – and to return to a world where firms repeatedly deliver bad outcomes and then pay for it both financially and reputationally further down the track?

Sure, the UK retail financial services industry may not be as an attractive a place for US private equity firms – as it’s not as easy to rinse consumers as it once was. But we have a healthy and profitable financial services sector, which helps provide financial stability for consumers and oils the wheels of economic prosperity. Going backwards will not deliver long-term sustainable economic growth – it will undermine it.

So I’m moving on from stage two to stage three of my grief – bargaining. Can consumer groups and progressive parts of the financial services industry start to join forces to make this argument to Government, and help shift the narrative? Unlike real grief, it is not too late to bring hope back to life with a shift in the rhetoric, and a willingness to take a more nuanced approach to improving our regulatory landscape.

A growing economy is underpinned by a trusted financial services industry that lends, protects, transacts and invests for consumers.