BREAKINGVIEWS-UK’s deregulation drive fosters wrong type of risk

By Liam Proud

LONDON, July 16 (Reuters Breakingviews) - Rachel Reeves reckons the City of London needs more dynamism. Britain’s finance minister is probably right. But some of her latest reforms, including weaker rules for banks, may raise the risk of economic harm.

Reeves’s latest bundle of policy proposals – dubbed the Leeds Reforms after the British city where she unveiled them – follows a similar speech last year at the Mansion House dinner, the preferred forum for the chancellor to flaunt her pro-finance credentials. On Tuesday evening she told City grandees that regulation was a “boot on the neck” of growth, and talked up a range of measures to cut red tape on the financial sector, which accounts for 9% of UK economic activity.

Many of the planned reforms are sensible. Watchdogs like the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA) will face clear deadlines on how quickly to approve new firms and senior managers. Separately, banks may be allowed to alert customers to the fact that money in their cash accounts could be earning higher returns in the stock market, a practice stamped out after the 2008 crisis. Reeves is also considering further changes to tax-free savings accounts, which could in theory include nudging more people into equities.

The common thread is that Britain’s weighty edifice of rules and regulations has left too much money sitting on the sidelines, harming both savers and the competitiveness of UK capital markets. It’s a broadly correct diagnosis. A recent Aberdeen report found that Brits had the smallest percentage of their wealth in equities and mutual funds among the Group of Seven wealthy countries.

Other elements of Reeves’s reform push, however, could create the wrong type of risk. She touted bank supervisors’ decision to raise the balance sheet threshold beyond which lenders must issue loss-absorbing debt to protect depositors to 40 billion pounds ($54 billion), from 25 billion pounds. That’s odd since the failure of U.S. lender Silicon Valley Bank in 2023 arguably demonstrated the dangers of not having such a buffer.

Supervisors are also extending the implementation deadlines for other global bank-capital tweaks and will report back to Reeves on broader levels of equity among lenders. She wants to ensure that the overall framework strikes the “optimal balance to deliver resilience, growth and competitiveness”.

It’s welcome that Reeves recognises Britain’s financial sector competes for international business, rather than just existing to funnel capital to UK startups and small businesses. Nevertheless, her deregulatory drive could be dangerous. The surest way to protect economic growth is to make sure systemic banks don’t get into trouble. A robust and stable financial system allows credit to keep flowing as the rest of the economy waxes and wanes. Meanwhile, the 42-million-pound fine the FCA slapped on Barclays on Wednesday is a reminder that money laundering controls can be worryingly lax, even at the largest UK banks. Cutting red tape is one thing, but tearing pages out of the bank-regulation rulebook risks going too far.

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CONTEXT NEWS

British finance minister Rachel Reeves on July 15 said she would further ease financial-services regulation, including by reforming requirements for banks to separate retail and investment banking activities and a plan to get more savers investing in stocks.

Reeves promised “meaningful reform” of bank ring-fencing rules designed to shield depositors from volatile investment banking activities. She also pledged simpler regulatory approvals for smaller financial companies and confirmed an easing of access to mortgages.

“In too many areas, regulation still acts as a boot on the neck of businesses, choking off the enterprise and innovation that is the lifeblood of growth,” she told an audience of financial executives at the City of London’s annual so-called Mansion House dinner.

Britain’s Financial Conduct Authority on July 16 fined Barclays 42 million pounds ($56 million) for failing to evaluate money laundering risks while providing services to its clients Stunt & Co and WealthTek.