The UK Financial Conduct Authority and Prudential Regulation Authority's secondary objective — to promote the UK's international competitiveness and growth — is an ill thought out piece of legislation which ought to be clarified or scrapped.
The FCA and PRA were formed in 2013 after the financial crisis, by splitting the old Financial Services Authority into an FCA focused on ensuring firms treat customers well and a PRA, under the Bank of England, meant to keep financial firms sound.
Their secondary objective, introduced by the Financial Services and Markets Act 2023, is to facilitate the international competitiveness of the UK economy — in particular the financial services sector — and the UK's growth in the medium to long term.
Regulatory competition
The first half of the objective could encourage the financial regulators into a race to the bottom on regulatory standards, against other financial centres.
This could be especially damaging at a time when the current US administration is militant about deregulation.
The UK’s standing as a financial centre rests on incumbency effects, convenient location and dependable regulation.
Firms come to the UK because they know they can rely on English law and UK regulations to do business safely — not because they think they will find more lenient regulators than in New York or Tokyo.
Firms which chase loose regulation, like many crypto-asset players today, ought to be pushed away rather than catered to.
An illusory short term boost to business is not worth the financial stability, money laundering and reputational risks.
Woolly thinking
But it is the second half of the objective — growth — which the current government has been most focused on.
By urging the financial regulators to pay more attention to the secondary objective, and by other regulatory tweaks, the government has found a channel through which it might be able to pep up growth, at what it believes is a low cost.
But beyond public admonishments, it has offered the FCA and PRA little guidance on how to achieve growth.
Small wonder. Financial regulators’ tools are not designed to drive growth but to set boundaries and prevent risk. Pushing the watchdogs towards the former is at best a distraction, at worst a diversion towards greater risk taking.
Since the levers are so unclear, the growth objective is currently akin to a corporate fad, repeated ad nauseam throughout the regulatory bodies but lacking content.
Say what you mean
A recent review of the secondary objective by the House of Lords' Financial Services Regulation Committee rightly recommended that the government clarify the links between financial regulation and growth.
This ought to be part of a broader review of the government's growth strategy. Its embrace of the secondary objective reveals a dearth of understanding of the causal mechanisms behind growth, and a lack of a clear plan on how to achieve it.
If the government can identify a clear causal link between financial regulation and economic growth, it ought to give the FCA and PRA sufficient guidance on how to change their approach, and take the fall if it leads them astray.
If no such mechanism is found, the secondary objective should be scrapped and the financial regulators allowed to return to the work they were created for, free from political slogans.