Economists urge caution over financial sector deregulation

In an open letter addressed to the chancellor, they cautioned that her encouragement for the financial sector—often referred to as the UK’s "crown jewel"—to expand could compromise financial stability and hinder overall economic growth.

Reeves has indicated a shift in the remit of the Financial Conduct Authority (FCA), urging it to foster growth and competitiveness within the sector while balancing consumer protection. However, these experts, including Nobel laureate Joseph Stiglitz, Labour peer Ruth Lister, eminent economist Sir John Kay, and former FCA board member Mick McAteer, believe that such deregulation may counteract the ambitions outlined in Labour’s industrial strategy and economic goals.

They assert that further expansion of the financial sector could detract from more productive economic activities. Specifically, they argue that the majority of lending primarily inflates existing asset prices, such as property, rather than supporting new business ventures.

The group of experts collectively expressed concern that unchecked growth in the financial sector could lead to excessive risks, thereby increasing the economy’s debt burden. Such unchecked growth has the potential to culminate in a collapse, as seen in historical precedents.

Their apprehensions align with those voiced by FCA Chief Executive Nikhil Rathi, who warned that adjusting the FCA’s role to allow for greater risk-taking would enable unscrupulous entities to operate with less oversight. Rathi emphasised, “We can’t stop everything. If we’re going to allow more risk into the system … it sometimes does attract people who don’t have the best of intentions.”

The economists referenced research from the International Monetary Fund and the Bank for International Settlements, highlighting that the detrimental effects of a bloated financial sector tend to materialise when private credit exceeds 100% of gross domestic product (GDP). In the UK, this figure has averaged around 160% since 2000, raising significant concerns about the current state of the financial sector.

Additionally, Andrew Bailey, Governor of the Bank of England, has echoed similar concerns, cautioning against complacency regarding the risks of a potential financial crisis. The experts, coordinated by the campaign group Positive Money, recalled the legacy of the previous Labour government’s light-touch regulation, which ultimately necessitated significant taxpayer-funded bailouts of major banks during the financial crisis.

In response to these pressing concerns, a Treasury spokesperson underscored the financial services sector’s pivotal role in providing employment for 1.2 million people across the UK, with two-thirds of these jobs based outside London.

They reiterated the government’s commitment to driving sustainable economic growth and improving living standards, asserting that these aims are intrinsically linked to the success of the financial services sector.