Reeves will rue the day she promised ‘light touch’ City regulation

Rachel Reeves
‘Rachel Reeves wants to help the City to rediscover its appetite for risk-taking and credit expansion’ - Kirsty O'Connor / Treasury

Here we go again. In a speech shortly before the financial crisis, Ed Balls, an adviser to Gordon Brown and at that time the Labour minister responsible for the City, repeatedly referred to “light touch regulation” as being key to the City’s success as a financial centre.

I imagine he’ll forever regret those words. Lapses in banking oversight were one of the chief causes of the financial crisis, the consequences of which we are still living with today more than 15 years later, seen in mountainous debt, low growth and pinched living standards.

That doesn’t seem to have deterred Rachel Reeves, the Chancellor, from launching her own particular version of financial deregulation – light touch 2.0, as it were. In her maiden Mansion House speech last week she trailed a series of “new growth-focused remit letters” sent to each of the five main institutions responsible for financial stability and City regulation.

She wants them to put economic growth at the heart of all they do and, in loosening the leash, help the City to rediscover its appetite for risk-taking and credit expansion.

I’ve long argued that the regulatory backlash against the City in the wake of the financial crisis went too far. It would be ill-become me now to criticise Reeves for this seeming damascene conversion to the cause of financial liberalisation.

Economic growth is in short supply, as the latest GDP figures cruelly highlighted. The data showed the economy slowing to a virtual standstill in the third quarter and actually some erosion in output per head in the final month of the period.

Labour has always had something of a love-hate relationship with the City, which it both despises as an exemplar of turbo-charged capitalism at its greed-driven worst, but also admires as a British success story and relies on as a key source of tax revenue.

Last week, Reeves was in loving mode, which she perhaps needs to be given how difficult it is to figure out where the 2.5pc annual growth rate she aspires to is going to come from.

She’s not helped herself in this regard by persistently talking down the economy, which ever since gaining office she has represented as a Tory-induced disaster zone. A decidedly business-unfriendly Budget has further queered the pitch.

With its streets of gold, the City offers potential salvation, or so the Government hopes. It scarcely needs pointing out that all those layers of growth-destructive regulation that Reeves now complains of didn’t just appear out of a clear blue sky; they were enthusiastically promoted by and legislated for by the politicians, with opposition Labour MPs cheering from the sidelines.

Who does she think was responsible for the hugely costly and completely unnecessary ring-fencing of retail banking? For the Senior Managers and Certification Regime? For byzantine anti-money laundering measures? For the Financial Conduct Authority’s entirely disproportionate Consumer Duty obligations? And so on. She only has to take a look in the mirror.

In any case, speculation is growing that Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), is about to be thrown to the wolves in symbolic recognition of the regulatory overkill of recent years. Already the FCA is in a humiliating retreat over plans to “name and shame” companies it investigates.

As it is, it is not entirely clear that the Chancellor means what she says. Many financiers at last week’s Mansion House dinner thought her new remit letters didn’t add up to a hill of beans and wouldn’t in themselves lead to significant change.

Nikhil Rathi, chief executive of the Financial Conduct Authority
Nikhil Rathi, chief executive of the Financial Conduct Authority, ‘is about to be thrown to the wolves’ - Eddie Mulholland

In her letter to Andrew Bailey, Governor of the Bank of England, Reeves only confirmed “that the Government’s economic policy objective is to restore broad-based and resilient growth built on strong and secure foundations”.

This is nowhere near the full fat US Federal Reserve version, with its dual mandate of maximising employment alongside ensuring price stability. If that’s what Reeves wants, she would have to legislate.

Indeed, it is actually quite hard to figure out precisely what she does want. Does she plan to go full Trump, who intends to rip up the entire rulebook and reduce capital requirements to a bare minimum? This would be “race to the bottom” stuff, but it is perhaps the only way in which the City’s once-leading position as an international financial centre can be defended.

Prior to Brexit, the City had carved out a defining role for itself as Europe’s de facto financial centre, but it has struggled ever since to find a new raison d’etre, and as things stand, the US looks set to clean up, with international capital markets increasingly focused on New York, Chicago and America’s other major cities.

Already, certain types of capital markets activity in the City are in precipitous decline. Corporate capital-raising in London has plummeted, even as it has continued to grow worldwide.

Does Reeves intend to get serious about this loss of competitiveness, or was her Mansion House speech just a belated recognition of a shift away from London which she is powerless to stop?

In a recent paper, the Banque de France’s prudential regulator, Autorité de Contrôle Prudentiel et de Résolution, sounded the alarm over the growing incursion of big tech into areas of finance previously subject to prudential oversight, and said that it posed a significant threat to overall financial stability.

Playing its role as the “Silicon Valley of regulation”, Brussels would sorely like to clamp down on technology’s advance into non-bank forms of credit provision. But where does that leave already-struggling European competitiveness if it does?

These questions play into an emerging debate in Downing Street over whether it is best to slink back into the cosseted but slow-growth embrace of the European Union, or throw in its lot with Trump’s America.

Peter Mandelson, widely tipped as Labour’s next ambassador to Washington, talks – in an echo of Boris Johnson – of having his cake and eating it. Like Downing Street he dreams of playing both sides, with Britain performing its historic role as a bridge between the US and Europe.

Sadly, it is as unlikely to be an option for today’s Government as it was when Johnson dreamed of ridding himself of the EU’s obligations while at the same time continuing to enjoy its benefits. There was never any such deal on offer.

One way or another, Trump will force the UK to choose. With wildly different policies on Ukraine, the Middle East, tax, spend and virtually everything else besides, this will not be an easy choice for Labour’s high command to make.

As for Reeves, like Ed Balls, she’ll no doubt rue the day she promised a return to light touch regulation. Something will eventually go horribly wrong in the City, and when it does, her words will come back to haunt her.