2023 was a bad year for financial services reform
Mick McAteer
Co-Director Financial Inclusion Centre; Chair Registry Trust; Director AfFI; Irish Financial Services& Pensions Ombudsman,CCNI Boards; UKRN Expert Panel. Ex Z2K Chair;Dep Chair CCNI; FCA/FSA, ShareAction boards; Which?
We have seen considerable progress in reforming finance since the 2008 financial crisis. 2023 also saw some positive developments in retail financial regulation. The Financial Conduct Authority (FCA) Consumer Duty should have a real impact, if robustly enforced. The FCA has played a critical role in protecting consumers from the effects of the cost-of-living crisis. It has worked hard with limited powers to deal with the explosion in internet-based scams and frauds. The FCA deserves real credit for trying to improve diversity in the financial services sector. The Payment Systems Regulator is proposing to reintroduce the cap on cross border interchange fees. Measures to protect access to cash are a positive development.
But, reforming finance is like a Sisyphean task.[1] Despite the gains in retail finance, overall, we saw serious reversals in financial policymaking and regulation, with government and regulators failing to act on serious market failures due to relentless, effective lobbying by the financial sector.
Civil society is poorly resourced and has to campaign on many financial fronts. We face well resourced, powerful, and influential finance lobbies. At the moment, we are clearly losing the war. In nearly 30 years of campaigning, I cannot recall a time when the finance lobby was so dominant and both major political parties so actively promoted the interests of finance.[2] This does not bode well for the future.
Finance lobbyists and politicians regularly laud the sector’s contribution to the UK national economic interest - and it does make a significant positive contribution to UK GDP in its own right. The sector is also supposed to play a central role in serving the interests of the real economy, households, and tackling climate change. A wide range of complex and lucrative financial activities is undertaken in the UK’s wholesale, capital, institutional, and retail financial markets. Added to this is the huge growth in the finance-related AI/ tech/ data in finance.
But, the positives must be set against the grave economic, financial, and environmental harms caused by finance. Examples include the 2008 financial crisis, the multi-￡billion systemic misselling scandals, extraction of high fees from pensions and investments, manipulation of consumer behaviours to encourage overconsumption of credit, chronic financial exclusion, misallocation of resources from the real economy to speculative financial activities, greater financialisation of the economy, and continued financing of economic activities that harm the environment.[3] [4] ??
Looking at the sheer scale of the economic, financial, and social harm caused by finance, it is obvious we need tough financial policies and regulation. Some argue that regulators should be ‘referees’, there to ensure a fair match between the public interest/ civil society and the financial services sector/ financial lobbyists.
But, the potential for harm caused by finance means regulators need to be more than ‘referees’. They should be clearly on the side of the public interest. Financial regulators should actively prevent finance damaging our interests and make finance serve the interests of the real economy, the environment, and households. Regulators should be judged on how well they make the industries they regulate serve the interests of the real economy, environment, and society not on how well they serve the interests of the firms they regulate.
As mentioned, since 2008, real progress has been made in improving conduct of business standards in retail financial services. This is due to a much more robust approach to regulation adopted by the FCA. Significant progress has also been made in making the UK’s mainstream financial system more resilient to future crises but this is under threat from the deregulation measures outlined below.
We have seen much less progress on the other priorities of greening finance, promoting financial inclusion, and ensuring finance serves the real economy and provides value for money products to households. Major new risks have emerged in the shadow banking sector. The confluence of finance and AI/ tech/ big data creates risks in the financial system, will exacerbate financial exclusion, and enables the manipulation and exploitation of consumers’ behavioural biases. The intersection between finance and the digital sector is poorly regulated. [5] We are seeing even greater financialisation of the economy and society as private finance takes over the role previously played by the state in areas such as health, social care, and housing. ???
The FCA’s Sustainability Disclosure Requirement (SDR) and investment label[6] is confused and ill-judged, and will do little to hold finance to account for continuing to finance climate damaging economic activities. The FCA even allowed a working group dominated by industry lobbyists to develop a voluntary code of conduct on ESG ratings and providers.[7] It is remarkable that protecting the environment from finance is not given the same priority as preventing misselling, money laundering, and insider dealing.[8] Social impact washing, the twin of greenwashing, is becoming a real problem.[9]
The already weak Solvency II regulation, meant to ensure insurance companies are prudently run, has been further weakened as a result of insurance industry lobbyists disingenuously claiming that this would enable the sector to invest in the green transition and social infrastructure.[10] Defined benefit pension scheme liabilities continue to be transferred to insurance companies despite the parlous state of the insurance sector. ?
The Mansion House Compact is built around a series of deregulatory measures aimed at encouraging private finance institutions such as pension funds, insurers, asset managers, and private equity firms to play an even bigger role in our lives. Rules on bankers bonuses and ring fencing of banks are being weakened.
The charge cap which has been so effective at preventing the pensions, insurance, and investment firms from extracting high fees from workers’ pensions schemes was weakened as a result of recommendations from yet another ‘expert group’ dominated by industry lobbyists. Industry lobbyists have been successful in moving the focus away from charges to the spurious concept of ‘value for money’, which allows them to draw attention away from the impact of their high fees on our pensions and investments.
Worryingly, the secondary growth and competitiveness objective imposed on regulators became law in 2023. Regulators are now expected to promote the growth and competitiveness of finance. This will compromise the independence of financial regulators. It forgets the main lesson of the 2008 financial crisis that allowing finance to become dominant is dangerous. Allowing finance to become dominant also harms the real economy and exacerbates inequality.
Politicians and regulators are considering weakening the regulatory boundary on financial advice, falling for the industry lobby’s disingenuous arguments that consumer protection regulation creates an advice gap. The real cause is that the for-profit finance sector is too inefficient, or just does not want, to serve less profitable or marginalised consumers. The industry is more likely to use this weakening of the consumer protection regime to sell more profitable, riskier products to better-off consumers knowing that rights to redress will be weakened, rather than try to serve marginalised consumers.
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So, 2023 was a bad year for financial market reform. Progress in key areas has been stalled while we have seen major reversals in others. Will 2024 be any different? Sadly, I don’t think so. Civil society is weak nowadays compared to the well-resourced industry lobbies. More worryingly, both major political parties are actively promoting the interests of finance and are showing little sign of addressing the serious harms caused by finance.
Mick McAteer
31/12/2023
[1] In classical mythology, Sisyphus was condemned by the gods to repeat the same task everyday of pushing a huge boulder to the top of a hill only for it to roll back down every time it neared the top.
[3] An Economic and Social Audit of the City | The Financial Inclusion Centre and Time for Action – Greening the Financial System | The Financial Inclusion Centre
Accountant and Tax expert | Crypto Tax Specialist | Board Member | Co-founder of The Kapuhala Longevity Retreats
10 个月Great insight into the challenges faced in the financial landscape ?? Your dedication to shedding light on these issues is commendable.