DOES LABOUR’S PLAN FOR FINANCIAL SERVICES STACK UP?

So, we finally have Labour’s policy document: Financing Growth Labour’s Plan for Financial Services. How does the Plan stack up? ?Well, there are some promising commitments in the document. But, overall, there is a disappointing lack of substance and in some parts it is downright misguided.

It is not really a plan, more a set of ambitions. We do need a successful finance industry. But, success cannot just be measured on the City’s terms. The Plan does not contain a clear strategy for making the City work for the environment, the real economy, and society or to prevent a dominant financial sector wrecking the economy as it did in 2008. Labour does not appear to have a framework to judge whether the City is working for us.

Labour seems to have no strategy for building household financial resilience, providing a financial safety net, and creating long term financial security to support economic productivity and risk taking.

There are certainly positive statements around sustainable finance, inclusive growth, the role of capital markets, innovation and tech for good, financial inclusion, and consumer protection.

But, this Plan should be considered alongside other announcements from Labour such the Shadow Chancellor saying Labour would ‘unashamedly champion’ the City, agreeing with the Government that bankers’ bonuses should not be capped or, critically, rowing back on its flagship ￡28 billion green investment commitment. Is it really sensible to expect that Labour in government will reform the finance and tech sectors given how much in thrall it is to the City and Big Tech?

While the Plan contains little policy substance, we are left in no doubt about Labour’s overall direction and support for the City. Labour has clearly bought the arguments of the various private finance lobbies. Perhaps we should not be too surprised given the access the private finance lobbies have been given to the Labour Shadow team.

The City finance lobbies are very vocal at promoting the supposed benefits of the sector. And the City does provide significant value to the economy. But, the City doesn’t need another champion in Labour. Labour’s Plan, while lauding the City, simply doesn’t acknowledge the huge environmental, economic, and social harm caused by a dominant financial sector.[1]

Pundits will say that ‘manifesto’ documents like this are not the place for detail. Perhaps so. But, detailed commitments and policies could have been published alongside this Plan.

With a General Election likely this year, it seems strange that Labour has not developed oven ready policies to tackle the finance-related crises facing us. We don’t have the luxury of the likely next government waiting until it gets into office before it develops and implements policies to tackle those crises. Instead, for the most part, Labour seems intent on pursuing this Government’s deregulatory agenda. Let’s hope it can be made to change its mind before it is elected.

Key priorities include:

·??dealing with the scale of climate harm financed by the City and the lack of mechanisms for deploying the most effective forms of state resources towards climate positive economic activities

·?the failure of the City to meet the long-term finance needs of the real economy and the harm done by institutional short termism

·?dealing with the creeping financialisation of the UK economy and the social sector,[2] an increased risk of social impact washing disguised by the emergence of ‘social impact’ finance

·?the risks of new systemic financial crises emerging in poorly regulated shadow banking sector

·?the risks associated with AI in finance

·?dealing with emerging risks to the pension system as risk is ‘individualised’ and poorly capitalised insurance companies continue to be allowed to take on pension scheme liabilities, serious underprovision for retirement amongst certain groups in society

·?regulation failing to respond quickly to harmful financial ‘innovation’

·?addressing the chronic low levels of financial resilience, and chronic financial exclusion and discrimination

Does the Plan address the crises facing us?

Below, I summarise my thoughts on the Plan and Labour’s overall approach. A series of mini features will follow on each of the six policy priorities laid out in the Plan.

Sustainable finance

There are some good intentions expressed in relation to sustainable finance. But, are we really to believe, given Labour’s unashamedly pro-City stance and retreat from green commitments, that the party when in government would introduce robust regulations to change the City’s climate damaging behaviours?

Labour remains committed to a market-led approach to greening the financial system rather than develop a strategic regulatory approach to compel the City to realign with climate goals and a strategy to efficiently deploy green state funding. Labour instead supports deregulation and de-risking of private finance to incentivise the City to fund the green transition. This is known as socialising the risks, privatising the rewards. Or, more bluntly, heads the City wins, tails we (society) loses.

There is no detail on how Labour would regulate the City to make it a global green financial centre or, critically, to prevent the City from continuing to finance, at scale, climate damaging activities. [3] Financial institutions are not allowed to facilitate money laundering, finance terrorism, or commit insider dealing. Yet, they are allowed to continue to finance climate harm – the great existential crisis facing us. Think about that. It is a remarkable abdication of political responsibility.

There is nothing on dealing with ‘social impact washing’,[4] the twin of greenwashing. Social impact washing is emerging with the financialisation of the UK’s social sector and financial institutions being allowed to get away with rebranding conventional return-seeking finance capitalism as ‘purpose based’ or whatever.

Where are the plans to regulate an ESG ratings industry characterised with conflicts of interest, inconsistent methodologies, and undemanding standards?

Financial inclusion, resilience, and security

The commitment to develop a national financial inclusion strategy and to explore how to support workplace savings is very welcome. But, strategies take time to develop and roll out. In 30 years of campaigning, I’ve lost count of the numbers of financial inclusion ‘strategies’ developed by governments, government bodies, and civil society organisations. Yet, let’s face it. We have made almost no progress in promoting financial inclusion and resilience over the years. The two areas where progress has been made – pensions autoenrolment and reducing the numbers of people without a basic bank account – happened due to direct legislation and regulation.

Millions with low financial resilience went into the Covid and cost-of-living crises in a very vulnerable state. That position is deteriorating. Millions face financial exclusion and discrimination now because of how markets operate. This is likely to deteriorate with the growth of AI/ fintech/ tech/ big data in financial services.[5] Why will things be different this time? Where are the detailed policies to tackle chronic financial vulnerability, exclusion, and discrimination?

It is disappointing that Labour is not committed to introducing a UK version of the US Community Reinvestment Act or commit, from day one, to tackle the financial discrimination facing minority communities. Why does it not commit to requiring all government departments to offer payroll savings schemes to employees or requiring large firms bidding for government business to offer payroll schemes?[6]

Covid showed how the state could respond to protect vulnerable households. The Plan says nothing about developing a framework to deal with the boundary between regulatory and social policy on financial exclusion. Where is Labour’s commitment to use the state’s economic and convening power to build financial resilience and create a genuine safety net for vulnerable households? This Plan may be about financing economic growth. But, creating a decent financial safety net aids productivity and risk taking.

City growth and competitiveness, promoting financial risk taking and innovation

Labour’s commitment to growing the City and supporting this Government’s policy on financial deregulation is downright misguided. Labour seems to have forgotten the lessons of the 2008 financial crisis. Allowing the City to become so dominant and a supportive permissive approach to financial regulation left the UK economy seriously exposed when the crisis happened. Ordinary people and public services are still paying the price for that pro City stance.

There are major gaps in the Plan that suggest little appreciation of the risks in the financial system eg. how Labour would regulate the shadow banking sector or AI in financial services, or deal with the risks involved in allowing poorly capitalised insurers to take over defined benefit pension schemes (insurance buy-outs).

As well as creating systemic risks, Labour’s approach would undermine other goals such as levelling up. Allowing finance to become dominant contributes to wealth, income, and regional inequality. Any positive policies (if they even happen) to promote regional financial hubs will be more than outweighed by the gravitational pull of the City. Similarly, encouraging a bigger role for mutuals will be undermined by the promotion of the commercial finance and tech sectors with huge financial resources at their disposal to dominate retail financial services. The way payday lending and more recently buy now, pay later lending rapidly crowded out mutuals should have provided a salutary lesson for Labour.

Labour views financial and tech innovation through rose tinted specs. It doesn’t seem to understand just how much harm has been caused by financial innovation over the years in wholesale, institutional, and retail financial markets. It doesn’t seem to grasp the risks emerging with the growth of finance-related AI/ tech and the speed of innovation.[7] This calls for a precautionary approach to finance/ tech innovation. A precautionary approach would not stifle genuine economically and socially useful innovation. It is remarkable just how much financial and tech innovation is spurious or variations on a theme dreamt up to create marketing opportunities.

Financial regulation and consumer protection

Like many before it, Labour seems to believe it can square the circle of effectively regulating finance and reducing regulation. It says it would, in consultation with the sector, work to identify overlaps and gaps in regulatory mandates across bodies including the PRA, FCA, Competition and Markets Authority, The Pensions Regulator, and Payment Systems Regulator (PSR). Where is the commitment to work with civil society on this?

The problem is not regulatory overlaps but ‘underlaps. There are major gaps in financial regulation particularly with regards to protecting the environment, financial exclusion and discrimination, and constraining the power of AI/ tech/ data sectors.

Contrary to industry lobby spin, the UK is not an overregulated economy.? The UK’s ‘light touch’ regulation in the past did not contribute to producing better outcomes for society. Indeed, the ‘heavier touch’ approach adopted by other countries can contribute to more robust business practices and better risk management.

Labour talks about how the Consumer Duty, as an ‘outcomes-focused’ approach to regulation, provides an opportunity to streamline some of the duplicative and excessively procedural rules in the FCA’s regulatory handbook. Yet, it doesn’t produce any evidence to support this assertion about excessively procedural rules. Labour would direct the FCA to issue an open call to industry to identify rules which have been made redundant by the Consumer Duty.

The claim that an outcomes-focused approach to regulation allows for ‘streamlining’ of rules is one I’ve heard many times over the years. Regulators should make markets produce socially useful, affordable, fair, genuinely innovative products and services that meet needs and enhance welfare of communities/ people.

But, regulation has to create those outcomes. Labour seems to believe that those outcomes can be created with fewer regulations and rules. It doesn’t seem to realise that much of the detail in the FCA’s rulebook is there because the finance industry has always demanded clarification from regulators on the intention behind regulatory principles. The industry couldn’t actually trust itself to interpret high level principles, it needed to be told precisely what treating people fairly means, what integrity means and so on.

The idea that outcomes-focused regulation would significantly reduce costs for financial firms is a pipe dream. Firms, if they are well run, would just end up transplanting the FCA's rule book into their internal compliance and risk functions.

I’ve regularly challenged the financial services industry to point out FCA rules that go beyond what is expected of well-run businesses. And if they could highlight genuinely superfluous rules, I’d support getting them removed from the rule book. Funnily enough, the industry didn’t produce examples.

Maybe the emphasis on consulting with industry is just a slip of the pen and it intends to involve civil society? But, it is symptomatic of Labour’s prioritising the interests of finance.

The comments in the Plan on ‘making Brexit work’ suggest that we will end up with a ‘trifurcation’ of financial regulation – domestic regulation, EU aligned regulation, and regulation to make the City more competitive in the rest of global markets. ???

Worryingly Labour supports finance lobby arguments for reforming the financial advice/ guidance boundary to close the so called ‘advice gap’. This would mean consumers having fewer rights to redress if they are sold unsuitable products. If this happens, the industry won’t provide advice to millions of underserved low-medium income consumers but sell greater volumes of high-risk financial products to better off consumers knowing they will have reduced liability for redress when things go wrong.

Making finance work for the economy, unlocking capital for infrastructure

Labour says it wants to make capital markets work for the economy and unlock capital for infrastructure. Yet, the Plan contains nothing to tackle the chronic investor short termism that makes it difficult for real economy firms to plan for the future, undertake research and development, and invest in workers.

Instead, Labour supports the Government’s very risky deregulation of Solvency II, now known as Solvency UK, to ‘encourage’ insurers and pension funds to invest in infrastructure and green industries. Labour wants to go even further by generating even more investment opportunities for private finance to invest in national transmission infrastructure. We could do with some honesty on this. Private finance is more costly than state funding. That will push up the cost of infrastructure investment which will be passed onto ordinary people in the form of higher bills and charges. Labour not only supports deregulation to create opportunities for the City it would ‘de-risk’ private finance. Labour would basically implement a huge corporate welfare programme.

Pensions and retirement savings review

This Plan may be to do with growth. But, unless citizens have the reassurance of financial resilience and long-term financial security in retirement this will undermine workplace productivity and people's willingness to take business risks.

Labour says it would undertake an in-government pensions and retirement savings review. But, this review seems mainly designed to unlock private finance rather than reform the public and private pension systems to address the serious underprovision for retirement amongst certain groups. There is no mention of reforming the inefficient use of ￡billions of pension tax relief to boost pension provision for lower income workers, self employed, and carers.

Moreover, Labour’s support for Solvency II deregulation and weakening the charge cap on workers’ pensions, and failure to recognise the risks associated with insurance company buy-outs of pension schemes will undermine the security of existing pensions.

Mick McAteer

February 2024

[1] See: An Economic and Social Audit of the City | The Financial Inclusion Centre and Time for Action – Greening the Financial System | The Financial Inclusion Centre

[2] The social sector consists of activities such as the NHS, social care, social and affordable housing, and public services. Increasingly, government (central and local) is withdrawing from the social sector and allowing or even actively promoting a bigger role for private finance. Private finance is not only more costly than state funding, it raises serious questions around fairness and equity.

[3] See: The Devil is the policy detail – will financial regulation support a move to a net zero financial system? | The Financial Inclusion Centre

[4] For example, where rent extraction from funding activities such as social care and ‘affordable’ or social housing is rebranded social impact. See: Preventing social impact washing | The Financial Inclusion Centre

[5] Fintech – beware of ‘geeks’ bearing gifts? | The Financial Inclusion Centre

[6] Getting Workforces Savings-Payroll Savings with Credit Unions | The Financial Inclusion Centre and New research shows deduction lending adds up for low income borrowers and lenders | The Financial Inclusion Centre

[7] AI in Financial Services: How to avoid the big risks - Finance Innovation Lab