Regulator warns against threat of another financial crisis
Just before her Mansion House speech last month, Rachel Reeves issued formal letters redefining the remit of the FCA and the PRA. The letters followed a trend started by the last Conservative government which gave the financial regulators a secondary mandate – don’t just regulate blindly, think carefully of the result of your regulations on the growth of the economy and the competitiveness of the companies affected.
And now the Financial Conduct Authority (FCA) has started to push back against its expanded role in promoting economic growth, saying that such focus must not lead to a “race to the bottom” in regulatory standards. Speaking to the Treasury Committee, Nikhil Rathi, the FCA's chief executive, and Ashley Alder, its chairman, underscored what they see as the challenges in balancing consumer protection and market integrity with fostering innovation and competition.
Addressing MPs, Rathi highlighted the complexities of this dual mandate. “If we move in this direction, we all need to be aligned. There are tensions here, and you will hear about them when things go wrong,” he said.
Alder warned against lowering regulatory standards, referencing the dangers of a deregulatory push raising the spectre of the pre-financial crisis period. “There are clear risks in engaging in a race to the bottom,” he stated, adding that the FCA must continue to uphold its leadership in international regulatory standards.
In a letter to the chancellor, Rathi and Alder reiterated their commitment to global regulatory collaboration. However, they cautioned that aligning international rules could become increasingly challenging, noting that on issues such as green finance and crypto asset regulation, the UK may need to take an independent approach.
The FCA is also seeking greater clarity from the government and parliament on what constitutes an “appropriate risk appetite.” Rathi cited recent reforms to listing rules, designed to encourage growth, as an example of where a shift in tolerance for risk is necessary. He warned that these changes would inevitably lead to more failures. “The test will come when things go wrong, and it will be crucial to see how parliament responds,” he said.
Alder echoed this sentiment, stressing the importance of proportionality as the FCA moves toward an outcomes-based approach, which emphasises fairness and reduced prescriptive rules. However, he firmly rejected a return to the light-touch regulation that preceded the financial crisis, noting, “That approach ended in tears.”
Committee chair Dame Meg Hillier described the FCA’s position as a significant crossroads. “You’re grappling with the trade-off between protecting consumers and promoting growth. This is a big challenge for your organisation,” she remarked.
