Brexit and finance – three priorities for the Financial Services Bill

Lab CEO Jesse Griffiths examines the Financial Services Bill, the first step in defining how financial sector regulation will be conducted post-Brexit.

Brexit is over, and yet has only just begun. The December divorce deal between the European Union (EU) and the UK doesn’t cover much of the service sector, which is 80% of the UK economy. Given the UK’s position as a major global finance hub, a central future issue will be what Brexit means for financial services. This will be the subject of the next stage of negotiations between the UK and EU, but the government’s new Financial Services Bill – introduced in the House of Commons in autumn last year and due to be completed early this year will define how financial regulation in the UK will evolve post-Brexit. The Bill covers a wide range of issues, including the regulation of investment firms, information requirements for investment products, penalties for money laundering, and improvements to debt and help to save schemes. The Lab has been following the process closely, submitting evidence to MPs at second reading, committee, and report stage, as well as giving oral evidence to the House of Commons Bill Committee.

The key importance of the Bill is the precedent it sets for how the UK will approach financial sector regulation in three key areas.

Social and environmental purpose

The policy objectives of financial stability, economic growth and competition that have been emphasised during the preparation of the Bill, while important, are not the ultimate purpose of financial sector policy. Instead, as the Lab’s Regulatory Compass report has set out, broader social, environmental and economic objectives should guide all legislation in this area.

Given the scale and urgency of the climate challenge, making sure that all legislation is compatible with the government’s legally binding climate commitments will be essential.

Recent research found that lending to fossil fuels from 35 of the biggest global banks continues to rise: it was $736 billion in 2019, up from $700 billion the year before. UK banks are currently the worst in Europe for high-carbon lending.

Part of the reason that financial institutions are not moving fast enough is that regulators and policy making departments do not take climate issues seriously enough. For example, the Treasury’s impact assessment for the Bill does not list greenhouse gas impacts as applicable, even though significant changes to how investment firms behave – the centrepiece of the Bill – are bound to have such impacts.

The Bill could respond to this challenge by using capital requirements for investment firms to penalise assets that carry large climate risks or create environmental damage, and incentivise those that support a sustainable, just transition.

Accountability and transparency

This Bill is part of an expansion of financial sector powers for the executive and regulators that the government is proposing after Brexit. The Bill would give the Treasury considerable power to amend important regulations, requiring only nominal approval from Parliament using the Affirmative Procedure – such approval has not been withheld since 1978. Previously these regulations were amended at EU level, including active engagement and approval by the European Parliament. Though far from perfect, this accountability allowed differing voices to be heard, enhanced transparency, promoted democratic debate, and significantly improved aspects of these regulations.

Consultation processes that have fed into the Bill – not all of which have yet been published – have been focussed on getting industry responses. Far greater effort needs to be made going forward to ensure that a wider range of stakeholders can be involved, as all financial sector legislation affects the wider economy, with potentially major social and environmental impacts. For example, longer consultation periods will be needed than the one month consultation period offered by HMT – over the summer – to comment on updating the UK’s prudential regime. It will also be critical to ensure that Parliament has a central role in scrutinising regulators and any important future changes to regulation.

High standards, not a race to the bottom

Ultimately, the purpose of the financial sector should be to serve the real economy to support positive social and environmental outcomes. The Bill is an opportunity for the UK to raise the bar. However, there is a worrying push for an alternative objective to support the ‘competitiveness’ of the financial sector itself. This introduces the dangerous idea that the growth of the financial sector should be seen as an end in itself, which would undermine the role it needs to play in contributing to the real economy and a just green transition. As the government’s own consultation document says, it can be argued that “…one of the reasons for regulatory failure leading up to the financial crisis was an excessive concern for competitiveness leading to the acceptance of a ‘light-touch’ approach to regulation and supervision.”

We agree with the head of the FCA who said that it would be far better for the UK to ditch any talk of a ‘competitiveness’ mandate and instead focus on maintaining high regulatory standards.  This should be the vision for the UK’s financial sector post-Brexit – leading the way in shifting the finance industry away from a focus on unsustainable and dangerous growth towards becoming a responsible support for the real economy, providing fair financial services for all, and financing the just transition to the green economy of the future.

More information about the work of the Transforming Finance network of civil society organisations working to change finance regulation to serve people and planet, which the Lab coordinates, can be found here.