by Jesse Griffiths, Lab CEO
We’re nearly two years in to the Labour government, so we’ve been taking a look at their policy approach to the financial system so far. What is clear is that they are torn between competing objectives: prioritising the needs of the global financial sector or the needs of the UK economy and society.
One objective sees the financial sector as an end in itself with the government’s Financial Sector Growth and Competitiveness Strategy and Regulatory Action Plan aiming to cut ‘burdensome’ regulation and grow the UK’s international financial centre as fast as possible.
The other objective needs the finance sector to be a means to an end: to boost the UK’s low levels of investment as the key to reviving economic growth and to achieving the government’s Industrial Strategy and the Clean Energy Mission, and to help address the cost-of-living crisis and high levels of inequality by better serving local economies and marginalised communities.
These objectives compete for a number of reasons.
First, regulation aims to protect the economy from the dark side of finance – including crises and economic crime – and ‘freeing’ the financial sector by reducing regulation can easily undermine those protections. Our recent review of policy to tackle dirty money provides a good example of this risk: while the upcoming Illicit Finance Summit pledges to tackle the growing links between crypto and economic crime, the government also wants to make the UK a leading crypto capital through making the regulatory regime for crypto as light as possible.
Second, a larger financial sector has not promoted higher levels of investment, with the UK consistently falling behind its peers, and a lot of evidence suggests it actually undermines it. This is because investment in the popular sense – investment in stocks and shares for example – is just the transfer of ownership of existing assets, not the creation of new productive capacity. To get real productive investment in the sectors and regions where it is most needed, we need the government to accept responsibility for steering credit within the economy to support key missions, in particular the urgent need for us to decarbonise our energy supply. Our analysis shows how policy to green the financial system is being undermined by these competing objectives. For example, whilst progress is being made through a new National Wealth Fund strategy that prioritises green energy, sustainable financial regulation policy is dominated by an approach that prioritises voluntarism and reducing the regulatory burden, meaning that vast sums are still flowing into fossil fuels and not into the clean energy and industry solutions that we really need.
Finally, chasing a bigger financial system means catering to the interests of international capital. Yet one of the biggest failings of the current system is that it excludes millions from basic services, and does not support small businesses. If we’re going to grow the financial system, we should be focused on growing the parts of it that can best support underserved communities and local economies, such as credit unions and CDFIs. Our policy analysis shows that the government’s Financial Inclusion Strategy is unlikely to deliver the kind of structural change needed, which is why a Fair Banking Act remains a top campaign priority.
This tension between promoting a globally competitive financial sector and one that serves our economy and society is real, and I believe it is fatal: government policy will fail to revive the British economy unless it focuses on the purpose of the financial system, not its size.