Financial Regulation is one of the most important topics the City has to contend with today. Not only has London faced reputational damage to its position as a global financial centre following the financial crisis, the square mile risks further damage as finance leaders appear to rebut the need for greater regulation.
This week the Bank of England has confirmed previously announced proposals that include a seven-year bonus claw back, greater scrutiny of bonuses and the possibility of criminal charges for misconduct to be brought against specific individuals. Omar Ali, UK head of banking and capital markets at EY said that “The regime is likely to be the strictest of any market or industry.” In addition the proposals from the Vickers Commission that include the ring-fencing of retail and investment banking draw ever closer to implementation with Banks asking for delays and warning of potentially devastating consequences, as well as stricter stress testing and further legal battles hitting the industry hard in coming months and years.
Believers in the free market would say that regulation is restrictive and drives up business costs which in turn can reduce profits, force up prices and reduce international competitiveness. It is no doubt true that complying with regulation is costly and I would agree that it is possible an increase in regulation would cause competitiveness concerns however it is also possible, in the case of financial services that less regulation or lobbying against further regulation actually has a negative impact on international competitiveness.
For the short-term the regulations face significant resistance particularly when they seem to be stronger than those in other countries, however could stricter regulation today mean a more successful finance industry tomorrow?
One possibility is that greater regulation in London attracts investors to the UK looking to utilise the services of reliable, secure financial institutions that have a low probability of bankruptcy and hence their deposits or other investments are relatively safer in the UK than abroad. During the crisis the UK Government famously used Anti-Terrorism Laws to freeze Icelandic assets in the UK in order to return UK savers their deposits from Icelandic Banks; one example of how lax regulation was self-defeating; would you now invest in Iceland? If strict regulations are enforced effectively and the likelihood of a Bank failing is reduced as a result, in the long term the liquidity of credit in the London markets may improve as confidence returns and so too may the accessibility of funds for borrowing by UK firms hence impacting the wider economy. It is not too far-fetched to imagine greater financial security offered by UK domiciled institutions who fully comply with incoming regulation to receive greater fees from their services in the long term as individuals and investors may pay a premium for greater security, and the reassurances to be had from strict regulation and a robust legal framework.
The UK Government would undoubtedly favor such an argument when facing significant anti-regulation rhetoric in the media and while there may be claims that such ‘extreme’ measures are unaffordable, the real questions should be one that asks if it is affordable not to pursue such policies, not only from the prospective of the UK Taxpayer, but for the financial institutions themselves.
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