How regulators are drowning Britain’s most valuable industry in red tape

gherkin wrapped in red tape

When Nikhil Rathi trudges into Parliament next Wednesday for a grilling from MPs, he could be forgiven for wanting to get a lot off his chest.

The chief executive of the Financial Conduct Authority (FCA) has in recent months seen his watchdog become the source of growing frustration in Westminster amid fears red tape is strangling economic growth.

The strain is such that tensions between the regulator and the City burst out into the open last week after the FCA unveiled plans to “name and shame” companies under investigation.

For many businesses, it was the straw that broke the camel’s back as tensions had been simmering for months.

These have stemmed largely from Prime Minister Rishi Sunak’s move to give the regulator a secondary objective to promote “economic growth” last year, stoking renewed scrutiny on whether the FCA is helping or hindering the economy.

The plans to name firms under investigation have triggered fears it could put off businesses from investing in the UK.

These are particularly acute given that the regulator has previously shied away from naming firms.

However, recent scandals – such as the failure to protect members of the British Steel Pension Scheme – have prompted the agency to consider naming companies under investigation to boost consumer protection.

Nikhil Rathi’s FCA has become a source of growing frustration in Westminster in recent months – Eddie Mulholland

The “name and shame” issue came to a head last Friday when UK Finance, the trade body for banks, coordinated a letter to Chancellor Jeremy Hunt signed by 15 of the UK’s largest trade associations warning the plan would stifle growth.

The letter, co-signed by the Investment Association, the Association of British Insurers and the CityUK, said the plan would have “damaging consequences for the competitiveness of the UK’s financial services sector as investors are put off”.

A source involved in drafting the letter said City firms felt the FCA’s initiative had “come out of nowhere”.

“The FCA has only had its secondary growth objective since last year and they have already fallen at the first hurdle,” they said.

Observers point out that the new name and shame plan has come hot on the heels of the FCA hiring new co-heads of enforcement.

The appointment of Therese Chambers and Steve Smart last March has coincided with a punchier approach from the regulator, industry sources believe, which has led to a growing list of complaints from the business community.

For example, the FCA’s motor finance review – which is examining claims customers may have overpaid for car loans – triggered disquiet in the finance sector over the length of time the regulator is taking to come to a conclusion.

Industry sources fear the investigation, which was scheduled to wrap up in September, could be delayed past the deadline and even into next year due to legal wrangling.

The uncertainty has heaped pressure on the lenders involved in the review, while customers are also unable to have their complaints dealt with until the matter is resolved.

Fuelling criticism of the FCA is a fear that Britain has lost its economic dynamism and that the regulator could do more to help reverse the decline.

London’s lustre as a financial centre has been dented recently by its poorly performing stock market.

The London Stock Exchange, the jewel in the crown of UK finance, is yet to register a major IPO this year and a yawning gap between UK and US valuations has added to the gloom.

On top of this, an increasing number of foreign swoops for companies has depleted the number of stocks on the UK market.

Analysts have warned that two of the UK’s top stock indices, the FTSE Small Cap and FTSE 250, could soon cease to exist due to the raft of takeovers.

Throw in the fact that international banks are also moving with their feet – Goldman Sachs last week announced plans to move its top financials banker, Dirk Lievens to Paris – and fears that London is losing its competitive edge have hit fever pitch.

Ministers have tapped into these anxieties by blaming the FCA for harming businesses with too many compliance burdens, making them less competitive and more likely to be overtaken by global competition.

In response to these concerns, the Government beefed up the Financial Regulators Complaints Commissioner last year, appointing lawyer Rachel Kentis to independently review complaints about the FCA and the Bank of England.

Kemi Badenoch, the Business Secretary, also used a set piece speech at the CityUK conference last month to pile pressure on the regulator over its plans to foist more of a compliance burden on companies.

The City of London was drowning in an “ever-rising tide” of red tape and micromanagement, she warned, stifling growth and productivity.

“I worry about the tendency to push for well-meaning but counterproductive measures that stifle growth, productivity, and innovation,” she told an audience of City lawyers and financiers.

Adding fuel to the fire, Ms Badenoch had privately complained to Mr Rathi about “regulatory overreach” in a letter over the FCA’s plans to force companies to report their diversity data to the regulator earlier in March.

“At a time when the Government is focused on driving economic growth through smarter regulation, the FCA should not be adding regulatory burdens which go well beyond the legislative framework in the Equality Act,”  she warned Mr Rathi.

Business and Trade Secretary Kemi Badenoch has criticised the FCA for regulatory overeach – Stefan Rousseau/PA Wire

The concerns stem from recent figures showing the increasing amount of compliance burdens companies have to deal with.

According to Ms Badenoch, jobs related to compliance functions now account for about 10pc of an average workforce, a sign the pendulum had swung too far towards risk-aversion.

She also echoed a statistic from former Bank of England ratesetter Andy Haldane, who said in 1980 there was one UK regulator for every 11,000 City workers, while in 2013 this had risen to one regulator for every 300 workers.

Others, however, point out that much of the growing compliance burden has ballooned under the Conservative government.

A report by the Centre for Policy Studies, a right-leaning think tank, last week revealed that the cost of regulation on businesses had grown by £6bn per year since 2010, which is the equivalent of an extra 2p in corporation tax.

The threat of Westminster targeting the FCA could also backfire, some argue, as it may discourage the regulator from reducing red tape.

A financial services lawyer said: “There’s always tension and there should be tension with politicians because the regulator shouldn’t be able to do what it wants. However, the question is what forum do you choose to have those conversations constructively.

“I wouldn’t say this way is the best way to influence the regulator.”

An FCA spokesman said: “We embrace our secondary objective to facilitate international competitiveness and growth alongside the primary objectives given to us by Parliament to protect consumers, market integrity and effective competition.

“Where we see potential issues with compliance with the law, as we have with motor finance or ongoing advice charges, we have to act to assess the evidence and try to bring clarity.

“And it is important for competitiveness that we do, because long-term growth relies on trust in financial services.”

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