The chancellor is making a great mistake and may be taking the UK down an “extremely dangerous and wrong path” by repealing City regulations meant to avoid another financial crisis, a key architect of post-crash banking reforms has warned.
Sir John Vickers, a senior economist who led the independent commission reviewing the UK banking industry after the 2007-08 crisis, said key elements of a deregulation package unveiled by Jeremy Hunt on Friday could put Britain’s financial stability at risk.
Vickers said he was particularly concerned about plans to roll back ringfencing rules that George Osborne introduced as chancellor after the crash, and were intended to protect everyday customers by separating their deposits from riskier investment banking operations.
Those rules, which only came into force in 2019, were the “bedrock of how we regulate banks in the UK”, Vickers said.
“If they’re saying: ‘Look, we’re 10 years on, we could make some adjustments, but it remains part of the bedrock,’ then I would say: ‘Fine’. If, on the other hand, they’re saying: ‘Maybe it’s time to roll back on this,” then I think that would be an extremely dangerous and wrong path for us to follow,” he told the Guardian.
The changes to the ringfencing rules, which will go to consultation in 2023, could take years to implement, but could free a number of smaller banks – including TSB, Santander UK and Virgin Money – from having to follow the regulations.
However, they could also result in larger banks such as NatWest and Lloyds facing fewer restrictions on how they fund their operations, and allow them to sell more complex products to customers within their ringfenced bank.
Hunt’s deregulation plans, called the “Edinburgh reforms” after being launched in the Scottish capital on Friday, will also prompt consultations about the senior managers regime that holds bosses personally and financially responsible for problems that occur on their watch. The package, which includes more than 30 changes, also includes plans for a central bank digital currency and changes to the rules on short-selling – where investors bet that the price of an asset will drop.
That is on top of introducing new targets for City regulators that will force them to consider how their rules could increase competition and UK growth, including by boosting venture capital funding for growing companies; unlocking funding for infrastructure projects; and helping first-time buyers access the housing market.
But Vickers, who previously sat on the Bank of England’s interest rate-setting monetary policy committee, said it was a mistake to give banks and insurers special treatment by rowing back on such a wide range of regulations, even in the name of growth.
“We want safe and sound institutions we want well-functioning financial markets,” Vickers said. “What I think would be a great mistake would be to put the financial services sector on some kind of pedestal, warranting kind of special light touch regulatory treatment, when we all need that sector to be safe and sound for the competitiveness of the economy as a whole.
“So I’m sure there are lots of good competitiveness, and productivity reforms, but let us think in a ‘whole economy’ way, not with undue concentration and focus on this sector, important though it is.”
However, Hunt defended the plans on Friday, telling a Financial Times conference his package of changes would not increase risk across the financial sector.
“This is a very considered and balanced package. I mean, we have to make sure that we don’t unlearn the lessons of 2008. But at the same time, recognise that banks today have much stronger balance sheets, [and] we have a much more developed resolution system if things do go wrong.”
“And in that context, it is perfectly sensible to make pragmatic changes such as the ones that we’re announcing today. But we’re doing so very, very carefully to make sure that the UK is competitive, exciting, the place to be the place to invest, but also that we don’t lose the guardrails that were put in place after 2008,” he added.