Regulatory Quality Takes Center Stage in Growth Debate
Dame Meg Hillier MP, chair of the influential Treasury Select Committee, has issued a significant call for the government to clearly define "the risks that the government will allow its own regulators to take in the name of growth." This demand highlights the ongoing tension between regulatory oversight and economic expansion, with implications for financial markets and business investment across the United Kingdom.
Beyond Binary Arguments: The Case for Effective Regulation
The current debate about regulation and growth has become unhelpfully polarized, trapped in what some describe as an Animal Farm mentality where less regulation is automatically considered good or more regulation is automatically considered bad, depending on political perspective. This superficial argument focuses primarily on volume rather than substance. The more critical question centers on quality: effective regulation that is predictable, proportionate, and operationally competent actually reduces uncertainty and lowers friction for firms seeking to invest and scale their operations.
Conversely, poor regulation characterized by slow processes, opaque decision-making, and inconsistent application deters market entrants and entrenches existing players. The functionality of regulatory frameworks proves far more important than the sheer size of the rulebook. This distinction positions the Financial Conduct Authority (FCA) differently from regulators in Brussels and Washington, emphasizing practical effectiveness over ideological positioning.
Risk Metrics and Democratic Accountability
The proposed solution involving government-set "risk metrics" that regulators would then operationalize appears to offer a tidy compromise between democratic accountability and regulatory independence. However, reality often diverges from theoretical constructs. The meaningfulness of this process remains questionable, as it's difficult to imagine ministers specifying precise numerical thresholds for acceptable risk levels in practical scenarios.
Furthermore, creating abstract risk metrics separate from the cost-benefit analyses already conducted by regulators for specific proposals risks creating bureaucratic complexity that could distract from what matters most: high-quality regulation supervised by high-quality regulators. This exercise could potentially become a procedural quagmire rather than a solution to genuine regulatory challenges.
Growth Without Increased Risk: Practical Steps Forward
While acknowledging potential trade-offs between risk and growth, numerous steps exist that the FCA could implement to support economic expansion without increasing systemic risk. Key opportunities include enhancing the operational effectiveness of the regulatory body itself. Faster and more consistent authorization processes would send stronger signals about the UK's business environment than mere platitudes.
Clear supervisory expectations, particularly in rapidly evolving sectors like artificial intelligence as recommended by the Treasury Select Committee, would reduce the "regulatory tax" created by uncertainty. More rigorous, proposal-specific cost-benefit analysis would strengthen the regulation-making process. None of these improvements necessarily require increasing risk within the financial system.
Strengthening Regulatory Capacity and Expertise
The FCA stands as one of the world's premier regulatory bodies, yet opportunities for enhancement remain, particularly in the supervision of financial firms. This depends fundamentally on ensuring the organization attracts and retains appropriately skilled and experienced staff with strong understanding of the markets they oversee.
Historically, the FCA attracted experienced professionals from the private sector through what was known as the FCA 'deal'—offering public service opportunities, improved work-life balance, and better organizational culture. However, pay stagnation, improved work-life balance in the private sector, and concerns about internal culture have diminished this appeal. Ironically, regulatory pressures have contributed to cultural improvements within the City itself.
Attracting superior talent may require increased funding from regulated firms, but more skilled and experienced FCA staff would likely receive broad welcome from those they regulate, creating a virtuous cycle of improved oversight and market confidence.
Moving Beyond Superficial Debates
Dame Meg Hillier rightly raises important questions about the relationship between growth and risk. However, civil servants' risk metrics alone cannot resolve tensions that are fundamentally political and contextual in nature. The financial sector doesn't require additional bureaucratic layers but rather smarter regulation and a more sophisticated debate that progresses beyond counting rules to improving how they function in practice.
The path forward emphasizes regulatory quality over quantity, with the FCA positioned to demonstrate that effective oversight can support economic growth without compromising financial stability or consumer protection.
