Financial reform risks are very real

It’s not Aviva managing the risk of regulatory reforms that worries me but the risk of less reputable firms taking advantage of lower standards to rip-off unsuspecting consumers. Less well managed and risk aware firms also have the potential to threaten the stability of some sectors. Surely, the recent crisis among pension funds caused by the government’s misguided September mini-budget reminds that we are only ever one step away from financial disaster.

Commenting on the government’s so-called Edinburgh Reforms, Aviva’s CEO, Amanda Blanc, is reported as saying “risk goes up when rules are relaxed, and all of us in financial services and beyond should identify and manage those risks all the time … The way to address risk is to understand it, and manage it, not necessarily to try and freeze it with immovable laws”.

Few will doubt that firms like Aviva will live up to this but what about the firms that do not? The likes of Aviva cannot control them or the reputational risk they would pose to the entire insurance and financial services sector.

Woven into all the reforms the government has tabled are too many proposals that the reckless or just plain unscrupulous could take advantage of. 

Take the suggestion that in the reforms to Solvency II, regulatory hurdles could be lowered for new entrants into the UK insurance sector. This has danger written all over it.

Does the UK really want to become another Gibraltar, where over a dozen insurers selling into the UK market have collapsed in the last decade? As they get excited about the prospect of widespread regulatory relaxation and urge the government to go further, the bosses of the major financial institutions need to pause and ponder the risks they might be exposing the sector’s customers to, and the reputational damage that would flow in the wake or similar problems.

There is certainly a need to make regulation more efficient, especially by speeding up processes, but lowering standards offers illusory benefits.

Further away from EU equivalence
The proposed reforms also move the UK further away from any hope of establishing equivalence with European Union rules for any part of the financial services sector, a point made at the same event by private equity boss Guy Hands. He warned that the equivalence “horse bolted back in 2016” and that regulatory reforms would not reverse the decline of the City of London and its financial services sector.

This points to the naïveté that lies at the heart of the Edinburgh Reforms. “Opening up the UK” and making the financial services sector more competitive carries risks that people seem to be blind to. I would be more impressed if the industry’s bosses acknowledged these and talked more about how they will protect customers from the potential downsides.

It goes deeper than that, however. We can make it easier for people to set up financial businesses in the UK but why would they want to? We cannot offer them access to other markets, especially in the EU. The strengths that were once unique to London or shared with only one or two other major financial centres are, as Hands points out, gradually ebbing away.It will take more than regulatory relaxation to reverse that and attract new fintech-led businesses to the UK. It requires a complete political re-set to re-engage commercially with our major markets. There is little sign that this government has grasped that need.