Is deregulation the answer?

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With the emphasis now on regulators prioritising growth, the government must be aware of pitfalls, and not only for financial stability

Following Rachel Reeves’ first Mansion House speech as Chancellor on November 14th, Professor Marianna Mazzucatto argued the following day on the BBC’s World at One that deregulation to encourage investment wasn’t really the issue for UK growth. In fact, we were either just as much or less regulated than most countries in Europe.

She was right. However, it is worth considering this line by line as some types of regulation may matter more than others. And perhaps the urge to deregulate in the financial sector as the new Labour government is trying to do, may have less impact for overall productivity and growth and therefore, overall prosperity than other types of measures might do. 

Look first then at how we stand internationally. According to the OECD, the UK ranks second in the least regulated in relation to product regulation and fourth least for employment legislation. And the World bank continues to rate the UK one of the highest in terms of ease to do business. 

The truth is that we are in fact regulating more in most areas as we go, not least for diversity and environmental reasons but also to keep up with what goes on elsewhere. We are pretty similar to the EU on gender and diversity legislation, though they are moving faster to legislate in favour of quotas and in enforcement. We have greater maternal leave times and benefits than the US – which has almost none – though nor as good as some others in Europe. But overall cross-country comparisons suggest that indeed we still do well for the moment, in relation to ease of starting a business and firing and hiring – though that may change as new legislation is due to come through. 

Otherwise the UK is tougher that the US on environmental issues on food and other areas where it has stayed in harmony with the EU to ensure that tariff free trade continues to flow between the two, albeit with much more bureaucracy around it since Brexit in the form of customs checks and health certificates. And during the last Conservative government environmental obligations linked to climate change, targets were increasing – and will continue to do most likely in the next Parliament adding to regulatory costs.

But there is more. The long debated Digital Markets Competition and Consumers Act became law in May 2024 and gives powers to the competition regulator to stop major players from abusing their monopoly positions and penalise firms that break consumer protection laws. And we know that the EU is also pushing hard in this field already imposing major fines on digital firms for anti-competitive practices. 

And, on the labour front, the UK is moving ahead with reforming workers’ rights that will add costs to anyone operating here. And those costs are significant. The government’s own impact assessment puts the cost at up to £4.5b per annum once fully implemented, which will admittedly take some time following what is likely to be a long period of consultation. 

So why is the financial sector such an exception, at least in the government rhetoric?

Yes, it may be true that a reform of local authority pension funds which was part of the previous governments plans and which Rachel Reeves has now majored on makes sense. Also encouraging pension funds and insurance companies to buy more UK companies’ shares as a percentage of their overall portfolio is part of this. 

But these take time to have an impact.

And truth is that in most areas, we have pretty much followed international norms like the Basel rules on capital requirements for the financial sector which have all been progressively strengthened in response to the financial crisis in 2008/9. It is true that Trump during his previous presidency lowered capital requirements and reporting requirements for smaller institutions during his time previous presidency which came back to haunt the American banking sector during the Biden administration that followed with the collapse of Silicon Valley Bank and the need to intervene and prevent others from collapsing too.

But yes, perhaps listing requirements in the UK have been too severe. The Financial Conduct Authority (FCA) a few weeks after the elections announced some relaxation in the rules to get Britain more in line with the US and presumably therefore attract more IPOs, as well as potentially increasing the valuation of companies here. New categories of shares are allowed to give more voting control to original owners, even if share ownership is diluted as a result of an IPO or a further fundraising. The regulator did admit that the changes add to the risks but argued that the ‘changes will better reflect the risk appetite the economy needs to achieve growth.’ 

Perhaps this is the aim. It is true that the risk appetite in the UK is below that in the US though it has tended to be higher than that in continental Europe.

But in sweetening the cake even further, requirements of briefings and consultations by the board for some company activities and plans have been reduced, admittedly causing some consternation amongst activist shareholders worried about the diminution in the quality of company governance. And the Labour government has also not so far not contested the decision by the Conservatives a bit before the general election to lift the 200% cap on bank bonuses over basic remuneration which the EU introduced to stem risk taking post the financial crisis of 2008/9.

So why should the City be given sweeteners? 

Given the bad reaction to the October 30 budget measures so far by businesses, Rachel Reeves in her Mansion House speech added the requirement for financial regulators to also have growth of the economy as a part of their remit. She certainly seemed to be trying to reassure the City at least that she was determined to support investment in the UK by a multitude of means – and not reversing some of the earlier regulatory path entered to by the previous Conservative government seemed to be part of the overall offerings. Lets see if it works. 

This blog was originally posted on November 18th, 2024, by the Centre for Brexit Studies.

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Radix is the radical centre think tank. We welcome all contributions which promote system change, challenge established notions and re-imagine our societies. The views expressed here are those of the individual contributor and not necessarily shared by Radix.

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