UK regulators must transform their approach to ensure the post-Brexit financial sector delivers for the economy and society, according to a new report released today by the Finance Innovation Lab.
Financial regulators, including the Financial Conduct Authority, Competition and Markets Authority and the Bank of England are currently operating according to a set of false beliefs, which are preventing the financial industry working for the good of society and the environment, according to the report.
One such false belief is that financial regulation is “purpose neutral”, whereas in fact it is skewed in favour of large, well-established, shareholder-owned companies and often disadvantages smaller players trying to do the right thing.
There is no such thing as values-free regulation – only values-blind regulation. Now it’s time to put human values back at the heart of the financial system.
Anna Laycock, Executive Director, Finance Innovation Lab
The report lambasts the current financial system for failing to support a productive economy, failing to serve its users and failing to address global environmental challenges. As little as 3 per cent of lending enables socially useful, sustainable activity in the real economy (as opposed to lending against existing assets or speculation); conduct scandals continue to abound and less than half the population (45%) trusts the sector. More than 1.5 million adults remained unbanked in 20168 and in 2017 the current account switching rate was just 1.4%. Furthermore, there is an $87bn annual gap in renewable energy financing if we are to meet internationally agreed targets to limit climate change to 2°.
The report states: “There is both a clear need and a clear opportunity for a shift in gear: for us to step back and ask ourselves what outcomes we are regulating the financial system for, and what kind of financial system – as well as what kind of regulatory system – can best achieve those outcomes.”
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Anna Laycock, Executive Director of the Finance Innovation Lab and co-author of the report, said: “The combined forces of Brexit and digital disruption give us a once-in-a-generation opportunity to reorient regulation around the ultimate purpose of finance. Yet the experience of the innovators we work with is that regulation often fails to appreciate the huge benefits of models that put people and planet first.
If we want to ensure our future financial system delivers for the economy and society, we need new regulatory mandates, rooted in democratic consultation; new metrics that focus on the things that really matter; and a different mindset, embracing fully human-centred regulation.
There is no such thing as values-free regulation – only values-blind regulation. Now it’s time to put human values back at the heart of the financial system.”
The report makes a range of recommendations, including:
- Government should conduct a review, based on full democratic consultation, to develop an agreed set of purposes for the financial system, using the results to update the mandate of the Bank of England and the FCA
- Regulators should identify and support the governance, ownership and business models that can best align the financial system with its social purpose
- Regulators should add an explicit understanding of social purpose and the value of diversity into their approach to innovation, including establishing a Diversity Hub for firms with atypical business models
- Regulators should use ‘regtech’ to focus time and energy on face-to-face interaction, aiming to build a deep understanding of firms’ culture and business practices.