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Rachel Reeves has been warned by City grandees that her plan to slash financial red tape could have little benefit for British households while increasing risks in the banking industry.
The chancellor used a speech to City bosses attending the annual Mansion House dinner on Tuesday to argue that in too many areas regulation was acting as a “boot on the neck of business”, as she pledged sweeping changes to help revive the economy.
However, leading figures involved in Britain’s post-2008 drive to prevent a repeat of the financial crisis warned Labour against unpicking bank ringfencing – a key measure introduced after the collapse.
Sir John Vickers, the architect of the UK’s ringfencing rules, deployed after the financial crisis to separate high street banking from riskier investment banking, said a wholesale retreat from the reform would be a “very bad idea”.
Lord Turner, who took over as chair of the Financial Services Authority during the 2008 crash and played a leading role in the post-crisis redesign of the banking system, also warned the chancellor to proceed with caution.
He said: “The costs of getting it wrong far outweigh the gains from loosening the requirements and allowing riskier activity by banks.”
Lord Tyrie, who chaired the post-crisis parliamentary commission on banking standards, said it would be “imprudent” to scrap ringfencing after banks had invested huge sums in separating retail banking from their riskier activities. Now a Conservative peer, he warned in 2012 that the ringfence needed “electrification” to discourage banks from lobbying future governments.
He said: “As the banking commission, which I chaired, strongly argued, it needs to be kept under constant review and where necessary adapted. From the Mansion House speech we have very little information about what is intended so far. Succumbing to lobbying in the misplaced belief that watering it down would somehow release the economy to a higher growth path would be a serious misjudgment.”
Reeves on Tuesday committed to “meaningful reform” of the safeguards, with the government saying it would review the rules in an effort to strike a balance between ensuring financial stability and supporting economic growth.
However, Vickers said: “Nothing is perfect, I am sure that its [ringfencing] implementation is capable of improvement. But a radical rowing back on it would be a very bad idea.
“It would remove a layer of protection, for the everyday banking that firms and households depend on, from global shocks. Look what happened last time. I am not saying ringfencing would have prevented 2008-09, which was a global event. But the damage to the UK, including to UK growth prospects, would have been much lower if we had such a regime in place.”
As recently as last month the Bank of England governor, Andrew Bailey, warned ministers against watering down the rules, arguing that it could lead major banks to funnel more cash to their global investment arms at the expense of British businesses and households.
Earlier this year, the bosses of four of the UK’s biggest banks: HSBC, Lloyds Banking Group, NatWest and Santander UK, wrote to Reeves to lobby for the removal of the ringfencing rules, arguing that it was a drag on lending to the British economy.
However, Bailey wrote in a letter to the Commons Treasury committee that ringfenced banks faced “no restrictions on lending” to UK firms.
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He said: “Removing the ringfence would most likely have a negative effect on UK lending, both in terms of cost and quantities, with banks directing funding from retail deposits away from UK households and SMEs [small and medium-sized enterprises] and towards investment banking activities or activities outside the UK.”
Vickers said it would be ironic if Reeves rolled back ringfencing in the name of supporting British firms and households. “It doesn’t help the UK growth objective. It would increase risk for no benefit.”
Turner said it was important to review City rules, but cautioned: “The fundamentals of the reforms we put in place – the ringfencing of retail activities and the capital requirements on systemically important banks – need to remain the bedrock of UK regulation.”
The Treasury said it would work with the Bank of England’s Prudential Regulation Authority to consider if ringfenced banks could provide more products and services to UK businesses, if inefficiencies could be tackled, and if banks should be allowed to share resources and services more flexibly across the ringfence.
Led by the Treasury minister, Emma Reynolds, the review would report by early 2026.
It said: “The government is committed to upholding the ringfencing regime to protect financial stability and safeguard depositors. However, the government also intends to take forward meaningful reforms to the regime to support its growth agenda.”
