The UK could be “sleepwalking into another financial crisis” unless more is done to change the culture at Britain’s financial regulators, according to a new report.
The Bank of England, Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) are failing to rein in Britain’s finance sector and are pressured into “watering down” new regulation, according to a new 150-page report from think tank New City Agenda and the Cass Business School.
Bank of England Governor Mark Carney has been repeatedly criticised by Tory MP Jacob Rees-Mogg, who claims the Canadian was politically influenced by the last government. Carney has been coming under increasing pressure since the change of government.
The report, released on Tuesday, claims: “Weakening rules designed to hold senior banking executives to account is the fastest example in over 300 years of watering down regulation following a crisis.”
The FCA was criticised last year for scrapping a major review into banking culture and instead working directly with banks behind closed doors. Hundreds of small businesses called for a judicial review of the decision.
The report adds that groupthink, lack of transparency, box ticking, and other shortcomings at top financial bodies have led to rules that are “both bureaucratic and ineffective.”
The report calls for the PRA and the Bank of England to improve transparency, reduce “groupthink”, and improve engagement with the public. The Financial Conduct Authority (FCA), the City watchdog, needs to demonstrate independence from politicians and the financial industry and prioritise cultural change in the City.
The FCA comes in for particularly strong criticism, with the report saying it suffers from “variable quality of staff, excessive box-ticking, a culture of secrecy, a lack of willingness to use new powers granted by Parliament, a lack of clarity about what the regulator was trying to achieve, a lack of independent evaluation, internal silos and poor engagement with small players.”
“Leadership changes and the perception of political interference are in danger of making the FCA into a timid and cowed regulator,” the report claims.
Not only are regulators allegedly “watering down” regulation, the regulation that is being adopted is current regulation “both bureaucratic and ineffective,” according to the report.
The document highlights: “There are over 13,000 pages of rules, guidance and supervisory statements published by the FCA and PRA. The FCA handbook costs £3,641, the same as a second hand Mini Cooper.” Financial regulation now costs £1.2 billion a year, according to the report.
Despite the mass of rules, New City Agenda and Cass Business School find they are ineffective at safeguarding against a new financial crisis.
Professor André Spicer, Professor of Organisational Behaviour at Cass Business School and author of the report, says in a statement: “Britain’s financial regulators must change to avoid sleepwalking into another financial crisis that will have a devastating effect on our economy and political system.
“If we want to avoid this, just making minor tweaks to the ever-expanding rulebook is not enough. We need to ensure a meaningful change of culture at our major financial regulators — they must practise what they preach.”
The report calls for the PRA and the Bank of England to have an independent audit of its cultural change strategy and do more to encourage challenges and engage with the public.
The FCA, meanwhile, is urged to return to its commitment to create a new culture in banking by “developing a new comprehensive programme of cultural change.” The regulator must also do more to demonstrate independence from politicians, “name and shame” bad bankers, take action against senior executives, and do more to fight for consumers.
New City Agenda and Cass Business School call for regulators to legislate to make all three bodies more open and accountable. They also criticise financial institutions, cautioning them not to make “generic criticism,” adding: “The financial services industry must recognise that those who work in regulators are not inferior to those who work in the industry.”
Professor Spicer and his team interviewed current and former employees of the institutions it surveyed, as well as financial institutions, consumer groups, and small business representatives.
New City Agenda is a think tank set up by David Davis MP, the Minister for Brexit, although he is no longer a director. It was founded because of a “lack of new ideas and challenging perspectives” in the City, according to its website.
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