The architect of banking reforms designed to prevent a repeat of the 2008 financial crash has warned that Jeremy Hunt’s relaxation of his rules could “rebound on us very badly”.
Sir John Vickers said that “chiselling away” at protections in the financial sector could have negative consequences for the whole of society.
His warning came as the chancellor was accused of a “race to the bottom” on regulation in a bid to restore competitiveness lost by the UK financial services industry as a result of Brexit.
Prime minister Rishi Sunak said Mr Hunt’s package of more than 30 regulatory changes – known as the Edinburgh reforms after they were launched by the chancellor in the Scottish capital – were an example of the UK taking advantage of freedoms gained by leaving the EU.
But Labour said the City had been “sold down the river” by the Conservative government’s Brexit deal, which has seen trading volumes in Amsterdam overtake London and Paris challenge for the title of Europe’s largest stock market.
Mr Hunt’s reforms include the loosening of ring-fencing rules to separate risky investment banking from retail operations, as well as a regime introduced to hold bankers directly accountable to issues on their watch.
And he has introduced a new objective for regulators to ensure the “international competitiveness” of the UK economy, alongside existing requirements to promote the safety and soundness of financial institutions.
The chancellor denied that he was “unlearning the lessons of 2008”.
Speaking in Edinburgh, Mr Hunt said: “banks today have much stronger balance sheets, and we have a much stronger resolution system if things do go wrong.
“In that context, it is perfectly sensible to make pragmatic changes just as the ones we are announcing today.
“But we are doing so very, very carefully to make sure that the UK is competitive, exciting, the place to be and the place to invest, but also that we don’t lose the guardrails that were put in place after 2008.”
And Mr Sunak insisted that financial services regulation remains “robust” in protecting the consumer.
But Sir John, whose Independent Commission on Banking in 2011 recommended ring-fending as a means of stopping bankers taking reckless risk with savers’ money, said that unravelling the protections was “a huge mistake”.
The new competitiveness objective could lead regulators to “cut slack” to the financial services sector, he told the BBC’s World at One, adding: “That that could rebound very negatively on the rest of us, on the economy as a whole.”
Sir John said: “The competitiveness of the whole economy needs banks that are extremely well regulated with very strong capital buffers, and properly structured banks, as ring-fencing provides.
“It does not need chiselling away at those protections for the rest of the economy, which could rebound on us very badly.
“We saw that absolutely clearly 15 years ago, and let us not forget the costs of that that we’re still living with.”
Sir John said it was ironic to hear ministers talk about using Brexit freedoms, as the ring-fencing protections were “absolutely made in Britain”. Brexit had been “very negative for the financial services sector” in the UK, he said.
Fran Boait, executive director at the sustainable economy thinktank Positive Money said Mr Hunt’s package amounted to “wide-ranging deregulation that threatens to destabilise an increasingly fragile financial sector, with huge risks to the public and little benefit”.
