Secondary International Competitiveness and Growth Objective (FSR Committee Report)

Our report is long and our conclusions and recommendations run to 77 paragraphs; I will not be able to cover them all, noble Lords will be relieved to hear. There are three angles on the secondary objectives in our report: first, the impact of regulation on the financial services sector; secondly, the impact of that regulation on the wider economy; and, lastly, the role of government.

The UK has a complex regulatory architecture, which we set out in Appendix 6. The PRA and the FCA are the lead actors, but there are many interfaces and overlaps with other bodies. The Government have started to address this with plans to roll the Payment Systems Regulator into the FCA and a consultation to address the interface between the Financial Ombudsman Service and the FCA, which many cited as a major problem. We welcomed these reforms, which must be completed.

In evidence, we heard how financial services firms are inundated by information requests, that the cost of regulatory compliance in the UK was considerably higher than in other jurisdictions and that the regulators did not focus on the cumulative burden of regulation on firms. The FCA’s consumer duty was often cited as lacking clarity and proportionality. We also heard that the regulators take far too long to deal with authorisations, with a disconnect between the regulators’ views of their performance and the experience of firms.

While we were encouraged by a new focus on operational efficiency in the regulators, in particular in authorisations and related performance metrics, we were disappointed that the Government resisted our recommendation that they should undertake international benchmarking as a spur to further UK improvements. Cumulatively, the evidence that we received pointed towards there being a regulatory premium, which discourages investment in UK financial services.

Lurking beneath all these detailed areas lies the complex area of culture in the regulators, which we characterised as risk aversion. Culture is the most difficult thing to change in any organisation. There are encouraging signs that the regulators are trying to change what they do and how they do it—for example, overhauling their voluminous data requirements—but the jury is still out on whether their culture is changing in a deep way.

Turning to the impact of the secondary objectives on growth in the wider economy, one of the problems that we found was that the effect of actions by financial services regulators is not well articulated either by the regulators or by the Government. In addition, the metrics that the Treasury has set in order to monitor progress simply do not deal with much beyond operational processes in the regulators.

Financial services firms, particularly banks, are an important source of funding to businesses, enabling the investment that is needed to underpin growth in the economy. Despite constant assertions that a lack of investment is one of the key factors behind lack of productivity growth in the UK economy and that more productive investment is essential to achieving the Government’s growth mission, we were surprised to find that data do not exist on the proportion of total lending that finds its way into productive investment. We said that the Government and the Bank of England should work on this and, while the Financial Policy Committee has published some findings on high growth firm financing, this falls a long way short of our call for proper data on economy-wide investment. On Monday this week, Positive Money reported that only 6% of bank lending last year went into productive investment. The Government really must start to take this seriously.

The Committee delved into the arcane territory of bank capital, which is a key determinant of lending capacity. We received evidence that, unlike in other countries such as the US, the approach of the PRA starts from the position that the Basel rules, which were aimed at international banks, should apply to all UK banks. The PRA is at long last introducing a small domestic deposit takers regime, which is less onerous and which we welcomed, but the PRA applies the rules in their entirety to mid-sized banks. Mid-sized banks are also hit by the minimum requirement for eligible liabilities—or MREL—rules, which mean that they have to raise costly capital once they hit the MREL threshold or alternatively manage their businesses so as to keep below the threshold. Neither course is good for lending into the productive economy.

An additional problem is that large banks can minimise their risk-weighted assets, and hence their capital, by using approved models—called the IRB approach—but the approval process takes many years, and few mid-sized banks have achieved it. We made a number of recommendations, including asking the PRA to consider a more proportionate judgment-based approach to setting bank capital requirements rather than slavishly following Basel III, and to speed up its IRB approval process. We also said that the Government should work with the Bank of England to look at the cumulative impact on regulatory capital to get the right balance between financial stability and the need to finance productive investment.

The Bank has now increased the MREL threshold, but only to keep pace with inflation. In addition, the Financial Policy Committee has reported that overall bank capital levels can be reduced by one percentage point, and the PRA has said that it will improve the IRB process. Although this is welcome, there is no sign yet that it will improve matters for mid-sized banks, and the PRA is unreceptive to the idea of a proportionate, judgment-based approach. This may be a missed opportunity.

We did not focus entirely on banks. We noted that the Solvency II regime should help insurance companies to unlock more capital for productive investment. We also noted the Government’s pension scheme reforms and recorded our serious reservations about the mandation power, which could force pension schemes to invest in particular ways. The House will express its opinion on that next week during the Report stage of the Pension Schemes Bill.

The final area of our report covered the role of government. We did not find clarity about how the policy objective of growth in the economy was to be achieved by the regulators, and the Government have set metrics that shed no light. The Government need to grasp this issue. I have already referred to our recommendation on benchmarking the performance of the regulators internationally; the Government have not embraced that either, claiming that it is difficult to do. That is not a good reason for not doing it, and I urge the Government to look at it again.

We could not avoid getting into risk appetite, especially as the FCA has regularly called for the Government to set their risk appetite. We did not fully agree with that, but we did think the Government could be more specific about the policies they wanted the regulators to action. We called for this to appear in the Government’s financial services sector strategy, but that strategy was silent. I hope the Minister will explain why the Government refuse to get involved in risk appetite.

Lastly, we recommended that the Government should keep the secondary objective under review. I do not think it controversial to say that it is still a work in progress. We asked that the Government update Parliament and the committee annually, in particular on whether the objective is achieving growth in the UK economy. I hope the Minister will today confirm that the Government will do that, and say when we will see the first of these annual reports. I beg to move.

“We are pleased that we have work underway, or already completed, that addresses most of the Committee’s recommendations”.

Perhaps one could not wish for a more tangible illustration of the need for cultural overhaul, one that puts a premium on a regulator that acknowledges its shortcomings, embraces radical evidence-based solutions—this inquiry —and demonstrates full accountability, rather than a response that basically said, “Nothing to see here”.

My second illustration of the pressing need for the type of cultural transformation that the inquiry called for is a subtle one. It is a deft line in the report:

“We were disappointed by the difference in candour between the evidence we received from industry in public and the views expressed to us in private”.

It is the inverse of my favourite political joke: the senator who was asked what he felt of a young, promising congressman, Bill. He said, “Bill? I think so highly of him that I am even prepared to praise him in private”. In this case, it is the opposite: the suggestion—not just a suggestion—that, in public, firms and trade bodies would toe the party line but, in private, they were somewhat more forthcoming, if I can put it that way. That might say everything about the health of the ties between the regulator and the regulated and, perhaps more particularly—I am sorry to say it—the trust deficit that lies between them. The fear of the regulated in expressing a candid view in public is hardly conducive to the type of dynamic, competitive business sector that the secondary objective has in mind.

Finally, the third illustration emerging from the report also draws on my personal experience. As declared in my register of interests and elsewhere, I have spent much of my career in the financial services, particularly in listed and regulated businesses. As a result, and sadly so, I fully recognise evidence that spoke of supervisory teams mostly having limited or no experience of the fields that they were supervising. My own experience has been of enforcement being overrigid and often indifferent to the realities, complexities and uncertainties of business life. This inflexibility becomes a brake on competitive ambition and often seems to run through supervisors like a stick of rock. A slavish adherence to what has been described elsewhere as the

“total elimination of all risk”

hardly seems conducive to the innovative competitive economy that Governments of all stripes aspire to. My own experience was simple, and sometimes positive. At the top of the food chain, our interactions with regulators were often constructive, engaging and solutions-oriented. Deeper into the system, the middle and junior ranks might show a modicum of willing, but too often a lack of understanding of financial services businesses and their complex realities.

So I offer three practical illustrations based, in some measure, on my experience of not just the culture change needed, as the report suggests, but the culture transformation. If we have learned one thing about competitive economies, it is that, when you have the right culture, especially a leadership culture, you will overcome most structural impediments. Conversely, if you do not have the right culture, especially at the top, no amount of structural overhaul or, indeed, well-meaning secondary objectives will help—a cautionary tale for our regulators and their political masters.

“There is a concern … that, as one person put it to me, being critical of the regulator publicly will result in an enforcement punishment beating later”.

That is concerning. It implies a lack of trust between the regulators and the industry. The regulators should recognise that and do everything possible to overcome it.

Mr Celic also gave us the example of an American company with operations in both the UK and the US, which said that

“regulators in the US … started from the position of asking, ‘What will the impact of what we are doing be on growth?’ But his experience in the UK was that the regulatory starting point was, ‘What will the impact of what we are proposing here be on risk?’”

It seems more difficult than one would expect to make international comparisons of the burden of regulation and there seems to be a reluctance on the part of both the regulators and government to research this fully. We received plenty of evidence that the UK regulatory burdens are significantly greater than those in comparable jurisdictions such as the US. The CEO of Marsh McLennan told us that

“on a direct cost-only basis, the UK is at least six times more expensive than our next most expensive country from a regulatory perspective”.

The Investment Association told us that

“industry headcount for Compliance, Legal and Audit has almost tripled from 2009”,

and other witnesses gave us stark examples of the amount of data that has to be provided, often for unclear purposes, as the data requirements are greater in the UK than in other countries. This may be anecdotal, but it is clear that, at the very least, the UK has gained a reputation for being a disproportionately high-cost environment from a regulatory perspective.

Rigorously analysing compliance costs internationally may be difficult, as the regulators and other analysts make clear, but unless we gain a clear understanding of how we compare to other countries it will be very difficult to understand if and where regulation is creating barriers to growth. This really must be addressed and measured to the extent possible.

However, the Government say in their response that “direct comparison is difficult”, which, to be frank, is pretty weak. They go on to say:

“The government and regulators will continue to consider how the regulators’ efficiency and performance can be meaningfully compared to those of international comparators”.

That was over six months ago, so perhaps the Minister can update us on what further consideration they have carried out in those six months.

The driver for this apparently higher level of regulation in the UK is the risk-averse culture that our report highlights. Regulators understandably became more risk averse after the financial crisis. I have some sympathy for the regulators here; it is very easy for us politicians and the Government to tell the regulators that they should tolerate greater risk, but the regulators know that if some serious risks were to crystallise, the blame would still fall squarely on them. If the Government want to see greater risk tolerance and a lighter-touch regulation, which I think we all want to see, they need to be much clearer about what is acceptable and to accept their share of responsibility if the risk crystallises, not just blame the regulators when it goes wrong.

We also mention in our report regulatory mission creep. Again, there is always a tendency for this—regulators will regulate—and it is right to call it out. But again, we in Parliament and those in government need to take some responsibility for this, too. We keep putting an ever-growing list of objectives, and in particular have-regards, on to the regulators. I know that I am guilty of this myself; I supported the net-zero have-regards in the FSMA 2023, which I now regret, having gone through this process. It can be no surprise that, if we keep adding to regulators’ remits, they will react by adding rules, data requirements and other onerous burdens to meet those. There needs to be a regular review of the objectives and the have-regards so that regulators are able to concentrate on their core purpose and reduce unnecessary burdens on the firms that they regulate. The Government and we as politicians need to be more disciplined about adding to the mission creep of regulators.

It is welcome that the FCA appears to be learning lessons from other jurisdictions. A good example is the creation of a Singapore-style concierge service to support international investment, which is very welcome. I look forward to seeing real metrics about how effective that has been once it has been up and running for a while.

The committee had a lot of discussions about what we mean by growth and competitiveness. First, there is the growth and competitiveness of the financial services industry itself. It is a very significant part of the economy, as the noble Baroness, Lady Noakes, said, so growth of the industry will have an impact on overall GDP of itself. But the secondary objective goes beyond the industry itself, requiring the regulators to consider the international competitiveness of the economy of the United Kingdom and its growth in the medium to long term. It is there that the secondary objective becomes rather less clear.

The link between financial services regulation and wider economic growth does not seem to be widely understood or well researched. Economic growth is driven by new investment into and by business and into productive assets. We saw very limited evidence of how regulation has much impact on that and a lack of data on how much investment is made by the financial services sector into productive assets or growth companies. This needs to be improved. Perhaps the Minister can tell us what the Government are doing to improve that understanding, as we recommended.

I will finish by referring to a current piece of legislation that is going through the House—the Pension Schemes Bill, to which we will be returning on Monday and indeed on which we had an exchange just 45 minutes ago in the main Chamber. Our report highlights that the pension industry is fragmented and underinvests in UK productive assets. I, and I think the committee, agreed with the Government that action should be taken to improve this, which the industry has also agreed. The Pension Schemes Bill tries to address that and a lot of what it includes is good. For example, the proposed value-for-money framework should encourage funds to look more at returns rather than just fees, which should allow funds to consider a wider range of investment types. However, the Bill also includes the blunt instrument of giving the Government the power to mandate asset allocation by pension funds, which the committee raised serious concerns about.

I will ask this Minister exactly the same question that I asked the Minister in the Chamber 45 minutes ago and that I did not receive an answer to. I have asked this several times and still have not received an answer, so I hope the Minister will actually answer it this time. If not, I would be perfectly happy for him to write to me with a real answer, rather than the platitudes that I have received so many times so far.

It is really simple: why do the Government think that pension funds have been so reluctant to invest in these UK productive assets that the Government are so keen for them to invest in? They keep telling us that these are fantastic assets and that there are fantastic returns to be made from them, so why are pension funds not doing it? This is not a rhetorical question, and I really would like an answer.

The reason I ask is that surely a better way to encourage pension funds to invest in UK productive assets would be to identify and remove the barriers that are preventing such investments from being made, and to make those investments more attractive. Surely that is a better way than forcing pension funds to make investments that they do not wish to make.

Such a shift must surely recognise and involve a concerted investment in education around two specific points. The first is the need for a fundamental understanding of the harm of the prevailing regulatory burden and the cost to business and economic growth of the status quo. In particular, it is vital to understand the consequences of regulatory duplication and overreach for business output, productivity, employment, taxation and wider economic growth. Specifically, regulators need a better and more practical understanding of how high regulatory burdens impose real costs in terms of time and financial expense, making the UK less competitive on the international stage. I was struck by the data showing that one firm employed 78 compliance officers for the UK market alone, compared to 73 covering 40 other countries in its European and Middle Eastern operations.

Secondly, it is important to innately understand the impact of regulation on innovation. This is a particularly crucial point given the enormous benefits as well as the costs that AI promises. It should be a priority to really grasp how this AI supercycle could append the UK’s growth fortunes and longer-term outlook for the country’s prosperity. In the United States today, for example, estimates suggest that, through productivity gains and increased capital investment, AI could add as much as 1.5 percentage points per year to the country’s GDP growth.

Were similar gains to occur in the United Kingdom— I am in a sense spitballing here—GDP growth could soar close to 3% per year here in the UK, thereby clearing a crucial hurdle to where we can put a dent in poverty and materially improve living standards within a generation. Yet, despite this appealing prospect, UK regulation is regularly blamed for weak capital markets, including a poor IPO environment, and paltry investment by cornerstone investors such as UK pension funds, endowments and insurance companies, all of which should be powering AI investment.

The unattractive UK investment landscape, buttressed by constraining regulation, could at least in part explain why the report highlights concern over a series C funding gap, which is forcing much-needed growth companies to leave the UK when they seek to raise in excess of £50 to £100 million.

To put it simply, the country needs less regulation, not more. In essence, policy should be attracting investment, not forcing investors, and a more growth-focused regulator is bound to attract more capital investment. I therefore agree with the serious reservations expressed by the committee regarding any proposal to mandate pension funds to comply with the prescribed asset allocation.

This debate comes when the Chancellor of the Exchequer has downgraded the growth outlook of the country to just 1.1% in 2026. Worryingly, this reflects how the country was already on a long-term structural economic decline, and the war in Iran will only dampen our growth prospects.

The essential question is this: in five to 10 years from now, will Britain’s economy in real terms be bigger, smaller or just the same? To alter our economic prospects from today’s growth malaise and set us on a prosperous trajectory, regulation must be relevant, on point and, most importantly, appropriately curtailed. Doing so will ensure the longer-term prospects of the financial services sector, which, as noble Lords have already heard, is critical for the economy. It will ensure that the sector is stronger and better equipped to serve as an engine of growth for our economy.

But as our report points out, and as my noble friend Lady Noakes has already said, we should think of this whole area as a work in progress, not as a fixed point. After all, our own risk appetite as a society is not fixed, nor is that of our international competitors. Indeed, we have only to look at recent regulatory developments in the United States since we started our inquiry to see just how dynamic and competitive that landscape is.

Therefore, as the report argues, we need to keep the metrics by which we judge the performance of the regulators under constant review. We should seek to tighten them, to be more ambitious, to raise the bar and to keep on pushing for better performance. Here, as we have already heard, the Government’s response to the committee’s recommendations was, I have to say, disappointing. Metrics may not sound very dramatic or poetic, but they are the means by which we can shine a light into the world of regulation and supervision. I argue that the Government should be more ambitious here, and so should our regulators.

I will draw attention to one other area: the question of whether we could do more to differentiate between how we think about regulating wholesale and retail markets. We raised this in the report, and we heard evidence that suggested that attitudes of mind developed in the field of consumer protection are, as it were, leaking across into the regulation of wholesale markets. Here, obviously, risk appetite and sophistication of investors are completely different, and it is in wholesale markets that London’s claim to be a global financial centre will be won—or lost. Ministers have given us hints that they think it is worth thinking more carefully about this wholesale/retail distinction, and perhaps the Minister might feel able to give us another hint today.

I have a final word for the financial services sector itself. Just as we want to prevent mission creep from regulators and supervisors, so the sector needs to prevent it in its own compliance departments, legal advice and board discussions. If we want to have a new attitude in Britain that is more accepting of risk, we cannot just blame everything on the poor old regulators. Yes, they have their share of responsibility, but the primary responsibility surely rests with the politicians, who have for too long outsourced the management of risk.

I believe that this report starts to unpack many of these issues, and it helps us in the long march of improving how we regulate and supervise financial services, unlocking more innovation and, ultimately, more capital to invest in our economy.

What has been the cost of all this post-crisis regulation? On a pragmatic level, the report, as the noble Baroness, Lady Noakes, noted, calls on the Government to commission an independent study of the administrative costs of compliance and, particularly, the relative costs of compliance as compared with other jurisdictions. It is enormously disappointing that the Government appear not to have taken note of this recommendation. What has been the wider economic impact of post-crisis regulation? It is clear that the proportion of business lending emanating from the UK banking system has fallen from up to 90% in 2007 to less than 50% today. Enforced risk aversion has squeezed business lending out of the banks and into private capital markets. What has been the impact of this migration on systemic risk? I leave that question in the air—a topic for another day.

I turn now from complexity to confusion. Throughout the committee’s investigation, we received evidence that particular institutions, whether banks or building societies, had “invested heavily” in the UK economy. Billions of pounds-worth of investment was itemised, but it soon became evident that the claimed scale of the investment exceeded the scale of gross fixed capital formation in the UK economy—something wrong, surely. The confusion arose because the term “investment” was used in two quite different ways. On one hand, it referred to the financing of the creation of new productive assets—the assets that are counted in the figure for gross fixed capital formation. On the other hand, it referred to the purchase of assets in secondary markets. For example, the representative of a major bank referred to the billions of pounds that his bank had invested in the UK economy, but when asked whether it funded the purchase of new productive assets, he replied, “We don’t do that”. Similarly, both building societies and banks referred to the billions invested in mortgages, yet well over 90% of mortgage lending is for the purchase of assets—houses—that already exist, not for new build. That 90% or more of investment does not fund real investment at all.

A similar mix-up seems to permeate the Government’s calls, via the so-called Mansion House agreement and similar encouragements, for financial institutions, including pension funds, to invest more in riskier equities rather than in the bond markets. But these so-called investments are in secondary markets, not in the creation of new productive assets.

We tried to untangle these confusions in the committee but, as the noble Baroness, Lady Noakes, and the noble Lord, Lord Vaux, noted, we were not helped by the Bank of England. It told us that it did not have data on the breakdown between investment by financial institutions in secondary markets and investment that actually results in the creation of new productive assets. Of course, there is a relationship between the two—the presence of active secondary markets provides the comfort of liquidity to the flow of funds into real investment—but that relationship is ill defined and opaque.

The Government have recognised that the squeeze on microprudential regulation has gone too far, and the Chancellor has suggested that regulators should be less risk averse. But this raises two vital questions that it would be helpful for the Minister to address in his summing up. First, are the Government confident that an increase in secondary market investment will result in an increase in the funding of real investment in new productive capacity? Secondly, are the Government happy to see an increase in systemic risk as the price of the relaxation of risk-management constraints?

The source of the dilemmas that lie behind these two questions is that the competitiveness and growth objective has been characterised as an issue of risk management, but it is not; it should be seen as an issue of institutional reform. The committee received evidence from a number of medium-sized fintech companies, all of which had successfully raised funding in the order of £35 million to £80 million to scale up their businesses. They had all raised those funds from venture capital firms in the United States. None of them could get their money in the UK.

The venture capital industry in this country—the financial institutions that invest in real investment—is tiny, with total assets under management of between £30 billion and £40 billion, which is less than half of 1% of the total value of assets under management in the UK. That is dwarfed by the venture capital funds in the US, with $700 billion under management, which is around 4% of their total assets under management. It is also dwarfed by the EU, which has venture capital assets in excess of $220 billion. The EU venture capital industry is growing rapidly with the support of European Investment Fund programmes. We desperately need real investment institutions—venture capital firms—similar to those in the US and the EU.

Of course, the Government have promoted the National Wealth Fund as a source of real investment in Britain, but even here there is a lack of radical new direction. Companies applying to the National Wealth Fund for the sort of scale-up funding required by the fintech firms I mentioned earlier are typically asked to show evidence of the value of their endeavour by securing private funding first. Note the wonderful paradox: the National Wealth Fund has been established because private funding has failed to do the job, and its investment decisions are dependent on the decisions of the private funders that have failed to do the job. Without major institutional change that directs financial flows toward real investment, the search for growth will be in vain.

What sort of change do I have in mind? What would I propose as a radical alternative? Regulators today require banks to hold specific proportions of their balance sheets in a defined mixture of instruments designed to maintain necessary regulatory capital and necessary liquidity. In the jargon of the day, it is mandatory. Why not add to these requirements the condition that, to secure a banking licence in the UK, a tiny proportion of the bank’s assets should be committed to venture capital, either through an entity of its own or through an approved venture capital entity? Even this tiny commitment would transform the flow of funds into venture capital investment in this country, and indeed would transform the culture of UK finance. This is certainly a radical suggestion but, without radical institutional reform, it is difficult to envisage the financial services sector playing the dynamic part that is required of it in Britain’s economic renaissance. Clarity and culture change are required.

We found a number of symptoms of this factor that regulators regulate in the interest of regulators. For example, time can be of the essence for any company setting up, appointing new management or undertaking some new activity for which it requires approval, but time is much less pressing for regulators. There were complaints that regulators take an inordinate time to approve, for example, board appointments and even appointments of people who have been approved for other financial services companies and are active there. The regulators get around time limits that have been imposed on them for concluding their appointments or approvals by restarting the clock whenever they seek new information.

I have a second example. Other people complain that regulators refuse to answer “what if” questions from people being regulated: “What would happen if I did such and such?” But regulators should not see their task as simply deterring or punishing companies for breaching the rules. They should help them actively comply and tailor their business to make sure that it is legitimate.

Thirdly, we were told that in Singapore the regulators offer a sort of concierge service, as it is called, particularly to companies newly entering the market and those newly entering Singapore itself and unfamiliar with its rules and regulations. In the past there seems to have been a reluctance for our regulators to add that role of helping people to the role of telling them what they cannot do.

Fourthly, we had some rather confused discussions with the FCA about its request that the Government should define the appropriate appetite for risk. Many of us thought that it was for individual investors to decide what risks they were prepared to take with their money. Of course, financial advisers need to make sure that investors whom they are advising do not unwittingly take risks that they could not absorb, and the adviser should tailor their advice to the reasonable risk appetite of those they are advising. But it emerged that the regulators meant that they were worried about the risks to themselves, since the regulator would be blamed if any companies failed or defrauded investors. It seems that they wanted some quota of companies that would be allowed to fail or not be properly regulated and carry out frauds. That was their idea of a risk appetite, rather than the risk appetite of the investor.

For a similar reason, regulators—not just in the financial sector—put too great an emphasis on box-ticking. They are conscious that if something goes wrong, questions will be asked about how assiduous the regulator has been. So the regulator needs to be able to show that it has at least ticked all the boxes, made companies go through all the formal checks et cetera, even if those procedures rarely prevent wrongdoing or financial mismanagement. Ideally, regulators should allocate most effort to supervising companies that are the greatest cause of concern. When I was a financial analyst, we were always aware of some of the symptoms of companies that should be a cause of concern—late accounts, constant changes of accountants or lawyers, dodgy people on the board and so on. It is these to which the regulators should devote most of their attention.

An unusual feature of financial regulation is that since Brexit the regulators have had the task of setting regulations as well as administering them. They have had to review the body of regulation inherited from the EU, at the very least adapting it to make it work where they—the FCA and the PRA, rather than the EU—are now the ultimate regulators, but also revising it to fit the UK’s needs now that we are free to do so.

So far, there have been only relatively modest changes. Why is that? Partly, I think it reflects bureaucratic inertia: people are always happy with the status quo. More significant is that even companies that implemented EU regulations reluctantly and at great cost are not keen on changing it, even to make it simpler, especially if those companies recognise that the more burdensome the regulations, the greater the barrier they are to the entry of new competitors.

Despite there being only modest changes so far to the rules that we inherited from the EU, industry values the changes that have been made and seems to have lobbied successfully to be excluded from the reset of our relationship with the European single market, which is currently going on. The financial sector seems to have no desire to return to EU rules, still less to accept dynamic alignment in future without even having a vote on it. Indeed, the Chancellor herself is implicitly willing to diverge further where it helps and has called on the regulators to seek ways to change the regulations to make them encourage growth and competitiveness.

I recommend that the Government go back to the ministerial briefs that were prepared when these directives and regulations were first negotiated. I had to negotiate some from the very first in the single market, the second banking directive and so on. I cannot remember a brief that did not begin, “We don’t want this directive, Minister, but we can’t avoid it so let’s try to seek some of the following list of amendments to improve it”. If we went back to those briefs, we would find a good working idea of changes that might be needed to make those directives simpler, less burdensome, more appropriate and more growth and competitiveness promoting.

The final point that I want to make echoes that made by the noble Lord, Lord Eatwell. It became known as the Eatwell thesis and I was its seconder in the committee. It is that the impact on the economy—the growth of the whole economy, not just the financial sector—depends on the amount of lending by banks and investment of the nation’s savings by financial institutions that goes into the creation of new assets, not just the purchase of secondary assets. Sadly, in this country the total volume of lending has not recovered to the previous level since the great financial crisis of 2008, unlike in the United States where, after a couple of years of delay, it returned to that rate of growth. We received conflicting evidence about why this may be. Some said that it is simply that the United States is different from us and the rest of Europe because it has the tech giants and that stimulates the economy and demand for lending. That may be part of the reason, but others said that US banks, especially regional banks, have been regulated with less onerous demands for new capital, which means that they are freer to increase the amount of lending to the real economy. That is a crucial issue, to which we need to return and make sure that, if it is true, we increase the amount of lending that meets the Eatwell criterion.

It is notable that I am one of few speakers in this debate who does not have to declare financial interests or a past record of working in the financial sector. That is a grave pity. I address this comment to noble Lords who are not in the Committee today but perhaps are reading Hansard tomorrow. It is far too important to the state of our country—to the issues of poverty, inequality, housing and food security, which I will come back to—for these issues of financial regulation to be left only to insiders. These are crucial issues for all of society and we need far broader perspectives on them.

On those broader perspectives, during the passage of the now enacted Financial Services and Markets Bill, I spoke at Second Reading, in Committee and on Report against the inclusion of a competitiveness and growth objective for the Financial Conduct Authority and the Prudential Regulation Authority. In its report, the committee focuses on

“the progress made in driving the regulators”—

the word “driving” is interesting—

“to support growth, both in the financial services sector and, crucially, in the wider UK economy … while maintaining the UK’s position as a global financial centre with a robust financial regulatory system”.

As I said at Second Reading, the final cause or aim—robust regulation—is essentially incompatible with growing the sector. Corruption and fraud are so enmeshed in the system that growing it inevitably means growing financial crime, and our regulatory approach is failing to address that. As I said in Committee, we should aim for a more secure financial sector that provides useful, effective and safe services to individuals and the real economy.

As organisations such as the International Monetary Fund have reported, there is an optimal size for a country’s financial sector, at which it provides the services that an economy and population need. Expansion beyond this size causes damage, increases inequality, boosts criminal behaviour and creates many other ills. Among those ills is what is broadly known as the London laundromat—the dirty and corrupt money of oligarchs and dictators that is being deposited, held and, all too often, washed here in London.

That is not in any of our interests. Nor is the level of risk in this age of shocks—geopolitical, climate, health and more. I note that the headline in today’s Financial Times:

“America has become an agent of chaos in world energy markets”.

And it is not just energy markets, of course. It is telling that, as the Evening Standard reports this week, the new Iranian leader of a theocratic, dictatorial, deadly-to-its-own-people regime, Mojtaba Khamenei, the successor to his father, Ali Khamenei, is said to own high-end Kensington properties through associates. They are apartments situated on the sixth and seventh floors of a building close to Kensington Palace and believed to be worth more than £50 million—although there are also servants’ quarters on the ground floor.

Regarding the current lack of regulation and the level of risk taking, a report in today’s Financial Times is headlined:

“Collapse of UK bridging loan specialist has sent reverberations across Wall St amid fears of weak underwriting standards”.

It refers to the refinancing merry-go-round of Market Financial Solutions, into which Barclays, Jefferies, Santander and many others put hundreds of millions of pounds before it suddenly collapsed last month amid allegations of fraud and double pledging of collateral, with creditors claiming a shortfall of £1.3 billion, and about £283 million unaccounted for.

My focus would be not, as in recommendation 1 from the committee, the cost of compliance but rather the costs and risks of non-compliance. These are practical costs and reputational costs, as the UK seeks to establish its place in a fast-changing, unstable geopolitical environment. I note in that context that the latest Corruption Perceptions Index from Transparency International shows that Britain has been slipping down the rankings since 2015. We were in seventh place then, and we are now in 20th place, with a score of 70 out of 100. That is a scoring of our financial regulation and how the outside world sees this.

Lest it be thought that I am picking just one example, I note that some other work by Transparency International identified a £40 million central London commercial property held by a company controlled by a trustee who is a member of a Singaporean money laundering gang serving time in jail, as well as £55 million-worth of commercial property owned by a former Malaysian Finance Minister via trusts—he died before a criminal trial into his wealth could take place.

I have identified areas in which I very much disagree with the committee, and I will now pick up some points with which I agree to some degree, particularly that made by the noble Lord, Lord Eatwell, and touched on by the noble Baroness, Lady Noakes: the failure of the financial sector to actually serve the real economy. I am drawing here particularly on excellent work by Positive Money and the figure that the noble Baroness, Lady Noakes, mentioned: only 6.6% of bank lending last year went towards productive investment in the real economy.