Watchdogs insist reducing regulation will not increase risk of financial crisis

Financial watchdogs have insisted that the risk of a financial crisis will not increase as a result of measures announced by the Chancellor to cut regulation in a bid to deliver growth.

Under questioning by the Commons Business and Trade Committee, a senior civil servant also confirmed the target to cut red tape by 25% will be measured in terms of costs to firms of current requirements, with a baseline set to be confirmed in 18 months.

Rachel Reeves has unveiled a package of reforms to the UK’s financial system aimed at boosting the economy and spurring on retail investing.

The changes include reforming the bank ring-fencing regime and reducing burdensome regulation in the City in order to reintroduce “informed risk-taking” into the financial system, the Government said.

The Chancellor said the “Leeds reforms”, unveiled in the West Yorkshire city, “represent the widest set of reforms to financial services for more than a decade”.

Liam Byrne, Labour chairman of the Business and Trade Committee and a former chief secretary to the Treasury, said evidence suggests liberalisation of regulation is “often accompanied by lending booms that end badly”.

He asked senior officials tasked with implementing the changes whether the announcements made by the Chancellor would increase the risk of a financial turmoil.

David Bailey, executive director at the Prudential Regulation Authority (PRA), said the organisation had “built overall resilience in the system” since the financial crash in 2008.

He added: “The risk of a financial crisis, from the PRA’s perspective in banking insurance, has not gone up because we have maintained the same level of reliance.”

Sarah Pritchard, deputy chief executive at the Financial Conduct Authority, said there should be a public debate about “where should the risk appetite be set” if, for example, greater access to mortgages leads to an increase in repossessions in the event of an economic downturn.

When pressed on how measures announced today are different to previous “liberalisation” implemented before previous financial crises, she added: “There is nothing in today’s set of announcements that causes me any different concern to that that David has set out.”

When questioned on whether the measures will lead to a rise in asset prices if lending increases, Ms Pritchard added: “There are a range of different factors at play.

“I think regulation is one aspect, but the general environment in which we all operate, in particular the UK being a global connected system, there is no one point that I would refer to in terms of that package today that is saying that will cause any different market risk or volatility.”

Mr Byrne later pressed Chris Carr, director at the Department of Business and Trade, on how the target to reduce the administrative burden of regulation by 25% will be set.

He confirmed the target is to reduce the burden to the planned level over the course of this Parliament and said the cost in pounds to businesses caused by red tape will be the measure.

Mr Carr added: “We have to agree and publish a baseline of the administrative burden and then strive to reduce it by 25%.”

When asked how long it is expected to take for the baseline to be set, competition and markets minister Justin Madders said: “We think it is going to take about 18 months, which is akin to the timescale it took under the last Labour government’s similar exercise.”