Bank balance

The UK financial sector, one of our most important industries, has had its share of problems and faces more than its share of challenges.

The uncertainty about Brexit and access to European markets, specifically the lack of much positive government action to capture the advantages of Brexit, does not help. Also, business is still flat since the Covid lockdowns; additionally, commercial property has been hit and more people are defaulting on loans.

Higher interest rates have hit the mortgage market too. Then there is Fintech (financial technology) which is challenging some of the traditional players, like the high street banks. Though customers are increasingly demanding digital banking, their systems are largely stuck in a previous era — thanks to the laziness that comes from having a cosy regulated market rather than one more open to new competition.

Plus all the problems in the pensions sector — investment conditions and the multiplicity of pension plans, and the general lack of transparency in pensions (need I say over-regulation by a jealous Treasury?). And there is growing competition from other financial sectors such as New York and Singapore (which again, is a direct result of the UK government’s over-taxing and over-regulating).

So what is to be done? Lower taxes on UK businesses would help. Instead of companies (and their financial needs) going abroad, or not coming to the UK in the first place, we need to attract businesses in and induce them to say. And encourage people to start new businesses too. High tax, by increasing the risk in already risky ventures, kills business creation stone dead.

We need more competition, too. Right now, getting a banking licence out of the regulators is like getting a smile out of a stone. The barriers to entry should be a lot lower. Right now, we are regulating banks as if they are all enormous, and that their failure would be a national disaster — as the failure of big banks was in the 2008-09 financial crisis. (And what did Gordon Brown do about it? He forced banks to merge, creating institutions that were arguably safer but which were even more ‘too big to fail’. ) And yes, if we have institutions that we really cannot afford to lose, they should indeed be carefully regulated.

But new, small banks are different. If a small bank fails, it’s a very limited disaster, not a nationwide one. We can get over it. Even if deposits are guaranteed by the taxpayer, the amounts at risk are manageable, unlike the 2008-09 bank bailouts, which saw government debt soaring and gave us much of the debt overhang we have today. It is quite possible too that customers of new banks are more aware of the risks than customers of large and established banks; so perhaps the need for taxpayer bailouts is less.

So the answer there is to have banking regulation that reflects the existential risk (or lack of it) of the institution. Large ‘too big to fail’ banks should have tough regulation, small ‘if it fails we can deal with it’ banks should be more lightly regulated. That would encourage more competition in financial services, and therefore greater focus on customers and keeping customers safe, instead of regulator-focused box-ticking complacency.