Charles Randell published this in linked in yesterday and wants it published on this blog. A group of us are meeting next week to get beyond “vibes and tribes” and I hope that this former Chair of the FCA will impact our thinking; thanks Charles.

Is it right to chide the financial regulators for the UK’s growth problem? Financial sector lobbyists say yes, while consumer advocates warn against deregulation. Each side brings its own preconceptions to the debate, with the result that it is largely based around vibes and tribes.

Two Parliamentary committees are getting involved. While the House of Lords Financial Services Regulation Committee was taking evidence about the regulators’ new secondary competitiveness and growth objective, the Chair of the Commons Treasury Committee was penning an Op-Ed in the Financial Times under the headline: “Show me the evidence that City deregulation will help growth.”

I start from the assumption that most Members of Parliament and many Peers work hard in good faith to advance the public interest. However, like all of us they are affected by biases and the views and approaches of those around them (culture) and the wish to please key groups, particularly where money is involved (incentives). These problems are arguably most acute in the House of Lords, currently the focus of further revelations about consultancies and paid lobbying.

On which note, I gave oral evidence to the Lords Committee and a few things struck me. The first was that the overwhelming majority of those giving oral evidence were representatives of the financial services sector. The second was that the majority of members of the Committee are (or have recently been) on the payroll of financial services firms, and the Committee’s specialist advisers also work closely with such firms. The third was the mindset revealed by this exchange:

Randell: “To my mind, the growth objective is about connecting financial services with the needs of the real economy …”

Committee member: “That is an interesting observation, but it is not the focus of the work of this committee …”

Based on this, I am a bit pessimistic about the Committee’s forthcoming report. I worry that it will concentrate on concerns which are prevalent in financial sector boardrooms, e.g. lack of senior supervisors and turnover in supervision teams, operational performance, red tape, compliance costs etc. Those are all perfectly fair targets which may produce a marginally more productive and profitable financial sector, but I don’t think they advance the debate nearly far enough to articulate how the whole country can benefit from a healthier and more purposeful financial services system.

So it will be interesting to see whether the report engages with the fundamental question which has been largely absent from the regulation vs. growth debate, and that is: what theories of growth should we be looking to, if the aim is to produce significant growth for the whole of the UK? Nor do I expect the report to question the tedious assertion that UK financial services suffer from “the stability of the graveyard”. This is quite difficult to reconcile with the evidence, given that the UK’s largest banks are leveraged somewhere between 17 and 20 times, and the UK continues to suffer from an epidemic of investment and payment fraud.

It’s fine to have a debate about more risk but we shouldn’t pretend that in many places we don’t have lots of it already. To the extent that the report comes down in favour of more risk, will this be vibes-based, i.e. asserting we need more risk without articulating clearly the products involved, who will bear the risk and the consequences to them of doing so? It will be tempting to the Committee to urge more risk and then charge the regulators with the unrealistic task of making sure it doesn’t crystallise.

I suspect that the Treasury Committee will come at the regulation vs. growth debate from a somewhat different perspective. After all, its members are of a different tribe: directly accountable to the electorate, many of them representing constituencies which include areas of deprivation. Their correspondence and surgeries are unlikely to be filled with grumbles about the regulators’ authorisation processes or rules but they will encounter cases where people need more, not less, protection through financial regulation and have been let down by the regulators. And they know that polling shows that most people want, if anything, more protection, not less.

With vibes and tribes playing such a large role in our Parliamentary system, is there a chance that we could eventually have a better debate about the balance between regulation of financial services and growth? This is difficult, given the complexity today of both our economy and regulation and above all given the huge imbalance in resources and access between the different lobbies involved. But if we are going to do so, I think we need to do four things.

The first is to seek evidence from a diverse (yes, I still use that word) group of witnesses. A few people connected with the financial services industry are haughtily dismissive of “the consumer lobby”, but most well-run financial services firms – and some trade bodies – believe that the customer is right (at least some of the time) and work hard to engage positively with consumer groups. Engagement with real economy businesses is also critical, so I was surprised that (unless I have missed it) neither the CBI nor the Federation of Small Businesses gave evidence to the Lords Committee.

The second is to engage with specifics and with evidence. Generalised assertions that there is “not enough risk in the system”, “too much compliance cost” or “too many rules” may well be true but do not do very much to advance matters. Which rules should be changed and how? Are we willing to accept more moneylaundering in order to ensure that small businesses can open bank accounts faster? Are we willing to allow financial advisers to make recommendations without understanding their customers’ personal circumstances? Do we want more people to cash in their pensions and buy high risk investments, and do we accept that some of them will be defrauded? Do we want banks and insurance companies to hold riskier assets (and, if so, will we feel the same way if some of them collapse)? Where is the evidence that these steps would benefit the UK economy and what are the foreseeable costs if consumers’ financial lives and their trust in finance suffer? And do financial services firms actually want a major rewrite of the rule book they have got used to?

The third is to articulate the theory which underlies the call for the regulators to produce more economic growth. Do we want a financial sector that better serves the real economy, and if so what gaps need to be filled? If, like the Committee member quoted above, we see restricting the scope of regulation and growing the size of the financial sector as ends in themselves, what are the mechanisms through which this may — or may not — benefit UK citizens? Where would the wealth of executives and shareholders in a growing financial sector come from and how does the Committee expect it to trickle down (or back) to citizens?

Finally, we need to question our own culture and incentives. As former chair of a regulator that was sometimes described as “embattled”, I have to try to avoid being defensive. Although the FCA protects many people from harm (without gaining much credit for doing so), the organisation accepts that it needs to continue to improve. The scope for deploying data, technology and improved ways of working in authorisation, supervision and enforcement is considerable; and some of its rules are no doubt too extensive or impenetrable. So it is perfectly fair that Parliament and others keep up the pressure. All I would ask is that they think hard about their own culture and incentives at the same time.