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Red tape risks turning city into ‘graveyard’, warns Bank of England official

October 18, 2024

HM Revenue & Customs (HMRC) is actively investigating 791 of the UK's largest companies for suspected tax underpayments, a figure that represents nearly 40% of the country’s biggest businesses.

Excessive regulation could turn the City of London into a “graveyard” by stifling innovation and risk-taking, Sam Woods, chief executive of the Bank of England’s Prudential Regulation Authority (PRA), has warned.

Speaking at the City’s annual banquet at Mansion House, Woods cautioned that while financial regulations are necessary for stability, over-regulation could suffocate the financial sector’s ability to drive economic growth.

Woods described risk as the “lifeblood” of a thriving economy, arguing that attempting to eliminate it altogether would hinder innovation and leave the City stagnant. “Risk is the lifeblood of a thriving capitalist economy, fuelling growth and innovation,” Woods said. “The whole point of having a strong financial system is to enable society to take risks.”

His comments come amid growing concerns that Britain’s efforts to make financial institutions safer are becoming counterproductive. Woods acknowledged that the balance between regulation and risk management is difficult but crucial, noting: “It’s implausible that good businesses can thrive in an environment of ever-expanding regulation.”

Woods pointed to recent moves by the PRA, such as the decision to abolish the cap on bankers’ bonuses, as evidence of regulators taking steps to reduce the burden on the City. The cap had been “damaging to competitiveness,” he said, and scrapping it sent an important signal of intent that unnecessary regulations should be rolled back.

The Financial Conduct Authority (FCA) has also faced criticism over its increasing regulatory requirements. In February, the FCA was under fire for proposals to “name and shame” companies under investigation, and it has also faced complaints regarding rules around diversity and inclusion disclosures. Jeremy Hunt, the former chancellor, introduced a new mandate for regulators, including the FCA and PRA, to consider economic growth as a “secondary objective” to their regulatory duties. The move was seen as a direct response to concerns that regulators were holding back the City’s growth potential.

Sir Keir Starmer, who has largely followed the previous government’s regulatory approach, reinforced this direction by urging regulators to take economic growth seriously. Speaking at the International Investment Summit, Starmer said the government would force regulators to focus on growth as a priority.

Nikhil Rathi, chief executive of the FCA, echoed Woods’ sentiments, describing the new growth mandate as “liberating” and leading to more open conversations about risk. Rathi and Woods both stressed the importance of striking the right balance between maintaining stability in the financial system and allowing enough flexibility for businesses to grow and take calculated risks.

David Postings, chief executive of UK Finance, the banking lobby group, agreed, saying: “If we can collectively get the balance right between risk and protection for consumers, this will help in supporting economic growth and financial inclusion in the UK.”

As regulators face mounting pressure to relax red tape and promote competitiveness, Woods’ remarks reflect a broader debate about how to balance the need for stability with the need for growth and innovation in the financial sector.