Chancellor’s new instructions to the FCA raise alarms over potential deregulation in the financial sector following the 2008 crisis

In a move that has raised concerns among critics, Chancellor Rachel Reeves has instructed the Financial Conduct Authority (FCA) to encourage more risk-taking across the City of London. The new guidance, which was sent to FCA Chief Executive Nikhil Rathi in an official “remit” letter, states that regulations designed to protect consumers should not hinder “sensible risk-taking” by investors, banks, asset managers, and insurers.

The remit letter, which outlines the government’s priorities for the financial watchdog, reflects a shift in the Labour government’s approach to financial regulation. Reeves acknowledged the “difficult trade-offs” involved but emphasized the importance of trusting existing systems to manage risks when things go wrong, ensuring that problems within individual firms do not lead to wider economic instability.

The move comes shortly after Reeves addressed City bankers at the annual Mansion House dinner, where she argued that regulations introduced in the aftermath of the 2007-08 financial crisis had “gone too far”. The chancellor’s remarks have sparked concern among campaigners, with some warning that a relaxation of financial regulations could repeat the mistakes that led to the global financial crisis.

Jesse Griffiths, CEO of the UK charity Finance Innovation Lab, warned that promoting growth in the financial sector as an end in itself could have detrimental effects, focusing too much on the interests of international capital rather than domestic businesses. “The global financial crisis showed how dangerous a focus on deregulation can be for the economy,” Griffiths added.

The Labour government’s own historical record on financial regulation has come under scrutiny. Critics have pointed to the role of lax regulation in the 2008 collapse of the Royal Bank of Scotland, which exacerbated the financial crisis and led to a costly taxpayer-funded bailout. In response to the crisis, both EU and UK governments imposed tighter regulations to curb risk-taking, but in recent years, there have been efforts to roll back some of these protections.

After the Covid-19 pandemic, Conservative ministers began dismantling some post-crisis regulations, including reintroducing a competitiveness objective for financial regulators. Critics have warned that this could encourage a return to the light-touch regulation that contributed to the 2008 crash. The Labour government, under Reeves, has continued to make adjustments to financial regulations, including changes to banker bonus deferral rules and reforms to the certification regime that ensures City managers are fit for their roles.

The Treasury has also signalled plans to ease regulations on smaller banks, particularly through reforming ringfencing rules, which separate retail and investment banking operations to protect consumer deposits.

In light of these changes, economist Sir John Kay warned that the Labour government needed to ensure that its financial reforms were not simply benefiting bankers. “Our objective should be that the financial sector serves the needs of the broader economy, not just the people in it,” he said, suggesting that the current reforms risk prioritizing City interests over those of the general public.

The Treasury, however, reassured the public that robust regulatory standards remain a cornerstone of the UK’s financial stability. A spokesperson emphasized that the government is committed to ensuring the financial system remains stable while promoting growth to benefit everyone.

In addition to instructing the FCA, Reeves also published an updated remit for the Bank of England’s Monetary Policy Committee (MPC), maintaining the 2% inflation target but introducing a new focus on fostering “broad-based and resilient growth” across the UK economy.