UK financial regulators in retreat after pressure from Keir Starmer

Britain’s financial regulators are in retreat. Only hours after Prime Minister Sir Keir Starmer announced plans to abolish one of the country’s financial regulators, the City of London’s main watchdogs announced they were ditching or delaying several of their most controversial proposals.

Confronted by an onslaught of government calls for them to support economic growth, regulators have been forced on to the back foot.

This is being cheered in the Citywhere executives often complain about excessive regulation, but it also raises concerns of watchdogs losing focus on their core objectives to protect consumers and guard against a financial crisis.

There are also doubts over whether this week’s moves represent the start of a major deregulatory drive to boost growth by unlocking the City’s animal spirits, or if the government is merely tackling the most obvious targets without doing much to benefit the economy.

Starmer announced the government would consult on planned legislation to abolish the Payment Systems Regulatorwhich oversees the UK’s main payment networks, by merging most of its activities with the Financial Conduct Authority.

The PSR has been widely criticised over several of its recent decisions and it is already closely integrated with the FCA, with which it already shares a headquarters, IT systems, staff contracts and senior leadership.

The PSR is also quite small, with only 180 staff and an annual budget of £28mn — compared with more than 5,000 staff and more than £750mn of annual costs at the FCA.

When the leaders of the PSR made a pre-scheduled appearance before the influential Treasury select committee on Wednesday, MPs expressed doubts over how much extra growth would come from abolishing a regulator created in 2013 with the aim of boosting innovation and competition in payments.

“The PSR was set up to drive growth and now it is being abolished to drive growth,” said Dame Meg Hillier, chair of the committee, raising a wry smile from the PSR chair Aidene Walsh.

The PSR was heavily criticised by payments companies for introducing a mandatory reimbursement regime for victims of payments fraud last year. But MPs congratulated it on Wednesday over figures it released showing consumer complaints about fraud had fallen and refund rates had shot up since the new rules came in last year.

In another sign of how regulators have been put on the defensive, the FCA said on Wednesday it was ditching two of its most controversial recent proposals — one to “name and shame” more of the companies it investigates and another to impose stricter rules for diversity and inclusion on companies.

Both plans had prompted a backlash among politicians and business executives, making them clear candidates for regulators looking for policies to scrap to show the government they were taking its calls to support growth seriously.

“It is clear that growth and competition are influencing the regulators’ direction of travel,” said Chantal Peters, a partner at law firm TLT.

Nikhil Rathi, FCA chief executive, told reporters that the watchdog’s double policy U-turn showed it was important to “listen carefully” and to avoid rules “jarring” with legislation. The watchdog is also delaying plans to introduce rules on non-financial misconduct, such as sexual harassment, by several months until June.

But Rathi also rejected the idea that its latest moves were a precursor for a wider deregulatory drive that could leave consumers more exposed to fraud and mis-selling. “I wouldn’t want to suggest in any way that we are resigning in any way from our core consumer protection mandate,” he said, declining to comment on speculation that he could leave the FCA when his five-year term expires in September.

Rathi and PRA boss Sam Woods said their decision to drop plans for stricter rules on disclosing more data about diversity and inclusion were largely driven by the fact that the government was introducing legislation in this area that risked overlapping with any rules.

City firms have loudly welcomed the regulatory retreat.

“Over the past six months we’ve seen the Bank of England and FCA embrace this objective and redouble their commitment to innovation and growth,” said Adam Gagen, head of government affairs at fintech Revolut, adding that abolishing the PSR would “make it even easier for the next generation of British fintechs to start up and scale up”.

Riccardo Tordera-Ricchi, director of policy at the Payments Association, said the PSR had “very much sealed its own fate by continuing to ignore the industry’s advice” on fraud. The regulator was forced to lower the threshold for fraud refunds from £415,000 to £85,000 last year after uproar from the sector.

Some observers of the government’s clampdown worry it could hamper growth by causing disruption at the rulemakers.

Naresh Aggarwal, a director at the Association of Corporate Treasurers, warned that merging the PSR with the FCA “would be a wasted opportunity if this was simply a rebranding exercise or even worse it led to consultations that slow down important progress that support companies and the wider objectives of growth”.

There are already signs the shake-up is unsettling people who work at the regulators. The PSR has lost several senior staff in the weeks leading up to the government’s decision. Its head of policy, Kate Fitzgerald, has resigned, along with Anthony Pygram, the senior manager leading its controversial review of interchange fees, which was recently subject to a legal challenge by payment companies.

One PSR employee said it was “the most dysfunctional workplace I ever worked in” and applauded plans to merge it with the FCA. “The PSR, like much of Britain’s public bureaucracy, was simply unable to rise to the challenge facing it and lacked critical mass, mature governance, and sufficient domain expertise to perform its functions efficiently and effectively.”