Secondary International Competitiveness and Growth Objective (FSR Committee Report)

Lord Eatwell Excerpts

Wednesday 11th March 2026 Grand Committee

[Lord Eatwell (Lab)]

My Lords, I draw attention to my declaration of interests in the register, in particular to my role as a non-executive director of Unity Trust Bank.

It is a privilege to serve on the Financial Services Regulation Committee, and it was a particular privilege to be part of the team producing this report under the able chairmanship of the noble Lord, Lord Forsyth. The evidence gathering gave committee members a bird’s eye view of the complexities and confusions embodied in current thinking on the role of the financial services industry in the pursuit of growth—everyone’s goal for the UK economy. Hence the need, as the report’s title stresses—and as noble Lords have also raised in the speeches we have heard—for clarity and culture change.

Let me deal with complexities first. It was clear from the evidence that the committee received that financial regulators are still operating under the dark shadow of the global financial crisis of 2008 to 2010. Risk aversion is the cultural norm and stability the dominant objective. Combined, risk aversion and stability do not make for the most dynamic growth platform. The combination has arisen due to the lack of macro- prudential tools in the global financial system. Despite the clear recognition of the macro dangers back in 2010, building in the buffers and shock absorbers that might do the job in global financial markets has proved beyond the capabilities of the international regulators in Basel.

Unable to manage risk macroeconomically, regulators have ramped up microeconomic risk management instead, significantly increasing the scale of risk aversion, the complexity of regulation and the costs of compliance. It was clear in the material presented to us that there was little or no evidence of any clear, well-defined relationship between the plethora of microprudential measures and the resultant level of systemic risk. Unfortunately, financial crises, often linked to innovation in financial products, tend to come out of a clear blue sky, from unexpected directions. Think of the role of credit derivatives in the global crisis: they were heralded as an efficient means of management of systemic risk; they proved to be the engine of systemic collapse. Can the Minister be confident that, in today’s world of anonymous, instantaneous, global crypto trading, the financial system as a whole is safer than it was in 2007? Has the new cost-benefit unit at the PRA addressed this question? If so, can the Minister tell us something of its conclusions?

What has been the cost of all this post-crisis regulation? On a pragmatic level, the report, as the noble Baroness, Lady Noakes, noted, calls on the Government to commission an independent study of the administrative costs of compliance and, particularly, the relative costs of compliance as compared with other jurisdictions. It is enormously disappointing that the Government appear not to have taken note of this recommendation. What has been the wider economic impact of post-crisis regulation? It is clear that the proportion of business lending emanating from the UK banking system has fallen from up to 90% in 2007 to less than 50% today. Enforced risk aversion has squeezed business lending out of the banks and into private capital markets. What has been the impact of this migration on systemic risk? I leave that question in the air—a topic for another day.

I turn now from complexity to confusion. Throughout the committee’s investigation, we received evidence that particular institutions, whether banks or building societies, had “invested heavily” in the UK economy. Billions of pounds-worth of investment was itemised, but it soon became evident that the claimed scale of the investment exceeded the scale of gross fixed capital formation in the UK economy—something wrong, surely. The confusion arose because the term “investment” was used in two quite different ways. On one hand, it referred to the financing of the creation of new productive assets—the assets that are counted in the figure for gross fixed capital formation. On the other hand, it referred to the purchase of assets in secondary markets. For example, the representative of a major bank referred to the billions of pounds that his bank had invested in the UK economy, but when asked whether it funded the purchase of new productive assets, he replied, “We don’t do that”. Similarly, both building societies and banks referred to the billions invested in mortgages, yet well over 90% of mortgage lending is for the purchase of assets—houses—that already exist, not for new build. That 90% or more of investment does not fund real investment at all.

A similar mix-up seems to permeate the Government’s calls, via the so-called Mansion House agreement and similar encouragements, for financial institutions, including pension funds, to invest more in riskier equities rather than in the bond markets. But these so-called investments are in secondary markets, not in the creation of new productive assets.

We tried to untangle these confusions in the committee but, as the noble Baroness, Lady Noakes, and the noble Lord, Lord Vaux, noted, we were not helped by the Bank of England. It told us that it did not have data on the breakdown between investment by financial institutions in secondary markets and investment that actually results in the creation of new productive assets. Of course, there is a relationship between the two—the presence of active secondary markets provides the comfort of liquidity to the flow of funds into real investment—but that relationship is ill defined and opaque.

The Government have recognised that the squeeze on microprudential regulation has gone too far, and the Chancellor has suggested that regulators should be less risk averse. But this raises two vital questions that it would be helpful for the Minister to address in his summing up. First, are the Government confident that an increase in secondary market investment will result in an increase in the funding of real investment in new productive capacity? Secondly, are the Government happy to see an increase in systemic risk as the price of the relaxation of risk-management constraints?

The source of the dilemmas that lie behind these two questions is that the competitiveness and growth objective has been characterised as an issue of risk management, but it is not; it should be seen as an issue of institutional reform. The committee received evidence from a number of medium-sized fintech companies, all of which had successfully raised funding in the order of £35 million to £80 million to scale up their businesses. They had all raised those funds from venture capital firms in the United States. None of them could get their money in the UK.

The venture capital industry in this country—the financial institutions that invest in real investment—is tiny, with total assets under management of between £30 billion and £40 billion, which is less than half of 1% of the total value of assets under management in the UK. That is dwarfed by the venture capital funds in the US, with $700 billion under management, which is around 4% of their total assets under management. It is also dwarfed by the EU, which has venture capital assets in excess of $220 billion. The EU venture capital industry is growing rapidly with the support of European Investment Fund programmes. We desperately need real investment institutions—venture capital firms—similar to those in the US and the EU.

Of course, the Government have promoted the National Wealth Fund as a source of real investment in Britain, but even here there is a lack of radical new direction. Companies applying to the National Wealth Fund for the sort of scale-up funding required by the fintech firms I mentioned earlier are typically asked to show evidence of the value of their endeavour by securing private funding first. Note the wonderful paradox: the National Wealth Fund has been established because private funding has failed to do the job, and its investment decisions are dependent on the decisions of the private funders that have failed to do the job. Without major institutional change that directs financial flows toward real investment, the search for growth will be in vain.

What sort of change do I have in mind? What would I propose as a radical alternative? Regulators today require banks to hold specific proportions of their balance sheets in a defined mixture of instruments designed to maintain necessary regulatory capital and necessary liquidity. In the jargon of the day, it is mandatory. Why not add to these requirements the condition that, to secure a banking licence in the UK, a tiny proportion of the bank’s assets should be committed to venture capital, either through an entity of its own or through an approved venture capital entity? Even this tiny commitment would transform the flow of funds into venture capital investment in this country, and indeed would transform the culture of UK finance. This is certainly a radical suggestion but, without radical institutional reform, it is difficult to envisage the financial services sector playing the dynamic part that is required of it in Britain’s economic renaissance. Clarity and culture change are required.