Secondary International Competitiveness and Growth Objective (FSR Committee Report)

Lord Pitt-Watson Excerpts

Wednesday 11th March 2026 Grand Committee

[Lord Pitt-Watson (Lab)]

My Lords, I should start by declaring an interest. By background, I am an investor, but I teach a course and run a centre at Cambridge that focuses on the purpose of finance, thinking about what are the aspects of the finance industry that allow it to perform its purpose well. Of course, regulation is one of them. I am particularly struck that this committee has not fallen into the trap of “either it is a market or it is regulation”. Regulations are there to try to make markets work well so that customers know what there are getting, suppliers know what they are committing to and the public are protected.

The interesting thing about the secondary legislation on the PRA and the FCA is that that is what it is trying to get to. It is trying to get to: “We want to measure the regulator by how well the finance industry is performing its function of being able to lend to and support the British economy”. That seems a step forward. Of course, it is tricky to do this because it is not just regulation and it is not just markets. There are also institutions, infrastructure, professionalism, good will, incentives, technology, information, branding and ethics. We do not all agree on that, as we saw in the debate between the noble Baroness, Lady Bennett, and the noble Lord, Lord Lilley, about how all those things work. Regulation tends to be rather rigid, whereas all the other factors—technology, for example—are changing quite quickly. Professionalism is something that changes depending on the circumstances to which it is addressing itself.

We used to have lots of self-regulation, which, of course, Adam Smith was very much against, and that has now changed to more and more government regulation. I think it was Andy Haldane who noted that in 1980 there was one regulator for every 11,000 people in the finance industry and, by 2011, that had changed to one for every 300. By the way, that is for every regulator—there are however many people in compliance. I rather like Robin Ellison. He is a senior pensions lawyer at Pinsent Mason who said that there were 3,000 pages of pensions regulation in 1990 and that, last year, there were 180,000 pages, which is three to 180.

We have been playing a sort of regulatory whack-a-mole. Whenever anything goes wrong, we put in another regulation. We built this Jenga tower of regulation. Sometimes you can take a block out of the tower when you play the game of Jenga, but sometimes, if you take too many blocks out, the whole tower collapses. I also worry that, if there is too much regulation, you leave the professionalism of the industry behind because people will say that, if it is not in the regulations, they can do it, and that is not a good way of thinking about how you run a finance industry. I think it was Laozi, the Chinese philosopher, who said more rules and regulations, more thieves and robbers.

That is why the secondary objectives are interesting: they are trying to focus back on what is the purpose of this industry, and the purpose of this industry is to serve the outside economy. It seems to me that this is not in the gift of the regulator, nor, to be honest, do we really understand the relationship between the finance industry and the growth in an economy or the role of the regulator in creating a successful finance industry. It is a great idea to have as many international comparators as we possibly can, but when you lack that sort of information it is awfully difficult to know where you are going.

It would be great to have someone who would tell you the risk appetite. I think it was twice in October 2008 that the move on the New York Stock Exchange was something that, according to the risk models, would have happened only once in the history of the world. Indeed, I think in one case it was once in the history of the universe. Unfortunately, there we were in October 2008. So, I think we need to be a little bit careful. I even wonder whether we should be cutting the Government a bit of slack so that they do not give us quick answers now, but give us proper answers long- term on how we are going to make this work.

On the points that have been made about primary investment, for example—the Eatwell criterion—I hate to have the regulators asking more questions, but surely we need to know where this money that is protected is going.

We need some definitions. I think there are definitions of the things we want the finance industry to do. Here are some basic ones: we need someone to keep our money safe; we need someone to help us transact; we need to be able to share risks; and, critically, we need to be able to take money from point A, where it is, and invest it in point B, where it is needed. If we look at the academic studies of how much the finance industry has improved in taking money from point A, where it is, to point B, where it is needed, over the past 80 years and how much the cost of doing that has gone down, the answer is very little indeed.

If the finance industry depends on trust, we have a huge problem. Ten years ago, the Bank of England— I think it was—did a study of British people to find one word that described their feelings about the direction of the finance industry. They chose “corrupt”. If we want companies to invest, they need to be convinced that the finance industry will not do to them what happened after the global financial crisis, where, as we all know, small and medium-sized companies were extremely badly treated.

What we have got is regulation on regulation. Some 42% of the fines issued to companies were to people in the finance industry, which is 9% of GDP. Yet, if we could get this right, the prize would be huge. In 2023, NatWest was involved in the issuance of £83 billion of green bonds. That outscales anything that the Government are doing. However, it needs to be the whole system. I am concerned that all our banks are targeting a return on equity above 15%. That surely is restricting the amount of money that will be available to the real economy.

As the noble Lord, Lord Kestenbaum, said, none of this will work if we have a standoff in trust between the regulator and the people who are trying to provide these services. I have one simple example. It is really difficult to open a bank account in Britain. I do not know whether noble Lords have tried it. If you ask the bank why this is, it will say, “Oh, we have all these regulations about knowing your customer, and we have those because we’re trying to stop money laundering”. That sounds fine, but in Bangladesh, if you have 10 taka—10 pence—you can open a bank account. I was talking to the governor of the Bank of Bangladesh and asked him how they manage to stop money launderers opening accounts. He said, “David, I don’t know too many successful money launderers who have only 10 pence in their account. Obviously, if somebody puts £10,000 through, we will do something about it”.

I note that there are folk within the finance industry who are trying to respond to all this. For example, Scottish Financial Enterprise under Sandy Begbie says that it will offer basic financial services to all those who want such services, and that this will include financial education and financial literacy materials. I wonder whether there is a regulator who is saying thank you, and a regulator who is keeping tabs on whether that happens.

I will finish optimistically, if I may. I talked about fines in the UK. One bank in America has been fined four times more than the entire British finance industry during the same period. Frankly, the regulation of finance in America is now felt by many to be very erratic indeed. In the European Union, the regulation feels suffocating, particularly on information. Surely this is an opportunity for the UK to do something to have an industry that fulfils its purpose well and is competitive as a result.

Let us not try to rush at this. I see that the Government have said that they want to embed these new secondary obligations and base them on independent evidence of how the financial services industry best serves the economy. That seems like a good thing that we should be pushing, not just as a destination but as a journey. Laozi’s most famous quote is:

“A journey of a thousand miles begins with a single step”.


We are already well along the journey, and the committee has done a wonderful job of taking us a few miles further. I look forward to this debate continuing, with reform appropriately administered by our regulators as we look to the future.