A Closer Look at the Leeds Reforms

Please can you explain what the Leeds Reforms are, and what the Government is seeking to achieve with these reforms?

The so-called “Leeds Reforms” is the name given to the UK government’s new financial services strategy.   Or, if you’re cynically inclined, it’s just the latest stop on the Government’s financial services roadshow — Edinburgh last time, perhaps Bradford or Birmingham next.  While the 2022 Edinburgh Reforms focused on post-Brexit competitiveness, the Leeds Reforms are framed more around unlocking capital and aligning finance with the UK’s economic priorities.

The package includes everything from a review of the Consumer Duty, to tweaks to the Senior Managers’ Regime, to regulatory changes in insurance, asset management, digital assets, sustainable finance, and retail investment.  There’s even a new “concierge service” to help overseas firms set up shop in the UK.

But the real action is in bank regulation.  The Government wants to loosen the ring-fencing regime that separates retail deposit taking from investment banking, delay the latest Basel rules, ease mortgage lending standards, and raise the thresholds at which banks must issue loss-absorbing debt.  It has also asked the Bank of England to reassess whether current capital requirements strike the right balance between safety and growth.

One view is that this agenda is being driven by the banking lobby, which senses the opportunity to turn the regulatory tables in its favour.   This effectively shifts the risk onto the taxpayer.  If that sounds familiar, it’s because this was the situation before the 2008 global financial crisis.

The Chancellor said that regulation was acting as a “boot on the neck of businesses” and constrain growth? What is your view on this statement?

It’s a striking phrase — but one that doesn’t stand up to scrutiny.

Financial regulation was strengthened after the 2008 crisis for good reason.  That crisis left a permanent scar on the UK economy; indeed we now have compelling empirical evidence that confirms that financial shocks of that scale have a long-term negative impact on growth and productivity.  Much of the UK’s poor performance since 2008 can be traced back to the costs of that financial instability.

Are current rules holding the economy back?  It’s hard to see how.  Banks are profitable.  Credit is widely available.  Lending isn’t the bottleneck to greater investment or hiring.  And when we look internationally, the picture is even clearer: the US has equally strong — in some cases stricter — regulation for large banks, yet shows no sign that this is holding back growth.  Remember that Silicon Valley Bank was exempted from tighter oversight and we saw how that played out.

It’s also worth remembering that large companies increasingly rely on capital markets, not bank loans, to finance investment.  Blaming bank regulation for low investment misses the point and risks distracting from the deeper structural challenges in the UK’s investment climate: policy instability, weak demand, and a lack of long-term planning.

That’s not to say regulation is perfect.  But the idea that it’s choking growth just doesn’t hold up.  What we need instead is a more honest conversation about where the real constraints lie — and how to unlock sustainable growth without repeating past mistakes.

The Governor of the Bank of England recently warned the Chancellor that there is no trade-off between financial stability and growth. What is your view on those comments?

At face value, Andrew Bailey’s statement is just plain wrong.  There absolutely can be a trade off — especially in the short run.  The post-war financial system was very stable, but credit was tightly rationed.  Mortgage markets were constrained.  Growth was strong, but largely driven by post-war reconstruction and catch-up, not financial liberalisation.

In fact, the Bank of England’s own remit acknowledges this tension: it explicitly instructs the Bank not to pursue financial stability at the expense of the UK’s long-term growth rate.

That said, I agree with the Governor’s broader point.  The idea that we can achieve higher growth by tolerating more financial risk — that there’s some kind of trade-off curve where you can choose a point with more growth and more risk — is a dangerous illusion.  History suggests the opposite: loosen regulation too much, and you’ll get a crisis that wipes out years of progress.  Ask anyone who lived through 2008.

So while the framing was a little simplistic, the sentiment is sound.  Financial regulation isn’t the enemy of growth – it’s what stops growth from blowing up in your face.