Secondary International Competitiveness and Growth Objective (FSR Committee Report)

Baroness Kramer Excerpts

Wednesday 11th March 2026 Grand Committee

[Baroness Kramer (LD)]

My Lords, I come from a different perspective from many of the people who have spoken today, because I am approaching this debate from the perspective of spending nearly two years on the Parliamentary Commission on Banking Standards following the financial crash of 2008, which was due to credit and derivative manipulation, much of it either deliberate or, frankly, due to people casting a blind eye. That was at the same time as the Libor scandal, which probably took away from creditors across the world something in excess of a quadrillion dollars through 10 years of consistent lying to the setting of the benchmark, and, frankly, at a time when mis-selling to individuals was on an industrial scale.

I quote from the final report from that committee:

“Policy-makers in most areas of supervision and regulation need to work out what is best for the UK, not the lowest common denominator of what can most easily be agreed internationally. There is nothing inherently optimal about an international level playing field in regulation. There may be significant benefits to the UK as a financial centre from demonstrating that it can establish and adhere to standards significantly above the international minimum”.


In taking evidence from those involved in causing the crash and knowingly manipulating Libor, it was consistently apparent that outperforming international competitors and generating higher profits were the two core motives, and these motives look very much like the secondary international competitiveness and growth objective.

In that context, the work of the Financial Services Regulation Committee is crucial, especially as, post-Brexit, the Conservative Government chose to transfer virtually all meaningful control of the financial sectors to the regulators by embedding that control in regulation and guidance, neither of which can be amended by Parliament. I am a strong supporter of the FSRC but I want to make sure that it understands where and why all this began.

The report that we have received reflects ongoing tensions between financial stability and an industry and some politicians who want the leash off. I completely understand the frustration with undue complexity and uncertainty of regulation—that helps no one. I also understand the need to reflect the different characteristics of different entities in regulation, and some of the discussion around MREL has addressed that. I am convinced that parts of our regulators are often slow to respond. I want to make the point that regulation is not cast in stone, but improving and customising regulation should not be a shorthand for deregulation.

I read in evidence to the FSRC that deregulation is the industry agenda—and the tool for its attack is the secondary objective.

Let us look at the risk that has been reintroduced into the financial system under the secondary objective rubric. I will give a few examples, as did the noble Lord, Lord Altrincham: the PRA’s easing of bank capital requirements; the undermining of the ring-fencing regime—there is a consultation in place but undoubtedly this will be a consequence; removal of the bankers’ bonus cap; significant limiting of the senior managers and certification regime—I am especially exercised by the removal of individual accountability; the reduction in the risk margin for insurance companies and the expansion of matching adjustment eligibility to cover highly illiquid assets; and the Mansion House Accord to put 10% of the pensions of low-income people and workers into high-risk, illiquid assets without their consent. With these changes, we see the industry, and this includes the banks, release its animal spirits—exactly what everybody wanted—and they have galloped, at quite some speed, into the private equity markets, often with little understanding of the assets.

There have been numerous red flags. On 6 March, BlackRock finally limited redemption of private credit funds as outflows continued to swell. Today, JP Morgan is marking down the loan portfolios of private credit groups. Most of this happened before the Iran war. It will accelerate with the Iran war, and in a way, which is incredibly sad, one of the side effects—perhaps we ought to regard it as beneficial but I do not want a war to create this—is that it may burst a bubble before it gets even more out of control.

While I can see the return to a much-increased level of risk, I cannot see the return to growth in either the financial sector or the broader economy. That is what is supposed to follow—you deregulate, the growth comes —but I cannot find that growth. We gave away our utter dominance of the European financial sector with Brexit, not in one step but salami slice by salami slice. The effect is somewhat masked because people always compare us with individual financial centres across the EU, which is of course functioning as a network of multiple financial centres, so we do not see how our competitive position has diminished very significantly. I am truly anxious that in June 2028 the EU will reduce its recognition of UK central counterparties because by then it will have achieved much of its own clearing capacity, and so much high-level finance co-locates with CCPs. You cannot deregulate your way out of a fundamental issue like that.

Frankly, we cannot deal with our biggest problems through deregulation. Financing scale-ups will not happen because we have made some kind of regulatory change to financial institutions; the problem we are dealing with here is one of huge market failure. In a sense, this picks up a point made by the noble Lord, Lord Eatwell. There is no point kidding ourselves that we can fuss with regulation and deliver the money that is needed for scale-up.

Neither do any of the rule changes suggest that we can cure our other fundamental problem: our lack of a layer of community banks, which were once the Captain Mainwarings of this world—the backbone of finance for local, small businesses. I do not mean those which intend to be unicorns but those which want to grow just a little faster than organically, which are the backbone of our local communities and economy. Dealing with these market failures goes way beyond fiddling with the risk weightings of banks’ capital holdings. That is regulatory intervention already.

The noble Lord, Lord Eatwell, mentioned that added to banking licences could be a requirement that banks fund some money for VCs. I have long argued—it has never got anywhere—that we ought to attach to banking licences a requirement that major banks fund people who can deliver that community banking profile. Exactly that happened in the United States under the Community Reinvestment Act, which has grown a community sector that, today, is the complete backbone of small businesses and the US economy. When I last looked at that sector, which was zero in 1970, it had something in excess of $300 billion in loan assets to small businesses. It is absolutely critical and it has been used by US Presidents to make sure that the US was able to survive two major economic crises.

The report asserts that

“regulators have made progress in advancing the secondary objective”.

I can see where they have advanced the objective of deregulation, but I cannot see the growth. We are pulling on a lever to create growth that does not really work. Professor Kern Alexander said to the FSRC:

“The gap we have is that, in many countries where they have been using secondary objectives for 25 or 30 years, there is no policy conclusion about whether they work, how they are applied or how the secondary objectives are defined”.


Of course it is right that Parliament and the FSRC scrutinise and question the regulators on their performance but, if we think that the answer to growth in the real economy is deregulation, we are looking in the wrong place. Its impact is marginal at best; when it is handled badly, it is a recipe for a cycle of crises. Regulation is a financial stability and anti-abuse tool. When we seek growth, as we should, we need to find other, real levers: investment, skills and productivity—to name but three.