Risk appetite can arrest Britain’s downward spiral, think tank says

By Kirstin Ridley

LONDON (Reuters) – Britain’s decade-long economic downward spiral could be reversed with a fresh appetite for risk that might help boost annual investment by a required 100 billion pounds ($131 billion) over the next decade, a leading think tank said on Friday.

In an analysis of banking and finance regulation since 2014, New Financial said a culture of risk-aversion in regulation and financial services since the 2007-2009 credit crisis had spilled into the wider economy and stifled investment.

In 80% of the metrics it had examined – after tracking activity across equity and bond markets, bank lending, private capital, pensions and investments and the wider economy – growth in activity had been lower than in the United States, it added.

“The UK economy needs more and not less risk in the system,” it said.

“The paradox is that in seeking to reduce risk, regulators have created bigger and longer term risks elsewhere. Enabling investors and market participants to take a little more risk could help create a virtuous circle of investment and growth.”

New Financial did not lay the blame for a poor relative performance of the banking, finance and capital markets only at the feet of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) market regulators.

It noted that the FCA’s budget had increased by just 5% in real terms over the past decade and that average pay at the FCA and PRA had fallen in real terms by a quarter as staff attempted to do a “near impossible” job that included post-Brexit reform.

It also urged the new Labour government, which will publish its first budget on Oct. 30, to speed up plans to cut regulatory duplication, allow watchdogs to take risks without fearing occasional failure, reset the metrics by which they report on growth objectives and to beware of political interference.

The FCA said it welcomed the feedback and recognised the need for a discussion on shifting risk appetite.

“To support competitiveness, since July, we have overhauled stock market rules, proposed new disclosure requirements, we’re reviewing commercial insurance regulation and we’re working with the government to spark innovation in the financial advice market,” a spokesperson said.

($1 = 0.7652 pound)