The Queen’s speech included proposals to introduce a bill to implement the Financial Reform Framework put forward by the Treasury in November 2021. Central to these is a plan to add the objective of promoting ‘competitiveness’ to the existing regulatory objective of promoting competition.

This modification of the regulatory remit sounds like a technical, semantic change. It is technical – the devil of all financial regulation is in the detail – but it is much more than semantic. The FCA has a good record of promoting competition. In particular, it has cleared the way for innovative new businesses to challenge incumbents in the finance sector – challenger banks such as Monzo and Starling, low cost providers of international money services such as Wise, and ‘robot-advisers such as Nutmeg which offer asset management services online.

But ‘competitiveness’ is something different. Competition describes the state of the market, competitiveness the state of the industry. The competitiveness of Britain’s financial sector is a measure of its ability to attract business from other financial centres such as New York, Frankfurt, Amsterdam and Hong Kong. In practice, promoting this objective through regulation means adopting laxer rules and instituting less rigorous implementation than is thought appropriate  competitive financial hubs.

The imposition of sanctions against Russian oligarchs as a result of the Ukraine war has drawn renewed attention to the degree to which London has become an attractive location for the world’s shady rich. Not just for their residences in millionaires row, but for laundering their wealth. The title of Oliver Bullough’s recent book describes London’s role of “Butler to the World’. Once, to be accepted as client of a major London investment bank or law firm was a mark of probity. Today it is a measure only of ability to pay. That is the change implied by the pursuit of competitiveness.

Viewers of the film of Michael Lewis’s book The Big Short learnt that credit default swaps were at the heart of the 2008 financial crisis. This instrument originated in arbitrage between the different regulatory rules applied to insurance and banking, The notorious ‘Potts opinion’ reassured the London market that these securities existed in a regulatory black hole. London was set to become a trading centre for such swaps. So the plan of Brooksley Born, chair of America’s Commodity Futures Trading Commission, to bring them under her regulatory wing enjoyed little hope of success against the opposition of Treasury Secretary Larry Summers and other American regulators such as Alan Greenspan. Their objective was to promote the competitiveness of New York as a financial centre.

Nevertheless, London was the location of the Financial Products Group of AIG, the largest issuer of credit default swaps. In 2008 this seemingly obscure division of America’s largest insurance company threatened the whole corporation with bankruptcy. The refinancing of AIG was the largest single bailout of the entire global financial crisis. It is events like these that Andrew Bailey, Governor of the Bank of England, had in mind when he said of the competitiveness objective ‘it didn’t end well, for anyone’ when tried before. When stock exchanges chase listings in international competition by lowering expected standards of disclosure and governance, the result is a regulatory race to the bottom which harms everyone except those who have something to keep from public scrutiny.

It is sometimes true that retired foxes, familiar with the habits of their kind, make effective guardians of the hen house. But when the CEO of the London Stock Exchange and chair of the FCA’s practitioner panel moves to the office of CEO of the FCA, promoting the interests of the businesses he regulates should not be at the top of Nikhil Rathi’s agenda.

Britain needs a healthy financial sector. But its health should be measured by the contribution it makes to the needs of British business and the welfare of British consumers.  The dangers of regulatory capture – the process by which regulatory agencies come to identify with the industries they regulate – are evident in many regulated industries. In none more than in financial services. Regulation should promote financial stability and favour competition, not competitiveness.