Credit risk

Chancellor of the exchequer, Rachel Reeves, has announced the rolling back of Financial Regulations in the UK.

In her Mansion House speech the Chancellor unveiled her so-called Leeds Reforms, which she said were aimed at cutting “red tape”, specifically that imposed as a result of the Financial Crisis.

These regulations were put in place after taxpayers had been forced to bail out banks, plunging the country into austerity, the effects of which are still being felt today some 19 years later.

At the time, the accepted practices with Financial Services had resulted in the collapse of two of Britain’s big banks and the near collapse of others, risking the entire global financial system and bringing the UK economy to its knees.

Bank executives have of course welcomed the news, while the man who spoke after the Chancellor, formerly head of the regulator that imposed much of the current regulation, Andrew Bailey, was surprisingly silent on the matter.

Some banks will be able to reduce their capital ratio, which means they will be able to hold less money in reserve. Ratios were originally increased in response to the run on the Northern Rock bank, which left customers unable to withdraw their funds.

There will be further loosening of the measures, including an easing of the Senior Managers regime. This is the process by which someone is deemed fit and proper to lead a complex and systemically important financial institution.

Alongside generally playing fast and loose with the macro financial risk, presumably in an attempt to boost a lethargic UK economy, the Chancellor went on to encourage individuals to make riskier investments, such as stocks and shares.

“For too long, we have presented investment in too negative a light, quick to warn people of the risks without giving proper weight to the benefits.”

For the average retail investor, gifting their money to be used by others for their gain and paying fees for the privilege, relatively small sums of interest can be earned.

The danger of being misled increases without appropriate regulation. Before the financial crisis spurred regulators to force firms to outline risks, investors were being encouraged to take out complex instruments that left them not only losing their money, but owing thousands of pounds more.

If investors do not understand the risks, they are more likely to lose money they cannot afford. While this move comes at a time when global stocks have been increasingly volatile and the downside risk to retail investors is high.

If putting individual savings at risk was not bad enough, on top of exposing the UK Economy to the potential for systemic shock, pensions will be allowed to invest in schemes by combining their resources into ‘mega funds’ - increasing the risk of a collapse in pensions on an immense scale in the future.

Anyone with memory of the Financial Crisis just felt a shiver, following these announcements, but the true effects will likely be felt by generations to come as the politicians of today chase short term growth over long term stability.