If the government wants to loosen financial regulations, it must also be prepared to answer just how much wrongdoing is it prepared to accept in the pursuit of growth, writes Lucy McNulty, editor of Following the Rules, in today’s Notebook
Regulators need a clearer mandate on risk
Chancellor Rachel Reeves kicked off a long-anticipated deregulatory drive in July, unveiling several reforms aimed at making the UK the most dynamic financial centre in the world.
The ambition to boost competitiveness is undoubtedly welcome. But attempting to achieve it through a sweeping overhaul of the financial rulebook risks distracting regulators from longer-term vulnerabilities quietly building in the system.
Mark Watson, a former senior executive at Silicon Valley Bank (SVB), recently told the Following the Rules podcast that regulators are being stretched too thin to supervise markets with the rigour required.
To counter that, he wants a more “anticipatory” model of supervision, where watchdogs proactively challenge financial leaders before cracks form. After all, SVB quadrupled in size in just four years. But its risk controls didn’t keep pace, and neither did regulatory scrutiny. We all know how that ended.
To be sure, Reeves has called for more “strategic” regulation. The Financial Conduct Authority CEO Nikhil Rathi has also emphasised the importance of moving away from reactive regulation in favour of more targeted oversight. Yet he’s been clear that embracing a more strategic regulatory stance comes with trade-offs.
To that end, Rathi has repeatedly called on politicians to define how much consumer harm and financial wrongdoing is acceptable in the UK’s pursuit of growth. His request reflects the political tightrope regulators must now walk.
If the government wants a looser regulatory regime, it must also own the risks. It should respond clearly to Rathi’s calls now, not after the next failure.
As Watson put it: “Every single time, [the cause of a crisis] was right in front of you. But somebody convinced you to ignore it.”
“We should not be convinced to ignore things all the time,” he says.
Certainly, in a sector grappling with new technologies and asset classes alongside blurring institutional boundaries and the steady migration of risk to less transparent corners of the financial system, the potential flashpoints are multiplying.
So if the UK is serious about building a competitive and resilient economy, it must be equally serious about setting clearer expectations for the City’s regulators.
It’s time to rethink the City’s defence system
Calls to rethink the financial sector’s traditional ‘three lines of defence’ model, designed to separate business units from legal, compliance and audit, have circulated for years. But recently, they’ve grown louder.
What was once seen as the bedrock of risk management no longer reflects the fast-moving reality of modern finance. In many institutions, rigid implementation has entrenched silos and created oversight gaps.
Regulatory expectations and enforcement actions that demand strict role delineation have at times reinforced this, unintentionally discouraging cross-functional dialogue and flexibility. But new risks are exposing the model’s limits. Generative AI tools, cyber threats and changing regulators parameters are blurring once-clear lines of responsibility.
Legal and tech teams now operate across multiple functions, first-line staff are taking on more risk ownership and a stronger regulatory focus on culture is drawing HR and compliance functions closer together, raising new questions about who sits where in the traditional framework.
The question should no longer be whether to rethink the model but rather how to adapt it for today’s realities. A more flexible, collaborative framework is overdue.
Taking on deepfakes in finance
The rise of AI-generated deepfakes is an escalating threat to financial market trust. Myles McGuinness, CEO of the Financial Markets Standards Board, has proposed a bold fix: a global repository of verified data for financial institutions and corporates, modelled on post-crisis clearing reforms. Legal hurdles could certainly complicate rollout. Firms have been deploying detection tools, tightening verification and sharing threat intelligence. But as deepfakes grow more convincing and thereby more damaging to market integrity, the bolder, more complicated fixes may be the solution we need.
Quote of the week:
“There’s no kind of magic [tax]. We’re not going to do anything daft like that.”
Business secretary Jonathan Reynolds dismisses the prospect of a wealth tax, amidst warnings that such a levy would damage the UK economy.
What I’m reading
If you are one of the few who has not yet read Careless People, the memoir from the former director of global public policy for Facebook (now Meta), it certainly deserves a spot on your summer reading list. Sarah Wynn-Williams offers a candid account of seven years inside Facebook, charting its journey from scrappy tech startup to big corporate animal. But it is her insights into power dynamics, groupthink and workplace toxicity that gives this book resonance beyond Silicon Valley, particularly for City leaders now under pressure to confront their own cultures. Thoughtful and funny, it is essential reading for anyone curious about how dysfunction spreads and why many fail to challenge it, even when they know they should.