UK Chancellor of the Exchequer Rachel Reeves has made it clear: boosting the country’s economic growth is a top priority. As recent IMF projections show, the UK’s GDP per capita is now expected to be 33% lower than it would have been if the 1990–2007 trend had continued. In response, Reeves is advancing a series of reforms, including deregulation of the financial sector — a move that demands both ambition and caution.
A Balancing Act: Growth vs. Risk
Reeves’ approach includes streamlining regulatory processes and reducing costs for financial institutions. This includes lowering intervention costs by the Financial Ombudsman Service, speeding up authorisation and approval timelines, and easing requirements under the senior managers and certification regime. These reforms, so far, appear pragmatic and not inherently dangerous.
However, deregulation is a double-edged sword. The 2008 global financial crisis (GFC), triggered in part by lax oversight, stands as a stark reminder of what can go wrong when the financial sector is allowed to take excessive risks. While the sector contributes around 10% to UK GDP and plays a vital role in exports and employment, its primary purpose is to serve the wider economy — managing risk, enabling investment, and supporting innovation. Growth in the sector must not come at the expense of systemic stability.
Lessons from History
Prior to the GFC, “light-touch” regulation allowed financial institutions to expand rapidly and take on unsustainable risks. The eventual collapse imposed massive costs on society — not just on banks. The long-term damage to fiscal health and economic resilience remains a cautionary tale for today’s policymakers.
Current pressures from banks to reduce capital requirements and dismantle ringfencing regulations should be viewed with skepticism. While these rules may seem burdensome to some within the industry, they serve a critical function: protecting the broader economy from bank failures and excessive risk-taking. With leverage ratios of around 20 to one, UK banks are already highly geared. Calls to loosen regulations further could repeat the mistakes of the past.
Bigger Banks Aren’t Always Better
Contrary to arguments that the UK needs bigger banks to drive growth, data suggests otherwise. The ratio of bank assets to GDP in the UK is already about twice that of the United States. Expanding this even further is unlikely to yield proportional benefits. In fact, removing safeguards like the ringfence around retail banking may hinder — not help — lending to domestic businesses.
Instead of focusing on growing the financial sector itself, efforts should be directed at expanding the availability of risk capital for UK companies. For example, in 2024, Israel’s venture capital industry raised three times more capital than the UK — a striking gap that highlights where real innovation funding is taking place.
A Smarter Approach to Reform
The priority should not be deregulation for its own sake, but the creation of a financial environment that channels capital effectively into productive areas of the economy. That means supporting challenger banks and streamlining bureaucratic processes, while maintaining firm safeguards against systemic risk.
In short, policymakers should focus on fostering a financial sector that fuels innovation, supports British enterprise, and contributes sustainably to economic growth — not one that merely expands for its own sake.
Conclusion
The UK government’s approach to financial sector reform must be rooted in lessons from the past and oriented towards the future. Deregulation may offer short-term gains, but only a well-regulated and innovation-focused financial sector will deliver long-term economic resilience. All other considerations are secondary.
