The Financial Inclusion Centre published a new report today (10th January 2025) called Shedding light on finance and the financial regulators. The report can be found here: Shedding light on the City Financial Inclusion Centre Final Report 0125
The report highlights that the City of London and wider finance sector is being given a central role in the UK’s economic future. Yet, the report concludes that, while finance lobbies and consultants produce numerous reports about the contribution the City makes to the economy, we cannot actually tell if the City works in our interests. The partisan industry reports extol the benefits of the City while the harms caused to the economy, environment, and consumers are downplayed or concealed.
We lack a comprehensive, balanced framework to objectively evaluate the positive and negative impacts of the City. As a result, we have a misleading ‘balance sheet’ of finance’s positive and negative contribution to the real economy, environment, and society. This also means we cannot properly evaluate the effectiveness of the main financial regulators whose role it is to make financial markets work in our interests.
The report proposes a new framework to evaluate: how well finance serves the interests of the real economy, environment, and society; and the performance of the financial regulators who are supposed to make financial markets work in our interests. The new framework enables the City and financial regulators to be judged from our perspective, not the perspective of powerful financial institutions and lobbies.
This new framework would enable civil society to produce a regular State of Finance Report, providing a public interest audit of the financial sector.
Report summary
The Government regards the City of London and wider finance sector[1] as the crown jewel of the UK economy[2]. The sector sits at the heart of Government’s plans to promote economic growth across the UK. It is expected to play a major role both in terms of a direct contribution to the economy and as an enabler of the real economy, the green transition, and inclusion. At the Financial Inclusion Centre we fully recognise the need for the UK to have a successful financial sector. Indeed, a core part of our mission is to promote a financial system and markets that work for the real economy, environment, and society.[3]
There are competing visions of success for the finance sector. One vision, promoted by industry trade bodies, emphasises the size and revenue-generating potential of the City and wider financial sector, and involves greater financialisation of the UK economy and society. With this vision, the way to deliver ‘competitiveness and growth’ is via: market deregulation and liberalisation; ‘rediscovering risk taking’; and the financialisation of social infrastructure and assets with private finance supported by corporate welfare and ‘de-risking’.[4]
The other vision, promoted by civil society, would judge the City on how well it meets the needs of the real economy, environment, and society not the size of the finance sector per se. This vision supported by robust policy and regulation emphasises economic sustainability, the extent to which the City stops financing activities that damage the environment, how much finance contributes to efforts to promote equality and inclusion, and regional economic success.
There is a worrying emphasis in government policy on financial sector growth and competitiveness. What’s good for the City isn’t necessarily good for the real economy, the environment, and society. There is evidence raising concerns that, beyond a certain point, financial sector growth can actually harm the economy.[5] History shows us what happens when finance is allowed to become too dominant.[6] Indeed, financialisation can exacerbate inequalities.
We argue that if the Government wants to put the City at the centre of national economic strategy, this needs to be accompanied by a far more balanced view, and clearer definition, of what a successful finance sector looks like. We also argue for a new objective, comprehensive and balanced performance framework and metrics to assess the economic, environmental, and social utility of finance. This is needed to inform government and regulatory policy and allow Parliament and civil society to evaluate the Government’s strategy for the finance sector and the effectiveness of the main financial regulators in making finance work in our interests.
We don’t actually know how well the finance sector works
The key message of this report is that, even though the City will be given an even more central role in the nation’s economic future, it is not actually possible to tell how well finance serves the interests of the real economy, environment, and society.
How did we reach this conclusion? We began by defining a set of high-level outcomes or tests that should be met if finance was working for the real economy, environment, and households.[7] We then interviewed a group of experts and refined these outcomes. Following this, we identified a set of performance metrics that would tell us whether these outcomes were being met and allow for monitoring of progress against the outcomes. We then researched the available data sources, focusing on the financial regulators, to determine whether it is possible to judge how well finance is working in our interests measured against those outcomes.
We concluded that financial regulators do not use a comprehensive performance framework to evaluate the finance sector. Furthermore, while there is a significant amount of data out there, it is not coordinated in a way that allows for a meaningful, objective evaluation of the finance sector. There are also major gaps in the data.
The City trade bodies and consultants publish regular reports, widely referenced by government and media, extolling the sector’s positive contribution to the economy, society, and how ‘green’ the City is becoming.[8] Those partial narratives tell us little about the actual economic, environmental, and social utility of finance.[9] These play down the harmful and negative impacts of finance. The experts we interviewed for this report shared our concerns that there is too much emphasis on measuring how well the regulators serve the industry they regulate, and that we lack a proper performance framework to evaluate the impact of finance and to hold regulators to account (see Annex I of the report for a summary of the expert views).
We do not know how effective financial regulators are at making finance work
Critical to a successful finance sector are effective financial regulators. The Financial Inclusion Centre said in its submission to the House of Lords Industry and Regulators Committee Inquiry into the accountability of UK regulators that “regulators should be judged on how well they make the industries they regulate serve the interests of the real economy, environment and society, not on how well they serve the interests of regulated industries”.[10] Therein lies the problem. By definition, the absence of a balanced, comprehensive performance framework to judge finance means we can only have a limited understanding of how well the financial regulators are doing.
In addition to their primary statutory objectives, the regulators now have a secondary objective to facilitate the medium-to-long term growth and international competitiveness of the UK economy and, in particular, the UK financial sector. This secondary objective risks becoming a de facto primary objective and compromising regulatory independence.[11] We have seen a programme of deregulation or deregulation being considered in key areas of financial markets and services. The financial regulators have been required to develop and produce a number of operating service metrics to demonstrate how well they are supporting the growth and competitiveness objective.[12]
Operating service metrics can tell us how well regulators are working for the firms they regulate. But these metrics tell us little about how effective financial regulators are at ensuring those markets work in our interests. To be fair, the regulators do produce some information relating to their statutory objectives. The Financial Conduct Authority (FCA) is working to enhance topline outcomes and metrics to track progress against the consumer outcomes of fair value, suitability and treatment, confidence, and access.[13]
However, many of these metrics rely on self-reporting by consumers so they are of limited use. These metrics do not allow independent experts to track and compare movements in the cost of finance, financial product costs and charges, or represent the regulator’s expert assessment of the utility of and value for money provided by retail financial services.
The regulators’ approach falls well short of an objective, comprehensive assessment of the risks and harms created by finance and the wider economic, environmental, and social utility of finance to balance the reports produced by City trade bodies and consultants.
A new performance framework and metrics to evaluate the financial sector
In addition to the secondary growth and competitiveness for regulators, government is also developing a specific growth and competitiveness strategy for the financial sector.[14] It will be very difficult to tell whether these major strategic initiatives are effective without a comprehensive performance framework that allows us to assess how well finance is serving our interests.
In this new report, we are proposing a new performance framework to allow stakeholders to measure how well finance serves the interests of:
- The real economy and businesses with a focus on SMEs and microbusinesses, regional and local economies
- Environmental and social policy goals
- Society (consumers/households)
We have developed a detailed set of performance outcomes and metrics to measure how well finance meets the needs of those categories of interest. To reiterate, finance is meant to be a service industry in that it is supposed to serve the needs and interests of the real economy, environment, and society and certainly not harm those interests. Specific outcomes and metrics are critical as they tie the performance of the finance sector to those interests. Data on contribution to GDP or tax-take, or numbers employed tell us nothing about how well finance is serving our needs.
In contrast, the performance framework we propose in the report would enable the City to be observed and assessed from our perspective. In doing so, it would also enable the financial regulators to be judged from our perspective.
This new framework, with outcomes and metrics, is set out in the body of the report with further details in Annex II including where the necessary data to populate the performance framework might be obtained.
The data to populate this new framework would consist of:
- Data and information already produced by the regulators
- Additional data and information regulators could and should produce to improve reporting and accountability with regards to their existing statutory objectives. We note that regulators are now under pressure to report additional performance information in relation to the new secondary growth and competitiveness objective – they should also be required to enhance reporting from the perspective of the environment, consumers, and businesses. If regulators don’t have the data and evidence, we would suggest they should start gathering it.
- Syntheses of existing relevant data and research published by other organisations.
- Newly commissioned research to fill gaps in the existing data resources.
This framework would allow civil society to produce a flagship regular State of Finance Report, which would provide a public interest audit of finance. The way the framework is structured also allows for specific reports and deep dives into how well finance serves different interests and how well each of the main finance sectors such as banking, insurance, asset management, consumer credit and so on serve those interests.
Developing such a framework and producing independent reports would undoubtedly present a challenge but it is do-able and it is needed. It is surely undesirable that we are so poorly informed about the performance of such a critical sector that has so much influence over the economy, environment, society, and our overall financial and economic wellbeing. We should be able to tell how well finance is working for us, and how well the main regulators are working for us.
Recommendations
- HM Treasury and the main financial regulators should convene a working party with civil society to recommend improvements to the data collected and published by the key regulators with respect to their existing statutory objectives.
- The key regulators should use their resources to gather and publish more comprehensive data and evidence on the performance of the critical sector they regulate. This should be based on the performance outcomes and metrics set out below in the report and in Annex II.
- These new performance metrics should form the basis of enhanced regulatory accountability in the form of regular reporting by the regulators and to Parliament, particularly the Treasury Committee, and the public.
- Civil society organisations should collaborate on:
- producing new research on financial activities to fill the gaps in the current data;
- creating a new central repository of performance metrics, data, and research on the finance sector overall and the main sub-sectors; and
- publishing a regular State of Finance Report.
[1] The ‘City’ is, of course, not the same as the wider financial services industry. But, we use the terms interchangeably throughout the report.
[2] See post by The Economic Secretary to the Treasury and City Minister (1) Post | Feed | LinkedIn
[3] This includes households/ consumers and more generally how well finance supports social policy objectives such as financial inclusion.
[4] Where private finance institutions expect third parties such as the state or non-profit sector agencies to underwrite risks allowing private finance to receive the financial rewards. This is known as socialising the risks, privatising the rewards.
[5] See for example: Too Much Finance?; by Jean-Louis Arcand, Enrico Berkes and Ugo Panizza; IMF Working Paper 12/161; June 1, 2012 and Reassessing the impact of finance on growth, July 2012
[6] Full article: Capitalism divided? London, financialisation and the UK’s spatially unbalanced economy
[7] For example, for the consumer category the preliminary outcomes were based on the established consumer principles of access, choice, value for money, redress and so on.
[8] See for example: State of the sector | annual review of UK financial services 2022 (theglobalcity.uk)
[9] Utility here refers to how well financial markets serve the interest of the real economy, environment, and society. There has been much justified criticism that a great deal of activity in the financial sector serves other financial activities rather than the economic, environmental, and society’s interests.
[10] Who watches the watchdogs? Improving the performance, independence and accountability of UK regulators
[11] Indeed, the Prime Minister has recently written to the main sectoral regulators, including financial regulators, setting out the need for the regulatory environment to become ‘more pro-growth and pro-investment. Starmer asks UK regulators for ideas to boost growth – BBC News
[12] The FCA has produced 51 operating service metrics. FCA operating service metrics 2023/24 | FCA
[13] Consumer topline outcomes and metrics | FCA
[14] Invest 2035: the UK’s modern industrial strategy – GOV.UK Financial_Services_Growth___Competitveness_Strategy_-_Call_for_Evidence_.pdf