City chiefs: We must embrace risk to stay competitive
Leading City figures have reignited calls to policymakers to embrace risk or watch the UK’s financial system lose out to rival markets around the world.
“The thing we’ve got to guard against is avoiding any form of risk,” David Postings, chief executive of UK Finance, told City PM
“If we’re going to be truly competitive, this has to be an environment where there’s strong regulation, the benefit of English law, great people and great infrastructure, but also an ability to make a decent return and to take risk,” he said.
Postings cited the example of how changing regulation of defined-benefit pension funds had incentivised funds to abandon equities and invest in bonds, which provide a more reliable stream of income.
This has hit London’s capital markets as listed firms have been deprived of investment. According to research from New Financial, as of last March last year just four per cent of UK stocks were held by pension funds, down from 39 per cent in 2000.
Other leading City experts also argued that this overly cautious approach had harmed the broader economy.
“The desire to over eliminate risk is an issue at multiple levels,” James Palmer, partner at Herbert Smith Freehills, told City A.M. “It stems from a desire to stop losses or particular ‘negative’ outcomes, without always thinking through whether there will be worse overall outcomes as a consequence.”
Palmer said that constant tinkering with regulation to prevent bad outcomes was having a real-world impact. “Reconfiguring the rules endlessly is adversely impacting productivity growth and substantive outcomes,” he said.
Mark Austin, partner at Latham & Watkins, urged stakeholders to recognise that “better returns tend to come from judicious and calculated risk-taking, and better returns are important for the wider economy”.
Alasdair Steele, a corporate partner at CMS, told City PM that the UK has been “largely ‘risk off’ since the financial crash”.
“The nature of equity is that it is higher risk than senior debt,” Steele said. “Yet when a listed company fails, immediately the questions turn to why the regulator, investment bank or auditor did not stop it happening.”
This then puts pressure on stakeholders to prevent further failures, which limits the potential upsides that investors can receive.
Responding to their remarks, City minister Bim Afolami told City PM: “We do need to make sure we don’t squeeze all risk out of the system – and do so in a sensible way.”
Lord George Bridges, chair of the Economic Affairs Committee, told City PM that a “balanced approach to risk” and a robust regulatory system “underpins a competitive global financial centre”.
The comments come amid a wider reassessment of the post-financial crisis regulatory system and growing concerns about the future of the City post-Brexit.
In late 2022, the government launched the Edinburgh Reforms with the aim of reinvigorating London as a financial centre. A slew of consultations have also been launched into various parts of the UK’s financial infrastructure.
Regulators have already accepted the need to re-evaluate risk. In a speech in October, Nikhil Rathi, chief executive of the Financial Conduct Authority, said: “We must take a balanced view of risk: let us not be so afraid of failure that we stifle innovation.”