Kemi Badenoch’s economic revolution could set the City free
Abolishing bank ring-fencing, recalibrating capital requirements, and replacing the Financial Ombudsman Service are essential steps to remove stifling regulations and reignite growth, says Norbert Sobolak
No political party in Britain has set out a positive agenda for the financial services sector since the 2008 crisis. The reticence is understandable; after 2008, defending finance won no votes. Yet the City is one of the country’s most powerful engines of growth: it supplies the capital for businesses to expand and families to buy homes, and contributes roughly one pound in every eight of tax revenue. The costs of that caution have compounded quietly for two decades – even the Bank of England, easing its leverage rules last week, tacitly admits as much. But adjusting one dial does not fix the machine. Kemi Badenoch’s new plan for the City is therefore welcome. Its core reforms – abolishing bank ring-fencing, recalibrating capital requirements and replacing the Financial Ombudsman Service – are the right foundations for her promised “economic revolution”.
Consider ring-fencing first. Because the regime applies only above a deposit threshold, challenger banks have a powerful incentive to cap their growth rather than shoulder its costs, which the government’s independent Skeoch Review puts at £1.5bn a year. A&O Shearman finds at least four banks have done precisely that. This means less competition for savers’ deposits and fewer of the cheaper, more innovative products a more contested market would generate. The annual cost exceeds the £1.3bn the bank levy raised in 2024-25; since the regime took effect in 2019, its ongoing costs, excluding implementation, come to nearly £10bn.
What has this bought? Remarkably little. The protection it promised is provided, more effectively, by parallel reforms. Drawing on Bank of England and Financial Stability Board analysis, the Skeoch Review concluded “progress in ending too-big-to-fail was not found to be attributable to ring-fencing” but to “the development of the UK resolution regime”. Tighter liquidity standards, recovery planning and derivatives clearing rules add further safeguards. It is no accident that no other country has adopted comparable ring-fencing. Nor is Britain’s banking system uniquely outsized: relative to the economy, it is smaller than Singapore’s or Hong Kong’s.
The government, to its credit, recognises the problem; its proposals, however, mitigate rather than resolve it. Reviewing the deposit threshold every three years concedes the cliff-edge distorts behaviour without removing it, and firms learn nothing about where the line will sit. Trimming duplicative rules cannot remove a compliance burden that flows from the structure itself. And the measures that would help most – a capped allowance for prohibited activities, shared services across the fence – remain consultations rather than commitments. The case is for repeal, not another review.
Capital requirements
Capital requirements are a different matter: they exist for good reason. Banks must hold enough capital to absorb losses and keep lending through a downturn, without recourse to the taxpayer. The question is not whether banks should hold capital, but how much. Britain’s answer has drifted well beyond the international Basel standards. Multiple buffers overlap, counting the same risk several times over. On top sits the leverage ratio, a backstop measuring capital against total exposure regardless of risk. Seven of the world’s ten most leverage-constrained banks are British.
The forgone lending is substantial. UK Finance estimates the regime restricts lending capacity by up to £450bn – £250bn from overlapping buffers, £200bn from restrictive leverage rules – money that could otherwise flow to businesses and homebuyers. Nor does this conservatism reflect the regulator’s own judgment. In December 2025 the Financial Policy Committee assessed the appropriate level of CET1, the strongest form of capital, at around 11 per cent. Britain’s large banks hold 14.5 per cent. Even in the FPC’s severe stress scenario, capital would fall only to around 11 per cent – it would take a deep recession to bring banks down to what the regulator considers appropriate in normal times.
The Bank concedes the case for action: last week it announced plans to ease leverage rules, and it will assess overlapping buffers. This is welcome, but one-off reviews do not make change durable. The answer is to require the FPC and PRA to weigh peer jurisdictions’ regimes and publish that analysis whenever they set requirements. Clear focus on competitiveness, and analysis open to challenge, will keep rules at a level that safeguards stability without strangling growth.
The third burden is legal. The Financial Ombudsman Service was created to give consumers and small businesses redress against financial firms – a necessary function. But the FOS applies a “fair and reasonable” test that is distinct from the law itself, so a firm can comply with every rule yet still owe redress. The government’s own consultation concluded that the resulting uncertainty “has suppressed investment and innovation in UK financial services, which can lead to firms offering fewer, less innovative products for consumers”. Those on low incomes are likely to be hit hardest, since the thin margins on products serving them are least able to carry the redress risk. Meanwhile the service itself is buckling. Pressed into mass-redress work it was never designed for, the FOS missed every timeliness target in 2024-25 and carries a backlog of more than 160,000 cases.
The government’s proposed remedy would make matters worse. Firms would “pass” the fair and reasonable test if they had met FCA rules, with a referral mechanism to the FCA where rules are ambiguous. That lets the regulator interpret, and in effect amend, its own rules in hindsight: a firm could owe redress for rules whose meaning changed after it acted.
The better answer is to replace the FOS with a Financial Adjudication Service required to apply only the law, alongside a First-Tier Tribunal for financial services generating binding precedent for appeals and complex disputes. This would strengthen the rule of law and create a healthy feedback loop: if consumers or industry dislike the direction of the case law, they can press the FCA to change its rules – prospectively through the rulebook, rather than by reinterpretation after the event.
None of this means forgetting 2008. Post-crisis safeguards that have not been overtaken will remain. What goes is cost without benefit: a redundant structure, buffers beyond the FPC’s own benchmark, and legal uncertainty that serves neither firms nor consumers. The opposition has put a serious plan on the table. A government serious about growth should not wait to borrow it.
Norbert Sobolak is a senior policy fellow at Onward, the centre-right thinktank