Bank of England is damaging UK financial services and economy, says former Deputy PM

For the UK economy to grow substantially this year, the Bank of England must end its over-regulation of financial services, says leading global financial services consultant Yerbol Orynbayev.

The intervention from the former Deputy Prime Minister of Kazakhstan follows reports of Revolut’s wait for its UK banking licence, which – due to demands from the Bank of England’s Prudential Regulatory Authority (PRA) – has now exceeded nearly three years despite internal confidence that it would be granted quickly (This is Money).

course, this is amidst the UK’s recent lacklustre economic performance: in Q4 2023, the country stooped into a technical recession, with GDP contracting 0.3% (Financial Times).

Orynbayev, who has also worked as a Governor of the World Bank on behalf of Kazakhstan, believes the Bank of England has taken an over-cautious approach to modern financial services firms and has hampered innovation in the process.

Yerbol Orynbayev said: “Under the never-ending demands of the PRA, Revolut’s struggles to obtain its banking licence certainly shows one thing: along with the FCA, the Bank of England is incredibly over-cautious. Revolut has spearheaded innovation across FX services – and a banking licence would provide them with access to other services they could dramatically improve. The Bank of England is missing a trick. They’re hampering innovation.”

In the case of Revolut, a UK banking licence would allow them to operate more efficiently and effectively in the country – and offer a broader range of secure financial services to their customers. But, while banking licences are usually granted within 12 months of application (Financial Times), the delay has prevented them from innovating these different areas, hampering their development and effective offerings in the UK.

However, more recently, non-bank financial institutions (NBFIs) – which include insurance firms, asset managers, pension schemes, and venture capitalists – have also been targeted. According to the Financial Stability Board, NBFIs hold just over 46% of global financial assets or approximately $218 trillion USD. Moreover, they have contributed to almost all of the £425 billion net increase in UK business lending since 2008 (Reuters).

Fearing their influence could leave the UK vulnerable to a credit crunch, the Bank of England’s Deputy Governor Sarah Breeden has recently outlined the central bank’s intentions to build a proactive case for regulating non-banks (Reuters). Of course, Orynbayev understands the need for this increased oversight but is wary about punishing these financial institutions for an issue that arose from then-PM Liz Truss’ tax cuts in 2022.

Orynbayev continued: “Liz Truss’ tax cuts in 2022 sparked this whole regulatory movement: UK government bonds were manically bought, yields rose, revealing vulnerabilities across the UK’s vast network of NBFIs. To boil it down to its very core, the Bank of England’s calls for regulation against NBFIs have stemmed from a critical political error.

“But this is not a surprise. Since the 2008 financial crisis, regulation against financial institutions has tightened and the spotlight on financial services has only shone brighter and harsher. The Bank of England needs to be wary of this approach, as reactive regulatory punishments like this could hamper the growth of the UK’s wider financial services landscape.”

Besides financial services, the Bank of England has also been overly cautious with its rates policy. Huw Pill, the chief economist at the central bank, recently warned that a cut to UK interest rates is still “some way off” (The Standard), dulling hopes for increased business activity and economic growth. Orynbayev believes the Bank of England’s hesitancy is impacting not only financial services, but also the country’s economic potential.

Orynbayev concluded: “Huw Pill’s recent comments on cutting interest rates is indicative of the Bank of England’s wider issue. Its hesitancy. Following months of economic troubles, the Bank of England should be itching to reignite the UK’s business activity and, as a result, supercharge the economy. But they’re doing quite the opposite. They’re twiddling their thumbs.

“The UK’s financial services sector has been the brunt of the central bank’s caution. And, for a country that has produced groundbreaking challenger banks like Monzo and Starling, this friendly fire is only going to put a ceiling on innovation – and leave its financial services sector in cobwebs.

“The Bank of England now has an opportunity to dictate the future of the UK’s thriving financial services ecosystem and the economy’s post-recession recovery. But, to ensure both, they need to shift their attitude. They can’t shy away from risk.”