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In a letter to the Financial Conduct Authority (FCA), finance minister Rachel Reeves has changed the government’s position on the regulator’s oversight of financial inclusion, while stating that financial services are a catalyst for growth.
Addressed to FCA CEO Nikhil Rathi, the letter emphasises the government’s commitment to broad-based economic prosperity, sustainable finance and international competitiveness.
Reeves highlighted financial inclusion as a cornerstone of the government's growth strategy, underscoring the need for every individual to have access to the financial products and services essential for participating in the economy.
She called on the FCA to reinforce efforts to “enable individuals to access the financial services and products they need to fully participate in the economy” and to “have regard” to financial inclusion.
This goes against the previous positions of Reeves’ department, the Treasury and the FCA itself.
In its response to the Treasury Select Committee in 2022, the regulator said that such a requirement would not “add to our existing ability to act within our remit in line with our objectives; and it might risk increasing expectations that the FCA should step in to fix problems that it does not have the power to solve, perhaps contributing to further confusion rather than addressing the root causes of exclusion”.
To "have regard" legally speaking is to take account and genuinely consider an issue.
The bi-partisan committee of parliamentarians said: “We recommend that the Treasury should require the FCA to have regard for financial inclusion in its rule-making, but not to make changes relating to financial inclusion to the FCA’s objectives."
It went on to suggest that the FCA should be placed under a statutory requirement to account for financial inclusion.
Driving growth
In her letter, Reeves continued to promote the government’s “growth agenda”, stating that the UK financial services sector has a “fundamental role to play in delivering this growth, both as an engine for growth and investment throughout the economy, and driving UK prosperity in its own right as a world-leading, dynamic financial centre”.
Reeves, a former Bank of England employee, wrote that financial services regulators are key to driving forward this mission.
“We must have proportionate, effective regulation that allows firms of all sizes to compete, innovate and grow, creates a stable, attractive environment which encourages businesses to establish and expand in the UK, and adequately protects consumers.
“A thriving, internationally competitive financial services sector, regulated by independent expert regulators with a global reputation for promoting stability and facilitating innovation, is essential for creating the conditions for businesses and consumers to invest with confidence,” she said.
The letter outlines several key priorities for the financial watchdog, including:
- Supporting innovation, by encouraging the safe adoption of emerging technologies such as artificial intelligence, to boost productivity and growth.
- Facilitating sustainable finance by positioning the UK as a global leader in funding the green transition and achieving net-zero ambitions.
- Enhancing the UK's global standing, through strengthening the UK’s reputation as a leading global finance hub through regulatory leadership and international collaboration.
- Streamlining regulation by reducing administrative barriers for firms while maintaining high regulatory standards.
Reeves also reaffirmed the government’s commitment to co-designing policies with regulators, consumer groups and industry stakeholders, stating that “co-design is a cornerstone of this government's approach to policy development and delivery”.
She added that the government is developing a financial services growth and competitiveness strategy, which will consider how to drive the growth of the sector over the next decade.
“I look forward to continuing to engage with you on this important work as it progresses,” she said. “I would be grateful for updates through your response to this letter, the second report on embedding your international competitiveness and growth objective, and your ongoing regular engagement with Treasury ministers and officials.”
What will this all mean?
Parts of Reeves' letter are unsurprising. Ever since she took the helm of Labour’s economic and financial brief in June 2021, while the party was in opposition, she has spoken of little but growth.
Growth is inevitably a good thing for payments and e-money firms, especially when matched with a renewed sense of direction from the National Payments Vision, also published last week.
What is more surprising is the decision to require the FCA to "have regard" for financial inclusion. This aligns with the broader goal of fostering equitable economic participation, but it necessitates careful implementation to avoid overreach, unintended market consequences and excessive compliance burdens on firms.
A collaborative, phased approach focusing on guidance and innovation rather than prescriptive mandates could enable the FCA to strike a balance between promoting inclusion and maintaining its core regulatory objectives.
Regulatory moves on topics such as new guidance on de-banking, access to cash and the Consumer Duty go some way towards achieving this, so it is hard to see where else the FCA could go from this in enabling financial inclusion.
In a 2023 speech, Rathi said that “financial inclusion matters to the FCA, deeply”, while agreeing with the then Conservative government’s position that this should not be a statutory requirement.
“There were good reasons for this, pragmatic rather than ideological, that regulators hold blunt tools, rather than the keys needed to unlock financial inclusion,” said Rathi.
“While we set expectations about how firms should behave and act when they fail to abide by these, it is outside our scope to tackle, alone, the widest socio-economic challenges.”
At the time, Rathi said that “financial inclusion cannot be solved by state action alone, there need to be commercial incentives too”, and called for the financial services industry to be more imaginative when it comes to incentives to provide services to under-served groups.
The FCA has clearly thrown its support behind firms unlocking financial inclusion for UK consumers, but how it shores that up under the new Chancellor’s watchful eye remains to be seen.
Reeves has plenty of expectations for the regulator, but how quickly it can meet them at a time when it is battling with new post-Brexit powers and employee churn is another thing altogether.
