THE COMPETITIVENESS OBJECTIVE IN FINANCIAL REGULATION: A PRUDENTIAL TRADE-OFF?

In a country’s economic framework, the financial system plays a quintessential role in enabling the financial management of households and businesses, besides fostering stability and facilitating growth. It is said to be stable when it dissipates financial imbalances that arise endogenously or due to significant adverse and unforeseen circumstances. In other words, If the system can absorb financial shocks through self-corrective mechanisms, preventing adverse consequences from impacting the economy it is said to be stable.[1] In the UK, the financial regulators, namely the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), are not limited to improving the system's functioning but also aim at ensuring its soundness, integrity and efficiency.[2] Traditionally, the regulators operated under a prudential and conduct mandate with the Financial Services and Markets Act of 2000 (FSMA); however, after Brexit, there was a policy shift which led to the enactment of the Financial Services and Markets Act which added an explicit secondary mandate for FCA and PRA to facilitate international competitiveness and growth to make the UK a global financial centre outside of the EU framework.[3] While welcomed by a few scholars and policymakers, arguing in favour of enhancing global appeal and efficiency, a significant amount of academic literature expresses concern about its potential to dilute the regulator’s primary objective to protect consumers, promote resilience and ensure financial stability. This essay critically examines this debate. Firstly, by briefly outlining the functions and role of financial regulators. Secondly, analysing the rationale behind introducing the competitiveness objectives by critically gauging the arguments for and against it and concluding by arguing that it might be a desirable goal, but embedding it within the regulator’s aim might risk regulatory arbitrage and financial instability.

The Role & Functions of Financial Regulators

As mentioned earlier, the purpose of regulation is to assist markets in functioning better than they would in its absence.[4] Its regulatory design is firstly determined based on the nature and extent of any market failures that might be prevalent. Secondly, based on the most appropriate combination required to remedy such a failure and thirdly, based on the evaluative cost or side effects of such remedial intervention.[5] The regulation dynamics are, therefore, very complex, which keeps financial services and financial institutions in a continuous state of flux, making it difficult for the regulators to keep pace. Consequently, financial markets are susceptible to various forms of market failures, including but not limited to information asymmetries, moral hazards, systemic risk and externalities. Regulators, therefore, focus on prudential supervision to maintain the resilience of financial institutions and conduct effective regulation to prevent the occurrence of unfair practices and systemic oversight to safeguard financial stability. While overregulation might stifle innovation and hinder market efficiency, under regulation increases financial instability risk and consumer harm. The exigency for a delicate balance between the two necessitates a dynamic regulatory approach incorporating economic growth and competitiveness alongside prudential supervision.[6]

The Case for a Competitiveness Objective 

The requirement of integrating competitiveness objectives enables regulators to evaluate the impact of their policies on market dynamism, innovation and global positioning. Such measures help achieve sustainability, attract international businesses, and allow participants to compete effectively, creating a higher impact on competition and advancing consumer protection or integrity objectives. It is not intended to be understood in purely deregulated terms but rather an emphasis on proportionate, adaptive, and forward regulation. The PRA and FCA have clarified post FSMA 2023 that their objective is to balance their primary duties to ensure that consumer protection, prudential resilience and financial stability remain paramount.[7] Before we critically analyse its impact on the market, let’s consider the arguments of the proponents and the critics.

Arguments For the Competitiveness Objective

1.    Encourages Innovation for Consumer Benefit - A competitive financial sector encourages and incentivises firms to develop new products and services, which gives customers varied options, lower costs and access to effective services. It gives them the entrepreneurial liberty to final novel ways to improve operational efficiencies and adapt emerging trends such as fintech solutions, blockchain applications and AI-infused services.

2.    Strengthening Financial Resilience through Market Growth- An Open competitive market attracts cross-border capital investments. Foreign investors actively seek jurisdictions with transparent, predictable and growth-oriented regulatory frameworks. Therefore, it’s quintessential that it maintains the intricate balance between prudence and agility. Such sustainable investments support job creation, improve financial ecosystems, and enhance tax base funding for public services and infrastructure.[8]

3.    Promotes Efficiency- Efficiency ensures that financial institutions operate at a minimal cost and time while maintaining prudential standards. A complex regulatory mechanism stifles growth, discourages innovation and raises business costs- thereby reducing a sector’s competitiveness. Contrarily, a well-calibrated system streamlines procedures and removes redundant regulations, enabling effective allocation of resources focused on core strategic activities rather than compliance overheads. It also benefits customers through better pricing, tailored access and quicker service delivery. In the contemporary world, access to digital technology and regtech solutions play a crucial role in shaping the competitiveness lens through automation in compliance and reporting.[9]

Arguments Against the Competitiveness Objective

1.    Potential Erosion of Consumer Protection- To attract financial investments, regulators may reduce oversight on product approvals, which leads to an increased availability of high-risk financial products. This is evidenced by the 2008 financial crisis, where subprime mortgage-backed securities were routinely approved by lax oversight, resulting in economic instability and consumer losses. Therefore, if competitiveness is prioritised over other core objectives, similar issues could arise in consumer credit, mortgage lending and investment products. Additionally, competitiveness also makes regulators reductant to the imposition of hefty fines, which incentivises unethical behaviour in the long run.[10] It would also encourage predatory lending practices- as instanced in the payday lending crisis in 2010, where Wonga offered high-cost loans with APRs exceeding 5000%, which later led to regulatory intervention in 2014 by FCA.[11] There are concerns regarding its impact on weakening protection provided by the Financial Ombudsman Services (FOS), which settles disputes between consumers and business/financial institutions.[12]

2.    Increased Systemic Risk- Regulatory relaxations due to competitiveness increase systemic risk. It is triggered by widespread economic instability. Contemporaneous regulatory frameworks such as the Basel III and UK prudential rules exist to prevent excessive risk-taking. However, if they were to be compromised by lowering capital requirements, liquidity standards or risk management obligations to make markets competitive, it would expose them to market shocks. Moreover, such liberty would incentivise banks to expand aggressively, take on higher debt and enter riskier markets, increasing systemic vulnerability. It would also loosen oversight of non-banking financial entities (shadow banks) concerning leverage and speculative investment.[13]

3.    Regulatory Arbitrage refers to the act where financial institutions exploit regulatory gaps to dodge unfavourable regulatory restrictions, often by restructuring, employing financial engineering or relocating to a jurisdiction with lenient oversight. This creates an uneven playing field, resulting in market distortion and erosion of regulatory effectiveness- leading to a race to the button wherein regulations routinely undermine their standards to attract businesses at the cost of compromising financial stability.[14]  

4.    Conflicts with other Regulatory Objectives- Introducing the competitiveness objective can create tensions with existing goals, particularly concerning market integrity and consumer protection. The FCA has already recognised the potential trade-off risk, including increased mortgage defaults and financial misconduct.[15]

While the competitiveness objective enhances the UK’s positioning as a global financial hub, its effectiveness hinges on the regulator’s art of balancing market dynamism and prudential oversight. Integration of this objective within the regulatory framework may attract higher investments and drive innovation but also incentivise excessive risk-taking and regulatory arbitrage, as evidenced by the financial crises. Additionally, the argument that a reduced regulatory burden necessitates the enhancement of long-term competitiveness is flawed because investors value regulatory certainty as much as they value flexibility. If competitiveness leads to deregulation pressures, it undermines financial stability and consumer trust, ultimately harming the market it seeks to make stronger. Therefore, I believe that competitiveness should be introduced as a secondary objective. The UK’s regulatory authorities must remain vigilant against the temptation to dilute prudential standards for global appeal. The Competitiveness objective, which is perused through proportionate and adaptive regulation that enhances efficiency without compromising systemic resilience, should be encouraged. Hence, its integration is desirable, but embedding it too profoundly within the regulation would undermine the safeguards that ensure market stability.

*LLM Student, London School of Economics and Political Science.

[1] World Bank, Financial Stability (2016) https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/financial-stability accessed 28 March 2025

[2] Ferran, Eilís, 'Institutional Design: The Choices for National Systems', in Niamh Moloney, Eilís Ferran, and Jennifer Payne (eds), The Oxford Handbook of Financial Regulation (2015; online edn, Oxford Academic, 12 Nov.  2015),  https://doi.org/10.1093/oxfordhb/9780199687206.013.6, accessed 28 Mar. 2025

[3] Eilis Ferran, ‘International Competitiveness and Financial Regulators’ Mandate: Coming Around Again the UK’ (2023) Journal of Financial Regulation 30

[4] Armour, John, and others, Principles of Financial Regulation (Oxford, 2016; online edn, Oxford Academic, 20 Oct. 2016), https://doi.org/10.1093/acprof:oso/9780198786474.001.0001, accessed 28 Mar. 2025.

[5] Ibid.

[6] Ibid.

[7] Financial Conduct Authority, ‘Competition and Innovation – A Financial Services Regulator’s Perspective’ (21 March 2024).

[8] Bank of England, ‘PRA Secondary Competitiveness and Growth Objectives Report 2023/24’ (July 2024).

[9] Ibid.

[10] Ben Martin, 'Reforms to boost growth will bring risks and failures, warns FCA' The Times (London, 27 March 2024)

[11] Financial Conduct Authority, 'Wonga to make major changes to affordability criteria following discussions with FCA' (Financial Conduct Authority, 2 October 2014)

[12] Ibid 10.

[13] Ashkey Prebble 'Should UK regulators take more regard for competitiveness?' (Clifford Chance, January 2019)

[14] Eilís Ferran, International Competitiveness and Financial Regulators’ Mandates: Coming Around Again in the UK, Journal of Financial Regulation, Volume 9, Issue 1, April 2023, Pages 30–54, https://doi.org/10.1093/jfr/fjad001

[15] Ben Martin, 'FCA boss warns of trade-offs in efforts to boost economic growth' The Times (London, 29 March 2024)