finance

Regulatory capture: banks should not write their own rule book


Fears that big banks will call the shots when the UK tries to implement open banking are fully justified. Incumbents in any industry have ulterior motives when they offer to help write rule books. In finance, it happens to be that bit easier to secure seats at the table.

Regulatory capture — the art of skewing market rules to the advantage of market participants — thrives in the UK, which has a weakness for clubbable elites. Willingness of regulators to play ball with banks contributed to the financial crisis and the Libor rate-setting scandal.

The subsequent bifurcation of the Financial Services Authority into the Financial Conduct Authority and Prudential Regulation Authority introduced more rigour. But it still left big banks with outsize influence. That was despite the arrival of newcomers in the form of challenger banks, such as Metro Bank, and fintech start-ups such as Starling and Monzo.

Open banking involves a data-sharing set-up designed to breed competition. It is envisaged as a platform that all banks, payment firms and others can access to share data, levelling the playing field for newbie fintechs.

Coronavirus has delayed a consultation under the Competition and Markets Authority. Proposals for the body that will oversee open banking from UK Finance, a City group, have won favour with the CMA. But there is too much scope for big banks to influence its policies with threats to pull funding. Previous efforts to open up banking by the CMA, Financial Conduct Authority and politicians were all heavily diluted down.

Big banks protest that they have already shouldered some of the burden that comes with hefty market share by offering free current accounts or acting as conduits for government-backed Covid-19 loans.

Open banking is partly a response by banking regulators to what, for them, is an existential challenge. Most Britons find banking boring and do not care that it is an oligopoly. Surveys over the years have shown that people are more likely to ditch their spouses than their lender. But that is no reason to let banks design their own supervisory body. 

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