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Britain's fight against fraud, regulatory independence is essential

A wave of unprecedented fraud is sweeping the United Kingdom.

According to the fraud prevention organisation Cifas, fraud schemes involving asset finance products surged 162% in the first nine months of 2022 when compared to the same period in the previous year.

At a time when effective, efficient, and widespread policing and regulation of fraud are urgently required, the new U.K. government is pursuing a policy that would potentially grant HM Treasury the authority to intervene with or overrule key regulators, including the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

This has prompted worry from prominent officials, such as FCA Interim Chair Richard Lloyd, who cautioned that the U.K.'s international reputation as a leader in financial services is in jeopardy.

Regulators must be able to function independently and without government interference in order to perform their duties effectively. Instead of aiming to tighten its control on regulators, the U.K. government should maintain their independence as a matter of critical concern as we continue to fight a growing plague of fraudsters and con artists.

Taking the long view

The British political atmosphere of the past few months has made it abundantly clear why it is essential for regulators to maintain their independence from the government. If the United Kingdom wants to develop a robust, long-lasting resilience against fraud, we need a long-term plan supported by a consistent and uncompromising approach to the regulation of the financial services industry. In order for this to be successful, regulators must not be subjected to the type of political unrest that the country has experienced over the previous year.

As evidenced by the recent exchange of power between the roles of British chancellor and prime minister, and the new chancellor's subsequent reversal of nearly all the policies announced in the ill-fated "mini-budget," the government's priorities, directions, and approach are susceptible to wildly fluctuating and changing in tandem with personnel, government, or political party changes.

These modifications have immediate effects on policy and markets, and the FCA and PRA must be able to operate freely in order to protect consumers. If HM Treasury may meddle in the objectives or plans of regulators, the regulatory regime runs the risk of being suffocated by political instability. If a regulation package can be approved by one administration and then fully reversed within weeks by another, there will be no long-term regulatory structure in place to prevent fraud.

In order to prevent this, regulators must maintain independence from short- and medium-term political swings. Consumer trust and safety rely heavily on regulators' ability to maintain stability in the face of government instability. If the FCA and PRA are used as political pawns by the proposed deregulatory package, their long-term mission of protecting financial service consumers will be jeopardised.

The declared goal of market deregulation by HM Treasury is to make the United Kingdom the best environment in the world for financial service enterprises to operate. Enhancing the government's authority over regulators as part of this approach, however, could have the opposite effect, since the regulatory framework could become utterly constrained by political instability.

The significance of long-term planning and strategy cannot be overstated when it comes to protecting consumers effectively. Even during periods of relative political stability, the regulatory agenda would be continuously shifting as power is transferred from one government to the next within the democratic political system of the United Kingdom.

Independence by deed

Recent events have demonstrated why it is imperative that regulators stay independent of government direction and policy. The Bank of England's action following the mini-budget demonstrated this.

The Bank of England's swift decision-making and speedy deployment of 65 billion pounds (U.S. $77 billion) for damage control were crucial in stabilising the U.K. economy through a series of the most tumultuous days in market history.

These crucial, rapid-response actions could not have been achievable without the Bank of England's freedom to act independently of government mandate. If the government had the power to dictate or strongly influence the Bank of England's decisions or replies, these activities may have been postponed or even halted. Consequently, the economy would have continued to experience panic and turmoil, and consumers would have suffered even more.

The Financial Services and Markets Bill might empower the government these powers over regulators, impeding their capacity to respond to market requirements.

Unquestionably, effective cooperation between the government and independent regulators is essential to establishing a solid regulatory environment. However, regulators must act and react with the same degree of autonomy as the Bank of England.

In addition, for London to remain competitive and at the forefront of its sector, regulators must be able to demonstrate that they set their long-term goals only in the benefit of the consumer.

Safeguarding civil procedure

Currently, only a minority of fraud reports result in criminal prosecutions. Recent estimates by the House of Commons Justice Committee indicate that only 0.16 percent of the 4.6 million cases of fraud reported annually in the United Kingdom get prosecuted.

Meanwhile, fraud prevention receives only 2% of police money in the United Kingdom. Maintaining a strong and effective civil enforcement system is crucial, as it is virtually the only remaining protection for consumers against fraudsters.

Fraud techniques in the digital age post-pandemic are becoming increasingly complex. In the weeks leading up to Christmas, Barclays issued a broad warning to consumers to be especially cautious of online purchase scams, which the bank estimates have increased by 70 percent year-over-year.

The bank advised consumers to pay attention to their intuition. Although great advice, it is unrealistic to expect the general population to be able to intuitively identify con artists.

This type of fraud requires a committed and specialised response directed by competent regulators and supported by a robust and similarly complex regulatory framework. The FCA, PRA, and other regulators must have unfettered access to their expert resources without interference from the government.

A deregulation plan might leave U.K. consumers at the whim of criminals, with limited or no enforcement allowing fraudsters to operate without fear or consequence.

Lingering questions

Lloyd's fear that the "perception of the loss" of regulators' independence "would occur very swiftly" touches on one of the fundamental issues of the U.K. government's current direction, despite the fact that the precise form of powers that could be provided to the government is still unknown. The United Kingdom is gambling with its international reputation, and the government is endangering consumer confidence in the financial services industry.

The British government must take proactive measures to reassure regulators, the public, and the international community that the nation's financial regulators will not become politicised.

It is not a secret that U.K. regulators have struggled with their own internal challenges, which have limited their capacity to prosecute fraud, so there are potential benefits to streamlining regulation. However, any procedure pursuing this objective must not compromise the independence of regulators. Moreover, it appears that the expanded reach of government power is only causing additional difficulties for regulators who are already addressing their flaws.

Regarding preserving the United Kingdom's status as a leader in financial services, the government would be prudent to leave sleeping watchdogs alone.



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