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When I started work in the City of London in 1979, the Bank of England was responsible for the light-touch regulation that had allowed our financial markets to flourish. Together with Britain's fortuitous geographical position within the global 24-hour clock system, London had grown into Europe's and arguably the world's pre-eminent centre for risk-taking and financial innovation, serving us well over centuries.
Today the regulatory apparatus involves the Bank of England, the Treasury, the FCA, and the PRA, costing over £2 billion a year. A labyrinth of laws, regulations, directives, and bureaucracy has crushed risk-taking, innovation, and enterprise. As usual, lawyers have moved into the confused vacuum like parasites to profit from the demise of London as a financial centre.
This short paper sets out the remedy to reversing this trend - a vital adjunct to the wider vision we articulated in The Wealth of Our Nation: Restore Britain's Economic Philosophy.1 New ideas in fast-moving growth markets need to be nurtured; productive jobs, not legal jobs, need to be rewarded; and small entrepreneurs, not faceless corporations, need to be prioritised.
In the end, our whole approach to financial regulation boils down to caveat emptor: 'let the buyer beware.' The old adage that a fool and his money are easily parted must apply if a country is to remain free and prosperous. When regulation empowers the state to step into a transaction on behalf of the buyer by treating the buyer's agent as principal, agents will leave the market in droves because it is no longer worth their while to act for clients protected by the state.
We cannot legislate to protect the fool and have a thriving capital market.
A wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.
Thomas Jefferson
Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities.
Ludwig von Mises
The priorities set out in our wider economic philosophy paper - lower taxation, reduced state intrusion, and proportionate regulation - apply with particular force to financial services.
Successive waves of anti-market participant legislation have done grave damage to market confidence, competitiveness, and growth across Britain, leading to a vicious downward spiral and prompting companies to leave our market or foreign buyers to purchase them on the cheap. A thoroughgoing restoration of our dynamic financial sector is therefore a central part of restoring Britain to prosperity.
As with tax, spending, money, and regulation more generally, a Restore Britain government would replace anti-market paternalism with limited rules that promote stability without suppressing enterprise, ownership, or the formation of capital. That is why reform of the regulatory architecture is an essential part of the Restore Britain programme to get real growth back into the economy.
Britain did not become one of the freest countries in world history by accident. Nor did we become prosperous through 'health and safety.' The basic liberties that we have enjoyed for centuries have both enabled and depended upon economic resilience. These liberties have become vulnerable now that the focus of our political economy has shifted from the pursuit of local and national self-sufficiency to the redistribution of scarcity.
Our capital markets were built on risk-taking, ownership, personal responsibility, and common law. Today in Britain these foundations have weakened, growth has collapsed, and wider financial failure looms large. Democracies throughout history have had to be financed. Ours is no different.
A pivotal date in the demise of London capital markets was 2 July, 1997. This was Gordon Brown's first Budget as Chancellor of the Exchequer under Tony Blair. Brown removed a major incentive for British pension funds to own British dividend-paying shares at a strategically important moment, abolishing their right to reclaim the tax credit attached to dividends from companies based in the United Kingdom.
This immediately reduced the income that pension schemes received from British shares. It accelerated pension funds' movement away from British equities to foreign shares and weakened a central source of demand for British equities. It could be described as the first domino in the exodus of capital from Britain.
Brown also sponsored the Financial Services and Markets Act 2000 (FSMA 2000). This marked the beginning of yet another disastrous shift. In short, we moved from a financial services system governed by personal responsibility and common law practices dominated by the private sector to a prescriptive rules-based regime placing the state between client and agent at every turn.
Regulation has become preventative, paternalistic, and focused on avoiding embarrassment. This approach has caused a long-running retreat of innovative ventures from London capital markets, all while failing to stop fraudulent activity in any case.
The FSMA 2000 created the Financial Services Authority (FSA) as a single super-regulator. It was sold as a sensible rules-based settlement that would deliver four outcomes via regulatory oversight: market confidence, public awareness, consumer protection, and the repression of financial crime. Yet over the last three decades, none of these aims has been achieved. Instead, we have witnessed repeated fraudulent or abusive failures.
FSMA 2000 regulation and subsequent updates have done nothing to prevent serious drops in market confidence courtesy of failures like Northern Rock (2007), the bank bailouts of 2008-09 or indeed later ruptures like the gilt/LDI spiral (2022) that required the intervention of the Bank of England.
As for public awareness, if anything the complexity of our financial system has intensified. Major retail scandals (PPI, 'mini-bonds,' UCITS-type promotions)
show that disclosure documents and rulebooks did not aid public understanding; consumers typically learned of risks they had taken on only after losses became apparent. Disclosure requirements multiplied paperwork while doing little to improve public understanding.
Consumers were no better protected by increased regulation. Large-scale mis-selling and fraudulence persisted inside regulated firms for years after warning signs, most starkly in the case of PPI (1990s-2010s), which ultimately led to tens of billions in redress despite prolonged supervisory engagement. 'Perimeter games' flourished with regulatory adaptation by fraudsters. Credit and investment-like risk increasingly moved into products and distribution channels that sat at the edge of the official rules, from Buy-Now-Pay-Later initiatives to more recently social-media 'finfluencer' (financial influencers) promotions, highlighting the inability of the turgid handbook to keep pace with the dynamism of financial innovation.
Last of all, no meaningful repression of crime within the world of finance has taken effect. Major frauds and manipulations have not been deterred: benchmark manipulation (LIBOR, revealed 2012), repeated investment scams sold through authorised intermediaries, and serial collapses where the perimeter itself became a weapon (e.g., products structured 'outside regulation' while using regulated marketing routes). The official 'authorised' label repeatedly became a marketing weapon. Firms and promoters used regulatory status to imply safety.
Over the last 30 years, Britain's financial sector has experienced a whole series of failures and even frauds that increased regulation, conspicuously enough, did nothing to stop.
1990s-2010s: PPI mis-selling. A mass retail product was aggressively and often unsuitably sold as an add-on; the regulator ran thematic work from 2005 onwards, yet the harm persisted and later required industry-wide redress on an historic scale.
2007: Northern Rock. The first bank run in Britain in over a century happened under the FSMA architecture. 'Market confidence' failed at the first systemic stress test; the credibility of the system depended on emergency liquidity and state action, not on the regulator's preventive model. In spite of sustained Parliamentary criticism, no senior individual at the FSA was formally disciplined, fined, or publicly sanctioned for the failure.
2008-09: RBS/HBOS and the banking rescues. The FSA later published a detailed review of why RBS failed. The lesson was simple: complex rulebooks and model approvals did not prevent catastrophic leverage, liquidity risk, and governance failure; losses were crystalised when confidence vanished. Fred Goodwin of RBS/NatWest was stripped of his knighthood in 2012 because of his role in the collapse and taxpayer bailout of its RBS subsidiary during the 2008 financial crisis.
2009: Arch Cru funds suspended. Funds were suspended over liquidity and asset quality concerns; investors later alleged mis-selling and poor disclosure. This shows 'consumer protection' did not prevent unsuitable distribution of complex, illiquid exposures packaged as moderate risk.
2012: LIBOR manipulation revealed. A global benchmark was manipulated by trusted employees at contributor banks who were exchanging information to protect their positions and fund their bonuses. Regulation did not detect it early; and when it surfaced, the response was after-the-fact enforcement.
2014-19: London Capital & Finance (LCF) 'mini-bonds.' A mass retail failure left thousands of investors exposed; an independent review concluded that the regulator did not effectively supervise and regulate the firm in the relevant period. The perimeter/authorisation distinction was exploited and became a trap: the product was largely unregulated, but marketing routes and consumer expectations, particularly after the event, were not.
2018: Carillion collapse. Extensive governance codes, audit processes, and disclosure obligations did not prevent a sudden failure with large creditor and pension impacts, illustrating that an overgrown rulebook is no substitute for a high-trust culture.
2018 onwards: MiFID II, the second iteration of the EU inheritor of FSMA 2000, introduced research unbundling and related compliance burdens. Reduced paid-for research coverage of small and mid-cap British equities, thinning liquidity and price discovery, and making London listings even less attractive - an example of 'investor protection' rules that unintentionally starved growth capital. This was very important because it contributed to the failure of the London capital markets themselves.
2019: Woodford fund suspension and liquidity mismatch. A widely distributed, authorised fund structure still ended with gating and loss of access for investors, underscoring that 'regulated' status does not remove underlying liquidity and valuation risks, but merely wraps them in paperwork. According to the Financial Times, the FCA knew about the liquidity problems at Woodford as early as 2015 but did nothing.
2021: Collapse of Greensill Capital. The failure of the London-based supply-chain-finance company highlighted gaps in the regulatory perimeter, as significant parts of its business operated outside direct financial regulation. It also exposed the risks created when non-bank financial activities are closely connected to regulated firms, investors, and government-backed schemes.
2022: The gilt/LDI spiral. A market plumbing crisis, not a traditional fraud, still exposed the same regulatory weakness: leverage and liquidity mismatch outside classic banking required Bank of England purchases to restore orderly conditions, showing that 'confidence' is ultimately a function of credible backstops, not compliance processes.
These cases show a consistent pattern whereby risk and fraud migrate around a regulatory perimeter faster than rules can be updated. Once the mismatch becomes unsustainable, confidence has to be restored by emergency intervention that embarrasses the regulator yet also emboldens them to demand more powers. In all of these episodes, the common feature is misplaced faith in the wisdom of faceless bureaucrats.
Financial services regulators have, in part, avoided sustained scrutiny because enforcement action can divert a firm from its business for prolonged periods and impose substantial costs. Faced with this disruption, many firms, particularly larger organisations, choose to settle so that they can return their focus to ordinary operations. Although commercially understandable, such settlements may leave regulatory decisions largely untested.
Challenges have therefore tended to come from individuals whose reputations have been damaged, while firms themselves have often lacked the incentive to contest the regulator's approach. This limited scrutiny has arguably allowed regulators to extend their reach into areas where their authority should have been questioned. In recent years, the FCA has expanded into an area they call 'non-financial misconduct' - an area entirely outside of their remit.
In disputes between regulators and firms, particularly those resolved by settlement, individuals may suffer serious collateral damage to their professional reputations. They can be left with little practical opportunity to defend themselves yet may find their future employment prospects restricted.
Reputation matters in every profession, but in financial services the consequences can be especially acute: action or threatened action by the FCA can effectively bring an individual's career to an end.
Following widespread criticism of the FSA's performance during the 2007-2008 global financial crisis, the FSA was abolished and replaced in 2013 by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). After the financial crisis, policymakers concluded that the 'one regulator' model had significant weaknesses. Of the FSA, a failure to identify systemic banking risks for not preventing the collapse or near-collapse of major British banks such as Northern Rock, the Royal Bank of Scotland, and HBOS.
Critics claimed that the FSA focussed too heavily on detailed compliance rules and not enough on the broader financial stability best pursued by close attention to capital, liquidity, and risk controls. The financial crisis served to expose the FSA's failure to supervise bank leverage, liquidity risks, complex financial products, and other such systemic risks.
The government decided that there had been an unclear division of responsibilities among a number of authorities - the FSA, the Bank of England, and HM Treasury - and that this state of affairs was partly to blame. This tripartite system was criticised for poor coordination during the crisis. The truth is that neither the government nor the regulators knew what they were doing: they replaced it by deciding to adopt a 'twin peaks' regulatory model, separating conduct regulation and prudential supervision, with the Bank of England taking a more central role in overseeing systemic risk. Nothing much changed other than superfluous wording and expensive rebranding, so the scandals kept rolling as if nothing had happened.
All the same, Britain's two main financial regulators cost roughly £1.1-£1.2 billion per year at present. The Financial Conduct Authority (FCA) enjoys about £789 million and the PRA about £343 million in annual funding. The bill is paid not by general taxation, but by the financial services industry itself.
When Britain was a member of the European Union (EU), EU law had primacy over national law, courtesy of the European Communities Act 1972. This applied as much to financial services as to other fields of life.
Given London's recognised position as the financial capital of Europe, the EU had largely copied FSMA to produce their MiFID Markets in Financial Instruments Directive regulation in 2007 and went even further than FSMA 2000 with it, a practice of overdoing required regulation known as 'gold plating.' That meant FSMA provisions were overridden or modified by EU directives and regulations and returned to member states and enforced by our own domestic FSA and FCA handbooks. There were relatively small, by Anglo-Saxon standards, equity markets in Europe, so some felt that moves by Brussels against more widely established equity investors and investment in Britain was a deliberate commercial move aimed at stifling natural competition.
All told, EU interference added both to complexity and to costs. Burdensome requirements - still retained in our domestic system of rules post-Brexit - like the Markets in Financial Instruments Directive (MiFID I) and the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation raised reporting and distribution burdens, encouraged an even more wasteful compliance culture, and reduced retail access and product choice.
The EU's regulatory harmonisation effort was launched in the name of investor protection and market stability, but for retail equity investors in Britain, it had the opposite effect: reduced choice, higher costs, and more barriers to investing. For companies trading on markets that needed investors to take risk and buy their equity, this was disastrous. Private investors at the time groaned at the endless paperwork they received from their brokers. This is an example of the EU positioning itself between retail investors and the market.
Political choices made by recent governments are responsible for the decline of high finance in the country that invented it. In particular, the Conservatives failed to identify the damage that had been done. Such is the complexity of regulation in financial services that, over recent years, Parliament has lacked the expertise and experience to question what regulators are up to.
Regulation has not only failed to ensure honest dealing, but it has also succeeded in suppressing economic growth. Stock market capitalisation is a critical growth indicator. Britain has stalled in comparison with the United States over the last few decades.
This may be illustrated by a metric for gauging success known as the 'Buffett Indicator': a ratio of market capitalisation over GDP for high-level comparisons between countries' financial health. Warren Buffett developed it in order to assess the attractiveness of a market in terms of overall value.
In our own case, the metric tells a story of decline and fall (see Figure 2 on page 15). It also more or less entirely mirrors the economic stagnation reflected in nominal GDP statistics (see Figure 1 below).
In 1999, at the height of the dot-com boom in London, Britain's stock-market capitalisation stood at around 170-175% of GDP - a rate higher even than that of the United States at the time. It had fallen to ~97.5% of GDP by 2023. Market capitalisation in the United States, meanwhile, is now hovering at around 225% an extraordinary divergence.
Earlier this year, total U.S. equity market value exceeded $69 trillion. Why has London suffered such a resounding fall-off while New York has continued to soar?
The American financial sector's remarkable success in recent years is driven largely by tech stocks, but why are none of them conducting their Initial Public Offering (IPO) in Britain?
An example is Arm Holdings plc. Despite being founded in Cambridge and long treated as a British crown jewel, Arm chose to stage its IPO in the United States. Arm's CEO Rene Haas stated:
' After engagement with the British Government and the [Financial Conduct Authority] over several months, SoftBank and Arm have determined that pursuing a US-only listing of Arm in 2023 is the best path forward for the company and its stakeholders. '2
When our own listing body UKLA - itself housed within the FCA, despite having been housed in the London Stock Exchange before 2000 - imposes heavier demands on prospective stocklisters than are imposed in the United States, the outcome is predictable: our growth firms list elsewhere and British investors are cut out of owning them. And the British economy does not benefit in the same way.
By contrast, a standout example of a stock with deep liquidity is Apple Inc. in the United States. Apple is now so large that its market capitalisation is roughly comparable to our entire equity market. Current estimates put Apple's value at around $4.4 trillion (about £3.1 trillion). Apple had a market capitalisation in 1999 that fluctuated roughly between $5 billion and $16 billion. A single U.S. technology company now rivals one of the world's oldest national equity markets in aggregate value.
The total value of companies listed on the London Stock Exchange this year, meanwhile, is generally estimated at around $3-4 trillion depending on exchange rates and whether only domestic companies or international secondary listings as well are included.
Apple shares are among the most liquid financial instruments in the world. Daily trading volume is enormous - typically 50-70 million shares per day on Nasdaq. At current prices, that translates into roughly $15-20+ billion of stock traded daily.
Bid-offer spreads are usually only 1-2 cents, meaning investors can transact with minimal friction.
Institutional ownership is very deep too, with pension funds, ETFs, sovereign wealth funds, and hedge funds all active in the stock. Apple is heavily represented in passive index funds such as the S&P 500 and Nasdaq 100, which creates constant two-way trading flow.
In practical terms, a fund manager can buy or sell hundreds of millions of dollars of Apple stock very quickly without materially moving the price - something impossible in most UK-listed shares.
Apple demonstrates a liquid market, where many participants trade continuously, bids and offers are close together, information is rapidly incorporated into prices, and a quoted market price is generally accepted as a fair approximation of value.
By way of contrast, a stock market deprived of liquidity is one in which there are too few willing buyers and sellers, too little trading volume, or too little confidence for securities to change hands smoothly at prices close to their underlying value. In such a market, the price discovery mechanism breaks down. This has happened in the London market.
In simple terms, our failure relative to the United States stems from the fact that financial regulation in Britain has removed the essential and misunderstood risk component of 'Buyer Beware' from investors, which has gradually scared off market participants and destroyed confidence over many years.
If very few trades occur, the last traded price may be stale or somewhat random. A share quoted at £5 may simply reflect the last small transaction days or weeks ago rather than a demand-driven valuation. Buyers may only offer £3 while sellers demand £7. Since no transaction occurs, there is no meaningful equilibrium price. The quoted 'market price' becomes largely nominal. When investors urgently need cash during crises, they may sell at any available bid. Prices then reflect desperation rather than value.
Even if a company is fundamentally sound, there may not be enough capital or confidence in the market to move the share price towards fair value. The result is that the stock exchange no longer performs its central economic function: discovering a reliable market-clearing price through active competition among informed traders.
So, the London market exhibits all the characteristics of failure:
A Restore Britain government would repeal large parts of the FSMA 2000 and replace non-systemic aspects of regulation with an upgraded version of the Financial Services Act 1986 (FSA 1986, not to be confused with the Financial Services Authority), restoring a more decentralised, industry-led approach to allow investment and growth to flourish as it once did.
FSA 1986 established a self-regulatory system, relying on organisations like the Securities and Investments Board (SIB) and self-regulating organisations (SROs). Its virtues consisted not only in the fact that it promoted regulation by those with direct experience in financial markets, but in the fact that it decentralised the entire regulatory process: multiple SROs allowed for tailored supervision and waste-destroying innovation.
This upgraded FSA 1986 would restore industry expertise and flexibility, provide robust consumer education in the form of 'Buyer Beware,' and ensure that systemic risks are monitored and managed without unnecessary state micromanagement.
All told, we would replace thousands of pages of rules and guidance with four simple enforceable duties:
Conflicts will exist. They may not be concealed; they must be managed within firms and their own disciplinary structures.
Every client is told clearly:
Every transaction between firms, agents, clients, and counterparties must disclose:
Firms will be required to identify their client. At the moment, they tend to do this by matching photographic ID with proof of address, but the process is accompanied by a number of more paternalistic requirements related to a client's risk-taking appetite as well. Companies should of course be free, but not obligated, to jump through these hoops. Clients must take responsibility for themselves, not rely on the state to intervene between them and their service providers.
Repeal large parts of FSMA 2000 and abolish the FCA and PRA where systemic risk is absent.
For:
The FCA and PRA will be replaced by:
Banking and systemic risk and infrastructure compliance would be overseen exclusively by the Bank of England, as before. The great advantage here is that the Bank of England enjoys a bird's eye view of the entire system, bears the costs of crises, and operates lender-of-last-resort facilities.
The simplified system of rules that we would implement will apply to all firms and be conducted by SROs.
Synaptic reporting will exist only where collective or systemic risk exists or is demanded internationally. It is best delivered by self-regulating industry associations, specific markets funded by participants, or indeed the Bank of England wherever banking systemic risk applies.
These bodies, where required, aggregate anonymised data, receive information and flag system-level risks, and demand the maintenance of orderly failure frameworks.
They do not approve products, judge suitability, or guarantee outcomes. What we need is shared sight, not shared control. We recognise, of course, that some information must be held in common. But we reject state micromanagement.
A nation that refuses to trust its people with risk cannot expect them to create wealth.
Our aim is to revive British public markets, attract growth firms back to London capital markets, re-engage retail investors, reallocate capital to productive enterprise, and restore some measure of public trust in politics through economic growth.
The decline of high finance in the country that invented it was a choice. So can our renewal be.
1. See The Wealth of Our Nation: Restore Britain's Economic Philosophy, Restore Britain (2026). ↩
2. See Arm opts for New York stock listing in blow to London, BBC News, 3 March, 2023. ↩