25 April 2022

Financial services regulatory reform could create a new golden age of investment in the UK’s infrastructure

By Tracy Blackwell

This country has an asset that is envied around the world – the trillions of pounds of pension savings that already exist, and that continue to be accrued, within our long-term insurance companies and pension schemes. 

Whilst successive governments have courted overseas investors like Canadian and Australian pension schemes to fund our infrastructure, Brexit gives us the opportunity to mobilise the UK’s savings, which back pensions that stretch out decades into the future, to fund our long-term infrastructure needs – social housing, renewable and nuclear energy, and urban regeneration projects. 

Long-term investors already invest considerable sums in these areas, but we now have the chance to really think again about how we can much more closely marry essential consumer protections with the considerable economic benefits and improved social outcomes that the country needs. 

In short, the life chances and financial security of millions of people up and down the country depend on the outcome of the deeply technical debate quietly raging across Whitehall, Threadneedle Street and the City at the moment, about how to reform financial services regulation. 

As an example of the type of investment I would like to see more of, my company has almost completed the re-development of a former city-centre car park in central Manchester, following a £130m investment we made in 2020. 

Once complete, we’ll have built an environmentally friendly block of 520 residential rental apartments with over 6,000 square feet of commercial space, which is a key part of the wider regeneration of Manchester’s business district. It is built to a very high specification because we will own the development for decades – the rents will be used to back our policyholders’ pensions over that period.

Over the course of the development, almost £2m a week has been injected into greater Manchester’s economy and we have created 550 jobs during the construction phase, with more than 7,000 apprentice weeks completed by the end of the project. 

I would love to see development projects like this in every region and city in the UK, a new golden age of urban regeneration and job creation, helping to pay the pensions of UK savers and creating real social value today and for future generations.

If the Government gets reform right, they open the way for tens of billions of pounds of UK savings to be channelled into similar long-term investments. My company’s planned investment of £30bn in the UK’s infrastructure this decade could increase to £50bn.

But to seize this opportunity we need system-wide thinking, rather than an almost exclusive focus by financial services regulators on protecting consumers by seeking to shut out all risk. Intuitively, minimising risk sounds like a good thing, and the financial crisis certainly showed that sufficient levels of capitalisation are important for financial stability. 

However, there is a balance. An excessively risk-averse approach to investments and trapping extremely high levels of capital within financial services companies leads to too much dead money sitting on balance sheets, investment concentration in a very narrow range of assets – particularly government gilts and the debt of very large, well-funded companies – and a higher cost of capital for financial services companies. 

This approach unintentionally creates a goldmine for investment consultants, lawyers and compliance officers. And who’s funding this goldmine? Ultimately these additional costs are paid by pension scheme clients and by the end users of the projects that do get invested in – they end up on the rents that social housing tenants pay, on renewable electricity bills, and so on. That’s without taking into account the lost life chances of those who might otherwise have benefitted from all the projects that didn’t get funded. This really is a zero-sum game.

Yet, as the Governor of the Bank of England said in a recent speech: ‘Achieving stronger and more sustainable growth in the economy will enhance the [regulator’s] primary objectives of safety and soundness and policyholder protection.’ 

This can only be done with a different regulatory view of risk which encourages capital formation and seeks to widen participation in savings and investments, both of which ultimately deliver better outcomes for consumers, end users, the economy and society. 

So one of the most important legacies of Brexit should be a change to the view of risk taken by financial regulators and to specifically include investment in the economy as a key focus for them, alongside consumer protection. 

From a regulatory perspective there is a tension here. But in my view, the decision about the right balance between consumer protection and investment in the economy is a political choice, not a technocratic one. 

Ultimately, appropriate and timely financial services reform will only be a success if the Government seizes the opportunity we have now to evolve a financial services system that is regulated on the basis of long-term, system-wide thinking, and with the creation of long-term social value at its heart – the key to levelling up communities across the country.

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Tracy Blackwell is CEO of Pension Insurance Corporation plc.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.