Why the UK’s regulatory system is an expensive farce

Accountants, lawyers and financial services experts are central to the flow of dirty money.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

The UK regulatory system is an expensive farce. There is a plethora of regulatory bodies, supposedly regulating relationships between citizens and powerful economic interests and protecting people from abusive practices. Sadly, that is not the case. All too often regulators lack independence and a backbone. Conflicts of interests are endemic.

This happens with the tacit approval of the state which is primarily concerned about the welfare of big business. So much so that regulators have a secondary objective to promote growth and competitiveness of the industry that they regulate, effectively diluting the remit to protect people from harmful practices. The result is social squalor which neither promotes confidence in business nor in the institutions of government.

Examples of failures are splattered across daily newspapers. In 2017, the Grenfell fire tragedy claimed 72 lives because regulators knowingly permitted the use of flammable insulation in housebuilding. It was cheap and increased profits. There was little concern about the human consequences.

The 2024 Grenfell report noted that “there were repeated occasions on which NHBC [National House Building Council] failed to demonstrate sufficient independence and showed itself willing to accommodate the wishes of Kingspan [company that made cladding and insulation products] for commercial reasons. It also showed itself unwilling to upset its own customers and the wider construction industry by revealing the scale of the problem caused by the use of combustible insulation”.

In respect of The Building Research Establishment, the report said that much of its work was “marred by unprofessional conduct, inadequate practices, a lack of effective oversight, poor reporting and a lack of scientific rigour”. The report adds that there was a complete failure on the part of the Local Authority Building Control to ensure that the safety certificates that issued were “technically accurate”. All regulators failed and some seven years after the Grenfell tragedy almost nothing has changed.

Some 2%-5% of the world’s GDP, or around $800bn – $2trn is laundered through the banking system. The proceeds relate to crime, tax dodging, narcotics, human smuggling, terrorism, sanctions busting and more. Despite a plethora of laws, almost 40% of the world’s dirty money is laundered through the City of London and its satellites in UK Crown Dependencies. UK governments and regulators collude to cover-up criminal activities by banks. The Financial Conduct Authority (FCA) is the lead regulator but underneath that there are at least 41 other regulators.

Accountants, lawyers and financial services experts are central to the flow of dirty money. They are regulated by 25 accountancy and law trade associations, including the Faculty Office of the Archbishop of Canterbury. All 25 are outside the scope of the freedom of information laws. They are supervised by the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) housed within the FCA. Its 2018 report noted that accountancy and law trade associations are very adept at turning a Nelsonian eye. The OPBAS director said: “The accountancy sector and many smaller professional bodies focus more on representing their members rather than robustly supervising standards. Partly because they don’t believe – or don’t want to believe – that there is any money laundering in their sector. Partly because they believe that their memberships will walk if they come under scrutiny”. Little has changed since. The 2024 report said: “OPBAS has not seen any material improvement in PBSs’ [professional body supervisors] effectiveness in the core areas of supervision, risk-based approach, enforcement, and information and intelligence sharing”. Yet the charade of regulation continues.

The market of insolvency is reserved for accountants and lawyers belonging to a few select trade associations. 1,257 active insolvency practitioners (IPs) handle all UK personal and corporate bankruptcies. They are regulated by the Insolvency Service and four trade associations, which are outside the scope of the freedom of information laws. The IPs have a licence to print money and their fees run into millions of pounds. BHS liquidation started in 2016 and is yet to be finalised. Carillion began in 2018 and is yet to be finalised. The liquidation of Bank of Credit and Commerce International (BCCI) began in 1991 and was finalised in 2012. Israel-British Bank’s liquidation lasted from 1974 to 2009, and magically ended when there were no more fees to extract from the carcass of the entity. The longer the duration of an insolvency, bigger the fees for IPs and smaller the chance of any recovery for unsecured creditors, which includes employee pension schemes. As of December 2023, some 20,822 corporate insolvencies were running for more than 15 years.

No regulator examines the reasons for the prolonged delay and its impact on stakeholders. Fines levied on IPs are pocketed by the trade associations.

Ofcom permits mobile phone and internet companies to hike bills every year, even in mid-contract, by inflation + 3.9%. The claim is that this enables companies to build the new 5G infrastructure but the problem is that most customers do not receive 5G and many areas have poor signal reception. In effect, companies are raising capital from customers rather than shareholders, whilst shareholders benefit from the resulting assets and income stream. When asked to intervene, the Competition and Markets Authority said that providers must tell customers about any mid-contract price rises at the point of sale. So, exploitation continues.

Ofgem lets energy companies profiteer. British Gas increased its profits ten-fold. BP and Shell have more than doubled their profits in recent years. Since the pandemic electricity generation companies have increased their profit margins by 198%. Electricity and Gas supply companies increased their profit margins by 363%. The failure to check profiteering takes its toll on people. Around 6m people live in fuel poverty. Some 2.3m households already owe over £1,200 on average and total energy debt is over £3bn. 

The failures of Ofwat and the Environment Agency have made headlines for 35 years. Last year, water companies dumped raw sewage in rivers, lakes and seas for 3.6m hours to cause new health hazards. Over a trillion litres of water is lost each year from leaky pipes and companies have failed to make the required investment. Since privatisation Water companies have paid dividends of £85bn and funded them by borrowing nearly £70bn. Regulators do little to check abuses as revolving doors facilitate cognitive capture. 27 former Ofwat directors, managers and consultants work in the industry they helped to regulate, with about half in senior posts. Ofwat and water company directors secretly meet to develop strategies for quelling public anger. Unsurprisingly, Ofwat’s pricing formula, codenamed PR24; guarantees water companies real returns each year.

The UK has a labyrinth of regulators as successive governments appease sectional interests by letting them act as regulators. Most are ineffective. There are about 90 main regulators, but that does not include government departments and public bodies. The government puts their number at 607. A 2005 study put the number of regulators at 674, and that does not include accountancy, law and other trade associations (see above). The total is likely to be in excess of 700.

A multitude of regulatory bodies results in duplication, inconsistency, and obfuscation. In the interests of coherence and efficiency the numbers of regulators need to be consolidated. In any regulatory system there is a concern that regulators will be captured by the regulated. That is the starting point in regulation by trade associations. No trade association should be permitted to act as a public regulator.
All regulators use the rhetoric of ‘serving the public interest’ but none let the public anywhere near their operations. Regulators like the FCA use handpicked consumer panels to give impression of public involvement. None of that ever checked the sale of fraudulent financial products, money laundering or tax dodges. This needs to be replaced by stakeholders who won’t be bullied, discarded or bought and are accountable to the public.

At water, gas, electricity, rail, banks, insurance and many other sectors regular customers are known with certainty, and they should elect at least 50% of the unitary board of the regulatory body and the regulated entity. Alternatively, there can be a two-tier board (i.e. an Executive Board for day-to-day running, and a Supervisory Board) with the Supervisory Board entirely elected by stakeholders with statutory responsibility to invigilate the executive board. Customers should also vote on remuneration pay of executives of regulatory bodies and regulated entities. This gives stakeholders a power base from which to hold regulators and entities to account.

All regulatory bodies shall meet in the open. Their agenda papers, board minutes and working papers shall be available to all. At the commencement of each board meeting, each director shall state whether since the last meeting s/he has had any meeting with any regulated individual and/or entity and shall provide complete details.

The above is not a panacea but provides the first necessary first steps for strengthening regulation and democratic accountability.