The Leeds Reforms: Why financial deregulation feels like déjà vu all over again

Chancellor Rachel Reeves' Leeds Reforms promise to boost growth by cutting financial red tape and encouraging investment. But scratch beneath the surface of these "widest reforms in a decade", and a familiar pattern emerges: pension funds pressured into expensive private equity, consumer protections quietly eroded, and banking safeguards dismantled. It's regulatory amnesia in action — and ordinary savers will pay the price when the next crisis hits.

The phone call comes on a Thursday afternoon. Your bank's "investment specialist" has noticed you've got £15,000 sitting in a current account earning virtually nothing. Would you like to hear about some exciting opportunities to put that money to work? They mention private equity funds, alternative investments, and something called Long-Term Asset Funds that will soon be available in your ISA. The returns could be fantastic, they say. Much better than leaving it in cash.

Sound familiar? If not yet, it probably will soon.

Welcome to the new world of "targeted support" (one strand of Chancellor Rachel Reeves' Leeds Reforms, announced yesterday as "the widest set of reforms to financial services for more than a decade." Banks will now be allowed to actively pitch investment products to customers with cash balances, supposedly helping the millions of Britons who keep money in low-interest accounts when they could be investing in stocks and shares.

On the surface, this makes sense. The UK does have the lowest retail investment rates in the G7. Too many people do keep too much money in cash, missing out on the long-term benefits of equity investment. As James Carter from Fidelity International rightly notes, we need to move from simply warning people about investment risks to actually informing them about how risk and return work over time.

But look beyond the surface, and a more troubling picture emerges.

The return of regulatory amnesia

What we're witnessing isn't just policy reform: it's a textbook case of what I call "regulatory amnesia." This is our collective tendency to forget why rules were put in place once the immediate crisis fades. It's the same psychological pattern that sees us promise to eat better after food poisoning, only to find ourselves back at the dodgy takeaway six months later.

The Leeds Reforms represent the latest swing of a pendulum that's been oscillating for decades: light regulation leads to crisis, crisis leads to tighter rules, tighter rules lead to calls for "red tape cutting," which leads back to light regulation. Rinse and repeat.

Modern financial services regulation is, as consumer advocate James Daley from Fairer Finance points out, less than 25 years old. When the Financial Services Authority was established, "the industry was awash with mis-selling scandals and bad practice." We implemented stronger rules not because bureaucrats enjoy paperwork, but because consumers were being systematically ripped off.

Yet here we are, barely 17 years after 2008, already talking about rolling back the protections that were designed to prevent another disaster.

The Leeds Reforms: five causes for concern

The Leeds Reforms contain much that sounds sensible. Encouraging retail investment over cash hoarding makes economic sense. Reviewing risk warnings to make them more informative rather than merely frightening has genuine merit. But dig deeper into the package, and five serious concerns emerge:

Private equity pressure: Pension schemes are being pushed to invest 10% of portfolios in expensive, illiquid private markets that deliver similar returns to simple index funds but with vastly higher costs.

Consumer protection erosion: The Financial Ombudsman Service will see compensation rates slashed from 8% to 1% plus base rate, while other protections are systematically weakened.

Banking deregulation: Ring-fencing rules that separate retail deposits from investment banking risks are being "reformed," despite warnings from the Bank of England Governor.

Political pressure on regulators: Key regulatory figures are being displaced while watchdogs are warned to prioritise growth over protection, undermining their independence.

Housing debt risks: Relaxed mortgage rules will allow lending at higher income multiples, likely inflating house prices while saddling buyers with unsustainable debt.

Let's examine the three biggest risks in detail.

The private equity mirage

The most significant danger lies in the government's relentless drive to funnel pension money into private equity. Under the Mansion House Accord, pension providers managing 90% of active savers have pledged to invest 10% of portfolios in private markets by 2030, unlocking £74 billion for these investments.

The government's pitch is seductive: support UK infrastructure, drive innovation, deliver better returns. But here's the inconvenient truth: pension consultants know that over the long term, private equity returns are no better than those from simple, low-cost index funds. Once you account for fees, illiquidity, and risk, private equity's supposed advantages evaporate.

What private equity definitively adds is cost and complexity. Fee structures involving management fees, performance fees, and transaction costs can eat 3-4% annually. Try explaining that to someone approaching retirement who discovers they can't access their pension because it's locked up in a renewable energy project.

Andy Agathangelou from the Transparency Task Force captures the concern: "We are genuinely concerned that if deregulation leads to a watering down of hard fought and won consumer protections then this could lead to numerous unintended consequences."

Consumer protection: death by a thousand cuts

The changes to consumer protection may sound technical, but they represent a fundamental shift in whose interests the system serves. The Financial Ombudsman Service will be "returned to its original purpose" rather than acting as a "quasi-regulator." In practice: compensation slashed and decisions aligned with industry-friendly FCA rules.

Fairer Finance warns these changes "signal to consumers that the government stands ready to peel back the protections that were built for them." The Senior Managers regime will be "radically streamlined." Consumer Duty rules will be reviewed to reduce their impact. Even voluntary standards are disappearing: the Lending Standards Board recently closed after banks withdrew funding.

Individually, these changes seem minor. Together, they signal that the pressure is off.

Housing debt: trying to cure a fever by smashing the thermometer

The housing reforms reveal how the government mistakes symptoms for causes. Faced with lack of affordability, the response isn't tackling supply constraints but making it easier to borrow larger amounts.

The Bank of England will allow more lending at over 4.5 times income. A permanent Mortgage Guarantee Scheme will ensure high loan-to-value mortgages remain available.

As Positive Money warns: "loosening mortgage rules really translates to saddling households with larger, less sustainable debts, instead of tackling the underlying causes of unaffordability."

We've seen this before. When you make it easier for buyers to borrow more, sellers simply raise prices. The buyer stretching from £300,000 to £350,000 finds everyone else can do the same. House prices rise, affordability hasn't improved, but buyers carry more debt relative to income.

One of the Leeds Reforms actually makes sense

Amid these concerns, there's one area where the Leeds Reforms deserve support: reviewing risk warnings on investment products. James Carter from Fidelity makes the case persuasively: "We believe that risk warnings need reform to focus on informing, not just warning. This means empowering consumers by explaining what different types of risk mean."

The current approach (plastering "Capital at Risk" warnings on everything from diversified index funds to cryptocurrency) treats all investment risk as equivalent. It's like putting the same health warning on wine and bleach.

Carter's research shows "traditional risk warnings can put off some people from investing, but when explained in more balanced terms customers, especially women, felt more engaged." There's a crucial difference between informing people about risk and frightening them away from sensible long-term investing.

This reform deserves support because it serves consumers' interests. The tragedy is that it's bundled with changes that do precisely the opposite.

Three frameworks for thinking about financial reform

When politicians promise to cut red tape and boost growth, how do you separate genuine improvements from dangerous deregulation?

The Private Equity Paradox

Any investment promising higher returns while adding costs, reducing liquidity, and increasing complexity is probably too good to be true. Your pension fund's private equity allocation isn't funding the next Google. It's buying the same companies you could access through public markets, just with more fees and less transparency.

If someone can't explain why their investment justifies 3% annual charges when an index fund costs 0.1%, they probably can't explain it because there isn't a good reason.

The Regulatory Ratchet

Financial regulation is like a ratchet: easy to loosen, incredibly difficult to tighten. Once you remove protection, restoring it requires another crisis. Ring-fencing was introduced after taxpayers bailed out banks that used retail deposits for investment banking losses.

Removing it won't cause problems tomorrow, but when the next crisis hits, those deposits will be at risk again.

The ratchet principle suggests extreme caution about removing regulations that work. It's easier to carry an umbrella than build one mid-thunderstorm.

The Growth vs Protection false choice

The most pernicious myth is that consumer protection and economic growth are fundamentally opposed. Strong protections create the trust that makes markets function effectively. Countries with the strongest consumer protections (Germany, Netherlands) also tend to have the most successful financial sectors. This isn't coincidence; it's cause and effect.

Politicians framing this as either-or are usually preparing to sacrifice long-term stability for short-term political gains.

Protect yourself as the Leeds Reforms roll out

These practical steps can help shield you from the unintended consequences of deregulation:

1. Audit your pension's private equity exposure

Request your pension scheme's annual report. Look for "alternative investments," "private equity," or "illiquid assets." If allocations are increasing, find out what fees you're paying. Many workplace schemes offer simpler, lower-cost options.

If told private equity is "essential for diversification," ask for evidence. Request performance data after all fees compared to index funds. If they can't provide clear answers, that's a red flag.

2. Prepare for investment sales calls

When banks offer "targeted support," remember they're now allowed to sell, not just inform. Prepare three questions: What are the total costs? Can I exit easily? What evidence shows this outperforms low-cost index funds over 20 years?

If they can't answer clearly and immediately, end the conversation.

3. Use the Financial Ombudsman while it has teeth

If you have disputes with financial companies, escalate sooner rather than later. The reforms will reduce compensation rates significantly. Document everything meticulously. The weakened service will likely be more bureaucratic and less generous.

4. Be cautious about mortgage borrowing

Resist borrowing at maximum multiples. Just because banks will lend 5.5 times income doesn't mean you should take it. Consider what happens if rates rise 2-3 percentage points. If you couldn't afford payments, you're borrowing too much.

5. Diversify your banking relationships

As ring-fencing weakens, spread relationships across multiple institutions. Don't keep all savings with the same bank handling your mortgage. Consider smaller building societies or credit unions for some savings. They're often more conservative and less likely to gamble with deposits.

Join the conversation before it's too late

Consumer groups have been "tied up in working groups," given just enough hope of small wins to prevent serious opposition to broader deregulation. But you don't have to be passive.

Raise pension concerns at your workplace. Complain formally about aggressive sales tactics. Make your voice heard politically. The government's narrative only holds if people accept that growth requires sacrificing protection.

Financial regulation might seem technical, but when systems fail, ordinary people pay the price. The Leeds Reforms bet that we've learned from past mistakes and won't repeat them.

History suggests that's a bet we can't afford to make.

The choice is clear: either accept deregulation as the price of growth, or demand an explanation for why countries with stronger consumer protections enjoy both stability and prosperity. The financial services industry will always prefer fewer rules. That's natural. But we don't have to make it easy for them.