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By Sean Rayment
Britain’s financial institutions are not prepared “tactically or strategically” for the way modern conflict threats could target them, it has been claimed.
The UK has left itself vulnerable to security risks by failing to put finance at the centre of its national defences, the head of the City regulator has warned.
Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), told leading financial figures at Mansion House that the UK was “not prepared, tactically or strategically” for the way modern conflict and other threats such as cyberattacks could hit companies and markets. In an unusual intervention by the regulator, Rathi called on the City to do more.
“With hard fiscal constraints and volatile bond markets, government cannot carry this responsibility alone,” he said. “The financial system, which determines how assets are insured, invested in and built, is as vital as any arsenal or base.”
Warning that it was “outdated and dangerous” to split finance from national security, Rathi stressed there was nothing in the FCA’s sustainability rules that blocked investments in defence.
He also cautioned that the recent hack on Jaguar Land Rover (JLR), which has caused chaos for the carmaker and its supply chain, had exposed a “protection gap”. It emerged last month that JLR had not finalised a cyber-insurance deal before the attack occurred.
“Globally, a fraction of catastrophe and cyber risks are insured,” Rathi said, adding that “we are potentially massively under-insuring”.
He went on to highlight an “investment gap”, urging investors and lenders to “back British capability”. Areas such as data security and cyber protection “are cash-generating growth markets,” he said, adding: “Don’t leave the rewards to overseas capital.”
The issue of security has climbed sharply up the agenda since Russia’s invasion of Ukraine in 2022. Concerns about Europe’s ability to defend itself have intensified this year amid tensions in the transatlantic alliance with the US and after drones caused disruption in European airspace.
Rathi said everything from data centres and payment networks to cloud software and satellites, assets that are mostly privately owned, were central to security, but that Britain was “defending too narrowly”, leaving “critical civilian infrastructure under-financed and under-armoured”.
He warned: “Britain will not remain secure nor competitive if we treat finance as separate from our security, and if investors treat defence as separate from growth.”
Meanwhile, Sam Woods, who heads the Bank of England’s Prudential Regulation Authority, used his own Mansion House speech to sound the alarm about a push by commercial lenders to loosen leverage rules.
UK Finance, the banking industry’s lobbying group, has called for British government bonds to be removed from the calculation of the leverage ratio, which requires lenders to hold high-quality loss-absorbing capital equal to at least 3.25 per cent of their total exposures. The United States is also reviewing whether sovereign debt should be excluded from the ratio.
Such a move would be “a profound and highly risky change”, Woods warned. Not only would it “allow a very large increase in bank leverage given the size of banks’ sovereign holdings”, but it would also “largely remove sovereign risk from the bank capital framework where banks hold such bonds in their banking books”, he said.
The warning comes as the Bank of England reassesses UK capital requirements, including a review of the leverage ratio.
