UK Faces Growing Security Risk as Financial System Seen as National Weak Link

Britain’s national security is under fresh scrutiny following stark warnings from Nikhil Rathi, head of the Financial Conduct Authority, who highlighted critical vulnerabilities stemming from the country’s failure to prioritise finance within its defence strategy. Addressing City leaders at Mansion House, Rathi contended that the United Kingdom is ill prepared for the evolving nature of modern threats, particularly cyberattacks and the broader implications of contemporary conflict for businesses and markets.

Rathi emphasised that the burden of national security can no longer be shouldered by government alone, noting the pressing realities of fiscal constraints and volatile bond markets. He advised that the financial sector—which has a fundamental role in the insurance, investment, and construction of vital assets—should be considered just as crucial to national defence as any military base or arsenal.

Highlighting a wide gap in preparedness, Rathi suggested that it is both outdated and hazardous to keep finance and security as separate concerns. Addressing any misconceptions, he pointed out that no element of the FCA’s sustainability framework prohibits investment in defence. He referenced the damaging cyberattack on Jaguar Land Rover, which recently exposed a major gap in protection after it was revealed that the company had not finalised a cyber insurance policy prior to the attack.

The regulator observed that only a small fraction of catastrophe and cyber risks are currently insured globally—a situation he characterised as significant underinsurance. Rathi also spotlighted an investment gap in British data security and cyber protection, sectors he described as lucrative growth markets. He challenged domestic investors and lenders to energise British capability and not leave the rewards of these market opportunities to international capital.

Growing concerns about European security have become more acute since the Russian invasion of Ukraine, with fears mounting about the continent’s capacity to defend itself in the current geopolitical climate. The focus, Rathi argued, must shift to funding and securing critical infrastructure—such as data centres, payment networks, cloud computing, and satellites—much of which is in private hands. Britains defensive posture remains too narrow by neglecting these vital civilian assets, leaving them underfunded and underprotected.

Meanwhile, Sam Woods of the Prudential Regulation Authority used the same venue to warn against commercial banks’ campaigns to loosen leverage rules, arguing that allowing institutions to exclude government bonds from leverage ratio calculations would represent a dangerous departure from prudent risk management. Such a move, Woods contended, would remove significant sovereign risk from capital frameworks and could facilitate a dramatic rise in bank leverage, risking broader systemic instability.

These debates come as UK authorities continue to reassess capital requirements for the nation’s largest financial institutions. The intersection of finance and national security has seldom been more relevant or contentious.