The independence of the UK’s financial regulators is widely seen as one of the attractions of London as a financial center. So the government’s idea of allowing ministers to overrule regulatory decisions has made many commentators uneasy.
Among regulators, it triggered a fierce pushback led by the Bank of England’s governor Andrew Bailey that prompted the government to drop the proposal from the Financial Services and Markets Bill.
Chancellor Nadhim Zahawi said in his Mansion House speech on July 19 that he wanted more time to consider all the arguments before making a decision. Yet the bill does include a power for the Treasury to force regulators to get an independent review of rules it doesn’t like, which some experts say should get most of what it wants anyway.
It is hardly surprising that Bailey is worried about political intervention, as he was on the receiving end of concerted pressure from ministers when he was head of the Financial Conduct Authority.
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One example we know about concerns the regulation of peer-to-peer lending. A cache of internal emails released as part of an unfair dismissal case reveal that years before problems emerged in the sector, leading to big losses for investors, FCA officials had serious concerns about the risk to savers.
Yet the FCA was very slow to take any action. Some of the emails suggest that the FCA felt under pressure from Chancellor George Osborne and Treasury officials not to hamper the development of peer-to-peer lending, which was seen as offering healthy competition to traditional banks and a potential source of funding for small companies .
Former FCA officials say that Bailey shared the concerns of his officials. But critics suggest he was loath to oppose the chancellor and possibly jeopardize his chances of becoming governor of the Bank.
There has been somewhat more overt pressure on the FCA over the regulation of cryptocurrencies. Ministers have made clear their frustration at what they see as the regulator’s excessive caution over authorizing firms to carry out crypto business.
In April, then-Chancellor Rishi Sunak announced the government’s ambition to turn the UK into a “global hub” for the crypto industry. As FN revealed, this came two months after crypto investor and lobbyist Christopher Harborne donated £500,000 to the Conservative Party.
Ministers have also been fairly open about their exasperation at the Bank’s Prudential Regulation Authority over reforms to the Solvency II capital regime for insurance companies. The government is keen to change the rules inherited from the EU. It believes doing so would allow insurance companies to invest more in UK infrastructure and other long-term assets. But the PRA, worried about protecting policyholders, is proposing other changes that the industry says would largely negate the impact.
The argument over Solvency II seems to have been one of the drivers behind the proposal to give the government the power to “call in” regulatory decisions. And to be fair to the government, it is a good example of why some sort of open debate between ministers and regulators is desirable.
It seems reasonable for the government to take a different view from regulators on an issue such as this when looking at the overall balance of the country’s interests. Even though financial regulators are (controversially) being given a secondary objective to facilitate growth and competitiveness, their primary objective will still be financial stability and consumer protection. So you can imagine circumstances where ministers might conclude that regulators were getting that balance wrong.
However, allowing the government to overrule regulators directly is probably going too far in terms of the potential damage to regulatory independence. If the government’s case is strong enough, it should be able to convince an independent reviewer (particularly one approved by the Treasury). But transparency is key, which is why it is unfortunate that the bill would allow a demand for a review to be kept secret if the Treasury “considers publication of the direction would be against the public interest”.
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The review power, which would be used only in “exceptional circumstances”, was generally welcomed in last year’s consultation, according to the Treasury. But some respondents rightly argued that further steps were needed to make regulators more accountable, given the increased powers they will get post-Brexit. If the Treasury can trigger reviews, why not firms or consumer groups?
In terms of government intervention, skeptics may say that behind the scenes, pressure will continue whatever new powers are given to the Treasury. Perhaps.
There is no way to end political interference — the issues are too important. The aim should be to make it more transparent and supported by proper evidence as part of a broader improvement in the accountability of regulators.
To contact the author of this story with feedback or news, email David Wighton