The independence of the UK’s financial regulators is widely regarded as one of London’s attractions as a financial centre. The idea of the government allowing ministers to overrule regulatory decisions has therefore made many commentators uncomfortable.
Among regulators, it sparked a fierce pushback led by Bank of England Governor Andrew Bailey, who prompted the government to abandon the proposed Financial Markets and Services Act.
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. However, the bill includes the Treasury’s power 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 not surprising that Bailey is concerned about political intervention, as he was under concerted pressure from ministers when he was head of the Financial Conduct Authority.
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An example we know is the regulation of peer-to-peer lending. A cache of internal emails released as part of an unfair dismissal case reveals that years before problems emerged in the sector, leading to huge losses for investors, FCA officials had serious concerns about the risk to savers
However, the FCA took a long time to take any action. Some of the emails suggest the FCA felt under pressure from Chancellor George Osborne and Treasury officials not to stand in the way of 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 businesses. .
Former FCA officials say Bailey shared his officials’ concerns. But critics suggest he did not want to stand up to the chancellor and possibly jeopardize his chances of becoming governor of the Bank.
There has been somewhat more open pressure on the FCA over cryptocurrency regulation. Ministers have made clear their frustration with what they see as the regulator’s overcautiousness in authorizing companies to conduct crypto business.
In April, then-Chancellor Rishi Sunak announced the government’s ambition to make the UK a “global hub” for the crypto industry. As revealed by FN, this comes two months after crypto investor and lobbyist Christopher Harborne donated £500,000 to the Conservative Party.
Ministers have also been quite open about their exasperation with the Banking Prudential Regulation Authority over reforms to the Solvency II capital regime for insurance companies. The government is keen to change legacy EU rules. He believes doing so would allow insurance companies to invest more in UK infrastructure and other long-term assets. But the PRA, concerned to protect policyholders, is proposing other changes that the industry says would largely negate the impact.
The Solvency II argument appears to have been one of the drivers behind the proposal to give the government power to “call in” regulatory decisions. And to be fair to the government, it is a good example of why some kind of open debate between ministers and regulators is desirable.
It seems reasonable that the government would take a different view than the regulators on an issue like this when looking at the overall balance of the country’s interests. Although financial regulators have (controversially) a secondary objective of facilitating growth and competitiveness, their primary objective will remain financial stability and consumer protection. So you can imagine circumstances in which ministers might conclude that regulators were getting that balance wrong.
However, allowing the government to override regulators outright is probably going too far in terms of potential damage to regulatory independence. If the government’s case is strong enough, it should be able to convince an independent reviewer (especially one approved by the Treasury). But transparency is key, which is why it is unfortunate that the bill allows for a request for a review to be kept secret if the Treasury “considers that publication of the direction would be contrary to the public interest”.
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The review power, which would only be used in “exceptional circumstances”, was generally welcomed in last year’s consultation, according to the Treasury. But some respondents rightly argued that more steps were needed to make regulators more accountable, given the increased powers they will get after Brexit. If the Treasury can trigger reviews, why not businesses or consumer groups?
As for government intervention, skeptics can say that behind the scenes, the pressure will continue with the new powers given to the Treasury. May be.
There is no way to end political interference: the problems are too big. The aim should be to make this more transparent and supported by adequate evidence as part of a wider improvement in the accountability of regulators.
To contact the author of this story with comments or news, please email David Wighton
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