Treasury’s veto ambitions just serve to rile City regulators
Does the Government have the appetite to defy technocrats over ‘call-in’ power, asks
Rishi Sunak and Liz Truss agreed on very little during the Tory leadership election, but they at least found common ground on one issue: a regulatory call-in power.
Proposed by Sunak in the dying weeks of his time in the Treasury, the mechanism would allow ministers to have an ultimate veto over decisions taken by the City watchdog and the Bank of England’s Prudential Regulation Authority (PRA).
Despite the potential consequences of such a move, the reaction over the summer was muted.
Andrew Bailey, the Governor of the Bank, is understood to have privately expressed his disapproval in meetings with Sunak. But considering Truss was mulling a review of Threadneedle Street’s mandate and briefing that she might merge the City’s three main watchdogs, regulators had bigger battles to fight.
Now, after the Bank and the wider regulatory ecosystem were forced to step in to avoid a financial meltdown in the wake of Truss’s mini-Budget, the technocrats have their tails up and have come out swinging.
Last week, Richard Lloyd, interim chairman of the Financial Conduct Authority, did not mince his words in denouncing the proposed call-in power in front of the Treasury committee. He said: “Even if it’s used very sparingly … the perception that comes with the ability of ministers to direct independent regulators will go to undermining our independence. We have been very clear to ministers that this is of great concern to us.”
This came just weeks after Sam Woods, head of the PRA and a deputy governor of the Bank, used his speech at a gathering of the great and good of the Square Mile at Mansion House to publicly denounce the move.
Woods said a call-in power would harm the City of London’s competitiveness, undermine its international credibility and create a system in which “financial regulation blew much more with the political wind”.
He added: “These are not features which would make the UK a more attractive place for international firms to do business in.”
For usually tight-lipped regulators who prefer to shun the limelight than attract it, these interventions represent a major escalation and highlight just how strongly they oppose the move.
Yet ministers, and critics, insist that the introduction of an “intervention power” is essential to ensure that post-Brexit regulatory reform can be pushed through amid frustration that the pace of change has been glacial since the 2016 referendum. Some even regard it as the only way the Government can save Brexit reform in the Square Mile.
Reforms to Solvency 2, the EU-era rulebook that requires insurers to hold vast sums of cash on their balance sheets, have been singled out by ministers as a particular area that has been held up by overbearing technocrats. Andrew Griffith, the City minister, has said the power would only be used “where there are matters of significant public interest”.
The proposed move has received a mixed reception in the City. Simon Morris, a financial services partner at law firm CMS, says: “The Government wants to free the UK’s financial sector from the legacy of Brussels micromanagement … it’s no surprise that this will be subject to additional public oversight.” He adds that regulators’ protestations are “difficult to swallow”. “First, the regulators currently operate under extensive statutory constraints with elaborate duties and reporting lines imposed by Parliament,” he says. “Second, the Government has repeatedly said it will maintain UK standards at the highest level to ensure the City’s soundness and integrity.”
Meanwhile, Andy Bell, founder of FTSE 250 investment platform AJ Bell, says he supports the power “in principle”, but cautions that it should be “used sparingly and not as a means to politicise City regulators, whose standing is a proxy for confidence in the UK”.
He adds: “There is a fine line between a regulator being independent and being a law unto themselves. Ultimately, the Government will be held accountable for actions taken by City regulators, so an ultimate veto doesn’t seem unreasonable. Whenever this veto is used, there will be intense scrutiny from the opposition, the media and ultimately the voting public.”
Others are less convinced about its merits. Peter Cruddas, chief executive of trading business CMC Markets and a Conservative peer, says although the current regulatory regime is not perfect, it works well and a call-in power could have unforeseen consequences.
“My concern is if the Government gets a final say over decisions made by City regulators, they could politicise regulations to suit their own political ideology,” Lord Cruddas says.
“For example, you could have Remain-supporting ministers trying to align with EU regulators to keep Britain more aligned with the EU. Putting politics before what is best for regulated businesses.”
Another City chief executive says: “Is what the Treasury is doing really necessary right now? Ultimately, the Government always has ‘call-in’ power. This is just making it explicit.”
Despite opposition to the move, the UK would not be the first country to introduce such a power. Last year, the Australian government created a mechanism that gives it similar control
‘The public spat between ministers and regulators speaks to growing tensions between the two sides’
over the country’s securities regulator. A “directions by ministers” clause allows the government to give the regulator “direction about policies it should pursue, or priorities it should follow, in performing or exercising any of its functions or powers”.
The power is qualified by a requirement for ministers to first notify the watchdog that they’re considering using it and allowing its chairman adequate opportunity to discuss the proposed direction with the minister. The power has yet to be used in Australia.
In the UK, the Government has yet to publish its amendment to the Financial Services and Markets Bill that will be required to introduce the call-in power. Regulators have yet to even get sight of a draft copy, The Sunday Telegraph understands.
While Griffith has delayed bringing the amendment forward for the time being, the very public spat between ministers and regulators speaks to growing tensions between the two sides and an increasing bolshiness on the part of the latter.
It will be up to Sunak and Jeremy Hunt, the Chancellor, to decide if they have the appetite to flex their political muscles, or whether they will cave to the pressure being exerted by the City’s technocrats.