It is difficult to say whether the government’s recent financial services bill will do anything for the City of London given how much depends on the follow-up actions. However, it will create fireworks between regulators and the ruling Conservative party. By Justin Pugsley.
What is happening?
Overall, there were few surprises in the UK’s Financial Services and Markets Bill, which mostly tinkers around the edges of rules inherited from the EU. The most eye-catching measures involve relaxing Solvency II so insurers can invest in infrastructure and the removal of the share trading obligation and double volume caps. The latter two measures restrict how and where firms can execute equity trades. All three diverge from the EU’s rulebook, but in totality it is not a drastic change in direction.
However, the bigger story is around how the UK government will work with the regulator going forward. So far, it appears that the Bank of England (BoE) narrowly escaped being subject to a ‘call-in’ rule. That would have allowed the government to trigger regulatory reviews if it deemed it in the public interest. Instead, it went for a watered-down approach, meaning that the regulator will have to constantly review its own rules to ensure they are not doing undue harm to the finance sector. If the UK Treasury feels this is not being done properly, it can bring in a third party to evaluate.
The BoE feels this is an intrusion into its independence and the possible politicisation of regulation, which could have implications for financial stability.
Governments tend to concern themselves with tax revenue, boosting gross domestic product and winning the next election, and will sometimes cut corners to get there. Worst still, the two contenders to lead the Conservative party and replace Boris Johnson as prime minister have vowed to implement the call-in powers. All this is happening against a backdrop of the government and the BoE already disagreeing over crypto, Solvency II and other regulatory approaches.
Why is it happening?
Among the pro-Brexit elements of the Conservative party, there is a deep suspicion that the country’s senior civil servants want to stay close to the EU, in hope of the UK one day rejoining it.
They see the UK Treasury and the BoE, in particular, as bastions of pro-EU sympathisers who are sabotaging efforts to make meaningful regulatory reforms to capitalise on Brexit.
Other parts of the party simply view the two as too wedded to orthodoxy and too timid to pursue bold reforms to fire up the country’s entrepreneurial drive.
What do the bankers say?
Such reforms as there were, such as on equities trading, were welcomed by much of the City of London, which is not keen for the UK to diverge too much from the EU because this would raise compliance costs. Others were disappointed that the bill did not go further.
Whisper it, but bank lobbyists are likely to welcome more government intervention in rule-setting. They are well aware that the government will be prioritising economic growth and, therefore, might have the best opportunity in decades to influence regulatory policy.
Will it provide the incentives?
Tensions between the government and regulators is nothing new. It happens often in the US and EU. Sometimes, creative tension can even be useful.
In the UK’s case, much will depend on how these self-granted powers are used, especially if they include the dreaded call-in rules. The government will have to be very careful over how it uses them.
A government constantly clashing with its regulators does little to instil confidence among regulated firms and their clients. If it is seen to be overriding its regulators too often for reasons of political expediency, this could undermine the UK’s capital markets and trust in the UK economy. Protest resignations by senior regulators would certainly play badly with the financial sector.
Finally, if the government goes too far, it risks undermining financial stability and making third countries wary of conducting cross-border financial services with the UK. This would be a pointless own goal and an erroneous use of Brexit freedoms.
Hopefully, the government will use any powers it grants itself rarely and judiciously.
To thrive, the City of London must have independent and credible regulators to ensure it is a safe and predictable place to do business.
