Ex-ministers and City figures have warned that the government is not doing enough to improve the scrutiny of regulators after Brexit, in a sign that past rows about protecting the independence of the UK’s top financial regulators could resurface in the coming months.
Following Brexit, UK financial regulators, such as the Prudential Regulation Authority (PRA) and the Financial Conduct Authority, were given the power to replace existing EU laws with new rules tailored to the UK market, significantly increasing their influence.
While some planned post-Brexit reforms, such as scrapping Solvency II, require new legislation, other proposed changes, such as changes to bank’s capital requirements do not. The PRA is already working on tweaking the latter, much to the annoyance of smaller banks and business groups.
This contrasts with the EU process, where changing the highest tier of legislation required the approval of the Commission, the Council and the Parliament.
Although the UK government has introduced some measures in the Financial Services and Markets (FSM) Bill to bolster accountability, industry bodies were clear that the measures needed to go further given the range of new powers at their disposal.
TheCityUK’s Emma Reynolds told City A.M. that “given the regulators get a lot more power post-Brexit, there should be some kind of additional oversight.”
“What we currently have isn’t fit for where we are,” she said.
UK Finance agreed, saying “with regulators being handed increased powers and expanded remits it is critical that there is enhanced oversight and independent scrutiny of their work.”
Call in powers 2.0?
Moves to increase the oversight of the regulators sparked a conflict in the City late last year. Both Liz Truss and Rishi Sunak wanted to introduce “call in” powers to be able to revisit or overturn decisions if they felt regulators made the wrong call on new rules – a move Bank governor Andrew Bailey warned against as he sought to defend regulators independence.
Sunak, after his appointment, backed down, but a range of proposals have been put forward since for boosting regulatory scrutiny.
One option is to strengthen parliamentary oversight through a new parliamentary joint committee. Another is to create an independent body which could both provide expert advice to legislators and question the regulators directly.
Proponents of an independent body say their model does not threaten the independence of regulators and warn that a parliamentary model could end up politicising the debate. They insist it is an entirely different lever to the call in powers.
Supporters of the parliamentary model argue an independent body would add another layer of complexity to an already complex system.
While the government has so far ruled out accepting either model, debates around accountability will likely continue.
As an increasing number of firms have snubbed London and chosen to list in other financial markets, the government has proposed in the FSM Bill that regulators be mandated to consider competitiveness when making decisions.
“This is a pivotal moment, and against the backdrop of concern about the City losing out to other financial services, it’s becoming a litmus test of whether the government is really intent on turning its words into action, and strengthening the City,” one Conservative peer told City A.M.
Reynolds said: “Our firms want [the competitiveness mandate] to have some bite,” adding that greater oversight of regulators would force them to act according to their mandate.
These sentiments were echoed by ex-Justice and Treasury Minister David Gauke, speaking to City A.M. following the release of a report by law firm Macfarlanes exploring industry concerns with the FSM Bill.
“A consistent message from those that we have spoken to is that they are worried that our regulatory system may well hold us back in terms of competitiveness,” said Gauke, now head of public policy at law firm Macfarlanes.
A welcome debate
As well as the competitiveness mandate in the FSM Bill, it also includes proposals to grant the Treasury the power to require a regulator to review their rules and establish cost-benefit analysis panels ahead of rule changes.
These come in addition to the main existing form of scrutiny, which is Treasury Select Committee hearings.
The government maintains that its proposals in the FSM bill will do enough to improve scrutiny of regulators.
“The bill ensures that the increased responsibilities for the expert, independent regulators are balanced with strong democratic oversight and transparency,” a Treasury spokesperson said.
“This is a landmark piece of legislation that will give us the tools to seize the opportunities of Brexit and create a safer, better system for consumers – while respecting the independence of regulators,” the spokesperson said.
The FCA said it welcomed the debate about how it should be held to account.
“We welcome this debate as we move towards a more outcomes-focussed system of regulation. That is why we have also published metrics that will allow others to hold us to account,” an FCA spokesperson said.
“Both operational independence and proper accountability are vital to a well-functioning regulator. Scrutiny allows us to show we are meeting the objectives set for us by Parliament,” they added.
The PRA declined to comment.