With Liz Truss having now secured her place as Britain’s new prime minister, the likelihood of more meddling and interventionism from the UK government in financial policymaking has significantly increased.
Several proposals currently under discussion could severely threaten the independence of financial policymakers. One of them, included in the draft of the Financial Services Bill, would essentially enable MPs to step in and ask regulators to review their decisions if they find them unfit. A potential call-in power would go even further and give them the possibility to veto decisions, effectively overriding regulators’ authority over policies.
“By giving ministers review powers over all regulatory decision-making, the independence of the regulatory framework is being completely stripped away, making it extremely vulnerable to prevailing political winds,” said Andrew Poole, director of UK regulatory consulting at ACA Group. “A persistent sense of instability will exist as necessary regulatory changes could be halted simply to gain political capital. This, in turn, could affect inflows as investors may shy away from a lack of clarity and continuous uncertainty. Engagement with the financial markets rather than second-guessing the political whims of the day is what’s needed going forward.”
This appears as a particularly risky path at a time when the UK government has clearly indicated its intention to cut any red tape it deems superfluous in the context of post-Brexit divergence from the EU, and when the temptation to overly deregulate is higher than ever.
“In an ideal world, a change in leadership would be an opportunity for a restart of European-British relationships, however, Liz Truss’s policy agenda is a recipe for more trouble ahead,” said Markus Ferber, member of the European Parliament (MEP). “Liz Truss has been an absolute hardliner [and her] economic policy that consists of deregulation of financial services and big tax cuts will cause tensions with the EU. The UK should not enter a regulatory race to the bottom.”
Other proposals floated by Truss on the campaign trail included merging the Prudential Regulation Authority and the Financial Conduct Authority into a single mega-regulator to boost economic growth – something which she says the agencies have not focused on enough since Brexit.
“The new prime minister arrives at an important moment for the City with the Financial Services Bill shortly entering into its second reading in Parliament and the UK making little progress concluding equivalence agreements with the EU,” said Jonathan Herbst, global head of financial services regulation at Norton Rose Fulbright. “The input of the new financial secretary to HM Treasury will be key, and there is also the issue of managing the expectations of those in the Conservative party who have been critical that City reform hasn’t been fast or wide enough.”
In a recent report on the future of financial services regulation, the House of Commons Treasury Committee – whose role is to examine the expenditure, administration and policy of HM Treasury – recommended that the Treasury should respect the principle of regulatory independence, and should not pressure the regulators to weaken or water down regulatory standards.
“The regulators have been made operationally independent for a reason – if regulatory standards were to be changed or substantially weakened so as to increase the risks to financial stability, UK consumers and taxpayers could be harmed,” the report read. “Simplifying financial regulation and tailoring it appropriately to the UK market must be approached with care, and without compromising regulatory independence.”
Separately, Liz Truss has also indicated her willingness to review the Bank of England’s mandate to ensure its policies are tough enough on inflation and monetary policy and promote competitiveness – something that has also sparked fury and concern across the industry.
“I don’t think from what I see that there is a large desire in this country to question central bank independence,” Bank of England governor Andrew Bailey said in a BBC radio interview, responding to Truss’s announcement. “It is critically important that central banks maintain their independence – this is something [the Bank of England] has strong views about.”
The dangers and conflicts of interest that can arise from mixing politics and the government’s interest with regulatory matters, however, are manifold.
The US regulatory space is a prime example of that. Take for example the Inflation Reduction Act – originally named the Build Back Better Act – and the time it took to bring it to completion.
The amount of political battling, negotiations and back-and-forth that was needed to bring the bill across the finish line – albeit in a much reduced and toned-down form – is a great illustration of why enabling too much government meddling in financial policymaking is a risky game.
A legislation with such obvious and wide-ranging benefits not just for the US, but for the world in general – given the usual ripple-effect that US policies have across the globe – should have not been stuck in the starting blocks and fiddled with for as long as it has on the basis of political discordance and games.
In the US, that is very much a result of the way policymaking is structured, and of how much of it is dependent on political factions and alliances. If the UK is looking to set itself on a similar course, it could be in line for similarly long-winded and politically instrumentalised on essential, and often urgent pieces of legislation.
The overall impact this could have not just on its financial services, but on the country’s economic and social future as a whole, could be very damaging.
For all these reasons, the clear cut between government and regulatory agencies should be maintained at all costs. In the same manner that church and state were formally separated by law in certain countries, so should financial regulators and government ministers always obey to different masters.