City of London bankers better check Rishi Sunak’s interference
The new power was Sunak’s brainchild while he was Chancellor of the Exchequer. He wants Britain’s watchdogs to be made more democratically accountable by allowing the Finance Ministry to tell them which rules to change, create or scrap.
Perhaps the power would only be used in “exceptional circumstances” and for matters of “important public interest”, as ministers have claimed, but those words sound like a slippery slope. The risk is headline-seeking political interference and unreliable rules. The Prudential Regulatory Authority and the Financial Conduct Authority have warned of the threat to their independence and the UK’s international credibility.
Yet some players in the financial sector want the government to crack down on regulators they see as overly cautious and resistant to change, even if they are wary of disruption.
Britain’s battle is more complicated than it seems. Sunak has bowed in part to powerful populist and liberal elements in the Conservative Party and public discourse since the Brexit vote in 2016. Ruling regulators goes hand in hand with tearing up European Union rules and giving people back their sovereignty.
But behind the politics is also the more mundane problem of how to change EU financial rules. In fact, solving this problem means giving more power to UK regulators, not less.
Let me explain. The way the UK regulatory system works is that parliament lays down a legislative framework for the kinds of financial policies it wants, and then the regulators jump in and do the detailed work of writing specific rules for the things that the banks and insurers. The United States and other countries have a similar approach.
This appeals to policymakers because they are not financial experts and do not want to spend time determining exactly how much capital should be held for different types of mortgages or derivative transactions, for example. Outsourcing the work ensures that “the day-to-day experience of regulators in the real world…is at the heart of the regulatory policy-making process,” as the UK Treasury wrote in the introduction to its regulatory reform proposals Last year.
But now UK regulators are about to get more power because the government wants to replace many EU-derived financial rules. So someone needs to take the EU legislation that is being scrapped and turn it into relevant regulation for Britain. It’s boring, technical work for specialists, and it’s understandable that the government would prefer regulators to do it. However, some areas of finance, such as clearinghouses, have been regulated directly by EU law, but over which the PRA and FCA previously had no authority, hence the need to broaden powers.
Populists and free market types don’t like technocrats having sweeping powers. It’s not just a UK case: Earlier this year, a US court ruling led my colleague Matt Levine to question whether the Securities and Exchange Commission was unconstitutional.
In addition, many in the financial industry believe that UK regulators are run by overly cautious people whose lasting career lessons came from the 2008 crisis. They demand too much capital from banks and insurers, while imposing too many restrictions on things like investing in new infrastructure, like wind farms, say industry executives. The city partly wants regulators to face greater scrutiny in general, but also right now it is campaigning for certain rules to be scrapped or simplified as regulators adapt them from EU law. .
The idea of greater accountability isn’t bad, but it has to be done the right way. Politicians can already hold regulators to account and monitor their work through parliamentary committees. And new rules must be submitted for public consultation. Sunak’s proposal for the power of appeal goes too far beyond these safeguards and allows the government to start making decisions directly.
The financial industry might want more accountability for regulators, but leaders need to be wary of who can wield it – not just now but in all seasons. That power would exist for a future government that might want tougher regulation on restricting consumer lending rates or derivatives trading, for example, or that wanted to steer finance toward industrial policy.
The bankers might like the liberal leanings of Sunak’s government, but the next prime minister, or the one after that, might not be one of them.
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Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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