The formal objectives of the FPC are set out in the Financial Services Act 2012. This provides that the FPC should contribute to the achievement by the Bank of England of its financial stability objective. The FPC also has a second objective, which is to support the economic policy of the government, including its objectives for growth and employment.
The two objectives are not mutually exclusive and have been the subject of intense debate for some time. In particular, the first objective should not be seen as a requirement for the FPC to stop all risk-taking in the UK financial system. Some of us in the City may remember that last September Paul Fisher, Bank of England policy committee member, made the point that if all risk-taking were to be stopped in the financial system – including, for example, those arising from the maturity transformation inherent in taking deposits and then lending – the economy would grind to a halt.
The FPC will use a selection of levers to meet its statutory objectives. These primarily consist of three types of action. First, an informal channel consisting of the publication of minutes of FPC meetings and general comments made in public statements. Second, the use of formal recommendations that indicate actions that the FPC believes are necessary to restore or maintain financial stability – to be made on a “comply or explain” basis to the Prudential Regulation Authority and the FCA. Third, the issue of directions made to the PRA and FCA in relation to specific tools prescribed by HM Treasury.
Since February 2011, the Bank of England’s interim FPC has been working with the government on the specific tools that should be available in relation to the direction power. In March 2012, the interim FPC made recommendations to HM Treasury on which tools it believed should be included in the direction power and these were the countercyclical capital buffer; sectoral capital requirements; and a leverage ratio.
The government subsequently issued a consultation document on the FPC’s direction power.
Interestingly, these tools are primarily intended to tackle cyclical risks, such as those arising from unsustainable levels of leverage, debt or credit growth.
In January, the FPC published a draft statement of policy for the direction powers given to it under the new legislation. One of the more striking points that came out of the statement is that macro-prudential policy is a relatively new area and to a certain extent will be a step into the unknown.
It would be a mistake for regulated firms to completely ignore the FPC. While it will have no direct contact with regulated firms, the levers the FPC will use – particularly the directions – could have a significant impact on them and the UK economy as a whole.
In addition, the regulated firms that are within the scope of the countercyclical capital buffer and sectoral capital requirements need to pay close attention to the FPC as these tools have the potential to affect their balance sheet.
Simon Lovegrove is a lawyer with the financial services team at law firm Norton Rose
