In the turbulent economic climate, and amid some indications of the City’s relative decline as a global financial centre, the government is understandably eager to enhance the competitiveness of the UK’s financial sector.
The so-called “Edinburgh reforms”, of which the financial services and markets bill forms a major part, represent a key pillar of the government’s attempts to achieve this.
A cornerstone of the reforms is to facilitate agile supervision. Before Brexit, the rules that applied to most financial activity in the City were mainly derived from EU legislation.
The machinery of the bloc turned slowly, making rapid evolution of regulation that bit more difficult. Out of the EU, though, the Edinburgh reforms grant the Prudential Regulation Authority and the Financial Conduct Authority significant new rule-making powers to effect swifter rule changes to changing circumstances.
At the same time, the bill also proposes providing the PRA and the FCA each with a new secondary objective to facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy.
Ensuring accountability
Put simply, the new rule-making powers should allow the PRA and the FCA to formulate rules that are tailored to the UK financial system’s needs and be more responsive to market developments.
By requiring regulators to facilitate economic competitiveness, the bill should also ensure they pay greater attention to how regulations are being felt on the ground.
An independent body of specialists could rigorously challenge the regulators’ self-assessment.However, the increased powers for the regulators raises the question of who guards the guardians, with the government and the wider financial services sector recognising the need for greater accountability.
Thus, last year, the government proposed to grant the Treasury an intervention power that would allow it to overrule regulators.
This proposal was ultimately dropped in the face of strong opposition from senior regulators who argued it would seriously undermine their independence and damage the City’s reputation.
A year later, though, and this fundamental question of how accountability can be secured without undermining regulatory independence has not gone away.
Greater challenge or increased transparency
In the Lords, amendments to the bill proposed by Lord Bridges called for the creation of an Office for Financial Regulatory Accountability, a body similar to the Office for Budget Responsibility.
This body would be responsible for providing an expert determination of the FCA’s and PRA’s overall performance in meeting their statutory objectives and impact assessments of specific regulation, evaluated against those objectives.
However, this amendment was swiftly rejected by the government on the basis that the creation of a new body was unnecessary.
Leaving oversight entirely to the Treasury Committee risks politicising the process.Instead, the government has chosen to rely on existing mechanisms of parliamentary scrutiny – the Treasury Committee, in particular – and provisions in the bill requiring regulators to include in their annual reports how their objectives have been advanced.
The bill also contains a new power enabling the Treasury to direct regulators to publish information where ministers consider it necessary to review their performance.
The Treasury is consulting on the key metrics that the PRA and the FCA should publish in relation to their new secondary competitiveness and growth objectives, and how the Treasury should exercise its direction power.
Requiring increased transparency from regulators certainly has a role to play in increasing accountability, and it is true that the Treasury Committee provides some of the necessary democratic oversight. However, whether this will be sufficient is questionable.
A hybrid approach
An independent body of specialists, such as the one proposed by Bridges, could rigorously challenge the regulators’ self-assessment, while also providing an additional layer of scrutiny of proposed rules, helping to ensure they achieve their respective objectives.
On a macro level, this body could help formulate the UK’s approach to implementing international regulatory standards, appropriately informed by domestic factors.
Assessing whether the regulators have successfully balanced the advancement of their new secondary competitiveness and growth objectives with their respective primary objectives – for the PRA, a general objective to promote the safety and soundness of regulated firms, and an objective specific to insurance firms for policyholder protection; for the FCA, to ensure that UK financial markets operate well – will clearly be a complex task, one that the Treasury Committee is not equipped for by itself.
New powers for the regulators call for increased accountability.Moreover, leaving oversight entirely to the Treasury Committee risks politicising the process, with potentially unfortunate consequences for the regulators’ exercise of their functions and approach to making rules.
OFRA seems to be the solution to these problems; not only can it provide the rigorous analysis to conduct thorough assessments that the Treasury Committee lacks, but it can also provide this service free from undue political influence.
For these reasons, there is much to be commended in Bridges’ proposal, and it is regrettable that the government has chosen not to accept it.
The UK’s financial system does not need “the stability of the graveyard” (as George Osborne put it) but nor will an over relaxation of regulatory standards be likely to deliver the sustainable growth and prosperity the country desires.
New powers for the regulators, as well as their increasingly complex (and potentially contradictory) mandates call for increased accountability. An independent body dedicated to ensuring this would benefit us all.
Romin Dabir is a partner at Reed Smith
