The UK’s most powerful financial regulators have warned Rishi Sunak’s fledgling government against introducing a political veto that would jeopardise their independence or any other legislative changes that would undermine regulatory standards post-Brexit.
Sam Woods, chief executive of the Prudential Regulation Authority and Nikhil Rathi, head of the Financial Conduct Authority, delivered the warnings at the annual Mansion House gathering of City leaders on Thursday.
Overhauling financial regulation has been a key priority of ministers after Brexit, most controversially through provisions to introduce a ‘call in’ power that would allow politicians to over-rule regulator’s decisions, in limited circumstances.
The Financial Services & Markets Bill, which had its second reading on September 7, also creates a new secondary mandate requiring regulators to “advance the international competitiveness and medium to long-term growth of the UK economy.”
Woods told the audience: “A power which allowed ministers to override regulatory decisions just because they took a different view of the issues involved would represent a significant shift away from a model of independent regulation,” adding that he would be “very cautious” of any such measure.
“Some might think that such a power would boost competitiveness. My view is that through time it would do precisely the opposite, by undermining our international credibility and creating a system in which financial regulation blew much more with the political wind — weaker regulation under some governments, harsher regulation under others,” Woods said.
His sentiments were echoed by Rathi, who said it was “vital” that the FCA’s “independence and agility at speed [was] not undermined by any proposed call-in power”.
Woods also sounded a note of caution about the prospect of a free-for-all on banker pay after the UK abandons EU rules that cap banker bonuses at twice salary. The PRA has been charged with running a consultation on banker remuneration rules to replace the cap.
“My own view, based on personal experience as a Treasury official through the global financial crisis, is that the 100 per cent cash-out at year-end approach to bonuses which was common in banking up until 2008 was an important part of what drove the financial system over the cliff, and we should have no appetite to return to that heads-I-win tails-you-lose approach,” he said.
On the secondary mandate around competitiveness, Rathi said that it was “vital that we do not compromise on consumer protection, market integrity and competition”.
Woods said that while there could be some sensible reform of regulation after Brexit, such as the overhaul of insurance solvency rules, “any attempt to become a global financial centre by competitively deregulating would be self-defeating by its nature: major international financial institutions want a safe harbour, not a wild west.”
A Treasury spokesperson said: “We have confirmed our intention to bring forward an amendment to the Financial Services Bill, to include an ‘Intervention Power’, that will enable the Treasury to direct a regulator to make, amend or revoke rules where there are matters of significant public interest.
“The government has always been clear that this is a safety valve that must be balanced with clear accountability, appropriate democratic input and transparent oversight.”
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