UK government rushes to outline proposed power to overrule financial regulators


The UK government is rushing to outline a proposed power to overrule the City of London’s financial regulators as it tries to avoid allegations the move is an attack on their independence.

The power is to be added to the government’s bill for financial services and markets, but the Treasury has not disclosed any details so far. Andrew Griffith, the City Secretary, said last week it would take longer than expected.

The government could water down the proposed power, which has become a controversial topic in recent months, according to several legal and financial experts with knowledge of the government’s deliberations, who asked not to be identified and described confidential discussions.

The effort to resolve questions about an on-call worker precedes Chancellor Jeremy Hunt’s tax statement on Nov. 17. Hunt’s announcement will show how the City of London can be boosted alongside the tax hikes and austerity measures needed to fill the gap in UK public finances. City officials hope the government will draw up plans for the call as part of its reform agenda.

Critics believe the power threatens the independence of the Bank of England and other institutions. But others feel a call is needed for parliament to give more oversight to regulators, given their greater scope for regulation outside the European Union.

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“We are determined to implement ambitious reforms in the UK’s financial services sector and ensure it remains one of the most open, well-regulated and technologically advanced markets in the world,” said a Treasury spokesman. “We will provide more details in due course.”

Limit use

The Treasury may limit when ministers can use the call to try to avoid clashes with critics, the people said. Options include a mandatory vote from the legislator on any intervention through a device known as a legal instrument. There could also be a list of circumstances in which it could be used, such as national security, to cover things such as lists of foreign companies closely associated with dangerous regimes, domestic unrest or emergencies such as the COVID pandemic.

Simon Morris, a financial services firm at law firm CMS, said the dial-in power remained an “enigma” as the Treasury and officials have not released any details about it so far. According to Morris, an approach to a legal instrument would provide the opportunity for scrutiny by MPs and legal experts.

Skeptics say this would not introduce meaningful democratic accountability. Legislative instruments have rarely been voted down by MPs, with the most recent notable examples dating back to the 1970s.

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Solvency II

When the intervention force was first envisaged by the Treasury last year, one of the reasons for helping bring about dramatic reforms to the EU’s Solvency II insurance capital rules, a move designed to boost billions of pounds of investment for infrastructure investments, the people said, who declined to be named when discussing the private negotiations.

The Ministry of Finance under Rishi Sunak would consider introducing the power to try to force the Prudential Regulation Authority to give up its opposition to some parts of those reforms, the people said.

The PRA remains opposed to the changes, warning that it would be risky to water down the matching adjustment — which calculates the correlation between insurers’ promises to pay out pensions to policyholders with their investments in long-term assets.

The two sides are continuing to negotiate the adjustment adjustment to try to reach an agreement, possibly by November 17. One possibility is to create a joint regulatory industry to consider ways to boost investment in areas such as climate transition and housing, two people said.

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Charity Poll

If the government goes ahead with a broad appeal, it risks further market uncertainty, said Angela Gallo, senior lecturer in finance at Bayes Business School.

A partial or full government pullout could be in line with public opinion, according to Marloes Nicholls, head of policy and advocacy at Finance Innovation Lab, a charity that promotes financial inclusion. According to a poll of more than 2,000 people conducted by the charity, fewer than one in ten are in favor of financial deregulation. Support was lowest among people who voted for Brexit or lived in the ‘Red Wall’ constituencies in northern England that the Conservatives won in the last general election.

If the issue is resolved, the government could focus on deregulation aimed at strengthening the UK as a post-Brexit financial center. Ideas under consideration that could be included next week include reforms to executive pay and directorships and easing restrictions on corporate research, the people said.

—With help from William Shaw and Philip Aldrick.

Copyright 2022 Bloomberg.

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