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 accusations that the move is an attack on their independence.

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

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

The effort to resolve questions about a call-in power come ahead of Chancellor Jeremy Hunt’s fiscal statement on Nov. 17. Hunt’s announcement is set to lay out how to boost the City of London alongside the tax rises and spending cuts required to fill the hole in the UK’s public finances. City executives hope the government will set out plans for the call-in as part of its reform agenda.

Critics believe the power threatens the independence of the Bank of England and other institutions. But others think a call-in is necessary, to award parliament more oversight of regulators given their greater scope for rule-making outside the European Union.

“We are committed to delivering ambitious reform of the UK financial services sector, ensuring that it continues to be one of the most open, well-regulated and technology advanced markets in the world,” a Treasury spokesperson said. “We will set out further detail in due course.”

Limit Use

The Treasury may limit when ministers can use the call-in to try to avoid clashes with critics, the people said. Options include a mandatory lawmaker vote on any intervention via a device known as a statutory instrument. There could also be a list of circumstances when it could be used, such as national security, to cover issues such as listings of foreign companies with close links to dangerous regimes, domestic turmoil, or emergencies such as the COVID pandemic.

Simon Morris, a financial services partner at law firm CMS, said the call-in power remained an “enigma,” as the Treasury and officials have so far not given any details about it. A statutory instrument approach would give an opportunity for scrutiny by those in parliament and legal experts, according to Morris.

Skeptics say this wouldn’t introduce meaningful democratic accountability. Statutory instruments have been rarely voted down by members of parliament, with the most recent notable examples dating back to the 1970s.

Solvency II

When the intervention power was first considered by the Treasury last year, one motivation was to help bring about dramatic reforms to the EU’s Solvency II insurance capital rules, a move intended to release billions of pounds of investment for infrastructure investment, according to the people, who didn’t want to be named discussing the private negotiations.

The Treasury under Rishi Sunak was seen to be considering introducing the power to try to force the Prudential Regulation Authority to abandon its opposition to some parts of those reforms, the people said.

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

The two sides are continuing to negotiate over the matching adjustment to try to come to an agreement, potentially by November 17. One possibility is to set up a joint regulatory-industry group to consider ways to boost investment in areas such as climate transition and housing, two people said.

Charity Poll

If the government goes ahead with a call-in with a broad sweep, it risks further market uncertainty, according to Angela Gallo, senior lecturer in finance at Bayes Business School.

A partial or full retreat by the government could chime with public opinion, according to Marloes Nicholls, head of policy and advocacy at Finance Innovation Lab, a charity which promotes financial inclusion. According to a poll of more than 2,000 people conducted by the charity, fewer than one in ten support 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 at the last general election.

Resolving the matter could allow the government to focus on deregulation intended to enhance the UK as a financial center after Brexit. Ideas being considered that could be included next week include reforms to directors’ pay and board tenure and relaxation on restrictions on company research, the people said.

–With assistance from William Shaw and Philip Aldrick.