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The interim chair of the UK Financial Conduct Authority (FCA) suggests it would be “unwise” to include the controversial call in power in the government’s financial bill as it would create the “perception of the erosion” of the agency’s independence.
There is “clearly economic and market volatility where it would be unwise to create a perception that rules would be made by future ministers potentially overriding the evidence-based decision-making of the FCA board”, Richard Lloyd, the FCA’s interim chair, told lawmakers.
Lloyd was questioned by Labour MP Rushanara Ali at a Monday (November 7) hearing by the Treasury Select Committee looking at the potential impact of the so-called call in power, which gives the Treasury authority to direct regulators, including the FCA or the Bank of England, to make and remove rules when there is a significant public interest.
The controversial power was proposed as an amendment to the Financial Services and Markets Bill by Rishi Sunak, then chancellor, to bolster greater democratic accountability.
Last month, city minister Andrew Griffith reportedly angered MPs by saying that the amendment, which has not yet been shared with parliament or regulators, would not be introduced during the bill’s report stage in the House of Commons.
“I would simply say this. Our international reputation and indeed our competitiveness in financial services internationally … is in part built very clearly on the perception and reality of the independence of the regulators,” Lloyds told the committee.
“Even if it’s used very sparingly … the perception that comes with the ability of ministers to direct independent regulators clearly would go to undermining our independence,” he stressed.
Once the power is used for the first time, Lloyd said “the perception of the erosion of our independence will happen very rapidly”. This is a concern shared by stakeholders, including international bodies such as the International Monetary Fund (IMF), the interim chair stressed.
Ali asked Lloyd whether the government intervention power could be a risk to financial stability, similar to the way the mini-budget was handled, which, in her view, showed what happens when a government “acts in a way that didn’t respect the independence of institutions like the OBR [Office for Budget Responsibility]".
“What we are hearing is that a lot of institutions, including yours, are raising a lot of bells,” the Labour MP said, concluding that in the aftermath of the mini-budget fiasco, it is important not to unsettle markets.
“I don’t want to speculate about what may or may not happen with an amendment that we haven’t seen yet, but I would say that clearly at the moment markets are very volatile,” Lloyd said.
Also speaking at the hearing, FCA CEO Nikhil Rathi warned against the potential impact if the intervention is used in relation to enforcement rulemaking.
“There are some areas which really go into the fabric of our institutional framework in the United Kingdom, for example, in the area of enforcement,” Rathi stressed.
“It really would be a very big departure from any established practice for there to be political rulemaking in relation to enforcement. There are good reasons why enforcement has been kept very separate.”
Rathi added that when regulators make rules, there is typically a constituency “that is unhappy with our decision”.
If these parties seek to approach ministers to get certain rules overturned, “the certainty for all parties, market participants, consumers, is eroded”, the FCA CEO pointed out.
Rathi emphasised the role of parliament in the event that the intervention power becomes part of the law.
“I think the role of parliament is going to be incredibly important”, and it involves a number of questions: “What is the parliamentary oversight of this? Does the power simply call in the rule but doesn’t require a parliamentary vote on any actual text of what is going to be substituted? Is there going to be an impact assessment? How are we going to express our view to parliament about what the proposed regulation may entail in terms of risks and how do we articulate what the operational issues for us may be?”
Nonetheless, Lloyd and Rathi both emphasised that the eventual impact of the call in power depends on how it is bounded, what the safeguards are and how frequently it might be used.
