Rishi Sunak has backed down in his long-running power struggle with the Bank of England over allowing ministers to control the City’s regulators and force them to exercise “Brexit options”.
The Prime Minister has proposed a controversial new “intervention power” for ministers that BoE Governor Andrew Bailey says would seriously undermine the independence of the financial services watchdog.
Sunak wanted to relax City rules so that insurers would have to keep smaller capital buffers, hopefully freeing up tens of billions of pounds for infrastructure, including green technology.
A senior minister has claimed the BoE is “unwavering” on EU Solvency II. in connection with the proposed reform of its system for insurers. The proposed ‘call-in power’ was intended to force regulators to act.
But the finance ministry announced on Wednesday that the new power, originally proposed by Sun when he was chancellor, would be scrapped.
The turnaround coincided with a compromise agreement between the Treasury and the central bank on the Solvency II reform announced by Chancellor Jeremy Hunt in his Autumn Statement last week.
Chancellor Hunt’s allies said it showed the BoE was willing to strike a balance between its mandate to generate growth and maintain financial stability.
Cities Minister Andrew Griffith announced: “The Government has decided not to pursue the power to intervene at this time.”
According to Griffith, the existing provisions in the new Financial Services Bill are sufficient for Britain to “seize the opportunities presented by Brexit by aligning financial services regulation with UK markets to strengthen our competitiveness”.
“We have always sought to find the right balance between increased responsibility for regulators, clear accountability, appropriate democratic input and transparent oversight,” Griffith added.
“We remain committed to the operational independence of financial services regulators.”
The decision comes as a huge relief to the BoE, which had feared that confidence in the City’s regulation would be undermined if ministers could simply overrule any decision they didn’t like.
The issue came to a head with Brexit: Sunak wanted to relax City regulations to show some of the tangible benefits of Britain leaving the EU, while the BoE warned that such a move could risk financial stability.
As chancellor, Sunak wanted to add new “intervention powers” to the financial services bill currently before parliament – a position the Treasury confirmed to the Financial Times this week.
But Bailey and Sam Woods, head of the BoE’s Prudential Regulation Authority, warned against the move, as did Nikhil Rathi, chief executive of the Financial Conduct Authority.
Woods told a City audience last month: “A power to allow ministers to override regulatory decisions simply because they have a different view on the issues involved would be a significant departure from the model of independent regulation.”
He added: “Some might think that such a power would increase competitiveness. My view is that over time it would do the exact opposite, undermine our international credibility and create a system where financial regulation is much more driven by the political wind.”
Sun’s withdrawal ends attempts by senior conservative politicians to undermine the BoE’s authority. Liz Truss, the former prime minister, said during her bid for the Tory leadership that she would review the central bank’s mandate.
Meanwhile, Hunt repeatedly refused to tell MPs on Wednesday that a Sunday Times story suggesting the UK would try “Swiss-type” relationship with the EU it was from a Treasury source, but he insisted it was wrong.
The chancellor said the government would not deviate from the core “Trade and Cooperation Agreement” negotiated by Boris Johnson and was committed to deviating from EU rules, as with Solvency II, if it made economic sense.
But he added that it was his “public position” that the technology could be used to ease physical barriers to trade “as is happening at the Franco-Swiss border”.