Sunak backs down in battle with Bank of England over financial regulation

Sunak backs down in battle with Bank of England over financial regulation

Rishi Sunak has backtracked on his long-running power struggle with the Bank of England over plans to let ministers override city regulators and force them to take advantage of “Brexit opportunities”.

The Prime Minister had proposed a controversial new “power to intervene” for ministers, which BoE Governor Andrew Bailey said would seriously undermine the independence of financial services watchdogs.

Sunak wanted to relax city rules so insurers would have to keep smaller capital reserves, hopefully freeing up tens of billions of pounds to spend on infrastructure, including green technology.

A senior minister had claimed the BoE was “intransigent” on proposed reforms to the EU’s Solvency II regime for insurers. The proposed “appeal power” was intended to force regulators to act.

But the Treasury announced on Wednesday that the new power, originally proposed by Sunak when he was chancellor, would be abandoned.

The U-turn coincided with a compromise agreement between the Treasury and the central bank on the Solvency II reform, announced in last week’s autumn statement by Chancellor Jeremy Hunt.

Chancellor Hunt’s allies said it showed the BoE was willing to balance the need to generate growth with its mandate to maintain financial stability.

City Minister Andrew Griffith announced: ‘The government has decided not to proceed with the power of intervention at this time.’

Griffith said the existing provisions in a new Financial Services Bill were sufficient to enable Britain to “seize the opportunities of Brexit by adapting financial services regulation to UK markets to strengthen our competitiveness”.

“We have always been concerned with finding the right balance between increased regulator accountability, clear accountability, appropriate democratic input and transparent oversight,” Griffith added.

“We remain committed to the operational independence of financial services regulators.”

The decision will come as a huge relief to the BoE, which feared confidence in the city’s regulations would be shaken if ministers could simply overrule any decision they didn’t like.

The problem came to a head with Brexit: Sunak wanted to ease city regulations to demonstrate some tangible benefits of Britain leaving the EU, while the BoE warned such a move could jeopardize financial stability.

As Chancellor, Sunak intended to add a new “power to intervene” to the Financial Services Bill, currently before parliament – a position confirmed by the Treasury 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 that would allow ministers to overrule regulatory decisions simply because they had a different view of the issues involved would represent a significant change from a independent regulatory model.

He added: “Some might think that such power would boost competitiveness. My view is that over time it would do the exact opposite, undermining our international credibility and creating a system in which financial regulation blew much more with the political wind.

Sunak’s retirement marks the end of attempts by senior conservative politicians to undermine the authority of the BoE. Liz Truss, a former prime minister, said in her bid for the Tory leadership that she would review the central bank’s mandate.

Meanwhile, Hunt repeatedly refused to tell MPs on Wednesday whether a Sunday Times article suggesting the UK might seek a ‘Swiss-style’ relationship with the EU came from a Treasury source, but he insisted that was wrong.

The Chancellor said the government would not deviate from the basic ‘trade and cooperation agreement’ brokered by Boris Johnson and had pledged to deviate from EU rules, such as with Solvency II, if it made economic sense.

But he added 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”.

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