This political veto on City regulation can only end in trouble
We’ll send you a myFT Daily Digest email rounding up the latest UK financial regulation news every morning.
Perhaps we need a new rule. When a politician complains that regulators are being too slow, too cautious or a bit of a “dog in the manger” about overhauling insurance rules for the glorious benefit of Brexit Britain, they should be asked to explain the issues involved.
Rather as political wannabes are regularly asked to prove they understand Real Life Issues by knowing the price of a pint of milk (up a fifth over the past year, as you’re asking), they should have a crack at the finer points of insurance regulation, an area of dread and mystery even for many in the City of London.
After all, our political leaders, both the outgoing set and those vying for the job, appear confident they know better than the pointy heads at Threadneedle Street or in Canary Wharf. It would be nice if they would prove that they appreciate the issues involved and are not just freewheeling for political effect.
Liz Truss, who appears likely to become the next prime minister, is the latest to embrace the idea that ministers should be able to “call in” decisions if they feel watchdogs are being too wary.
After a lengthy post-Brexit debate about requiring regulators to consider “competitiveness” and industry proposals for a new body to vet the watchdogs, this comes close to saying the quiet part out loud: politicians want to be able to steer financial rulemaking for their own ends.
It has very little to do with accountability, per se. The regulators are indeed being handed vast new powers as a result of Brexit and should be held to account in a more rigorous and detailed way. The government has, in its various consultations, made clear that it considers that this is for parliament to do and has in effect passed the job to the Treasury select committee for now.
Part of the reason there has been a vocal campaign for a new, well-resourced parliamentary body to scrutinise regulators is that doing a proper, line-by-line job is not for the faint-hearted.
But the Prudential Regulation Authority at the Bank of England is not digging its heels in against industry lobbying on changes to Solvency II insurance regulation because it is irredeemably and tediously timid. It is because it thinks that part of the matching adjustment, which allows writers of long-term business to match predictable cash flows against their liabilities for a capital benefit, is calculated wrongly. Namely, the calculation should be tightened to reflect the credit risk to insurers, in case the assets backing the savings of policyholders and pensioners go bad.
I do not know if they are right. I am reasonably sure Truss does not either. But, behind the political fire and fury, the BoE and the insurance sector (or at least parts of it) are going back and forth debating if there is another way to address the regulator’s concerns, while enabling UK insurers to invest more in long-term UK assets.
The bust-up over Solvency II will not be a one-off. Much financial rulemaking involves seemingly short-term trade-offs between safeguarding the system, protecting consumers, allowing the UK’s oversized financial sector to thrive, and economic growth. With a longer-term time horizon, tension dissipates. A lightly regulated, crisis-prone financial sector is ultimately very bad for consumers and the economy. Providers of capital are less willing to put their money into institutions not backed by a robust regulatory framework.
Politicians are generally acknowledged to be quite bad at weighing short-term gain against longer-term risk. It is not their fault really; just the nature of the vote-winning beast. The independence of central banks is founded on the well-evidenced belief that politicians cannot resist overheating their economies for electoral gain when they have control of monetary policy. The ensuing lack of faith in the economic framework, then, makes effective tightening harder and more painful.
Politicians in search of post-Brexit gains are eager to point fingers at financial regulators. But Legal & General’s Nigel Wilson, while this week railing about the slow pace of insurance reform, also reprised his longstanding complaints that the UK planning system makes it hard, slow and costly to invest in the housing, student accommodation, clean energy and other infrastructure that the UK desperately needs.
That is very much in the politicians’ gift to tackle. Why so cautious, gang?