The author is a member of the House of Lords and a former EU financial services commissioner
Most people think of financial regulation as a technical issue, suitable only for geeks. But with the financial services and markets bill currently making its way through parliament, they need to tune in, not tune out.
Why? Because in essence it is financial regulation that sets society’s risk appetite. It may come disguised in impenetrable technical language, but what regulators decide directly affects our ability to compete and grow. By setting the level for how much capital banks have to hold, for example, regulators determine how much is available to invest in businesses and hence jobs around the country. So financial regulation is politics and economics by another name.
It follows that getting the framework for regulatory scrutiny and accountability right is central to our national wellbeing. One consequence of leaving the EU is that the UK now has to rethink that framework. That is what the new bill sets out to achieve. Whatever gets decided in the next few weeks will establish the system within which everyone will have to operate until the next bill comes along — which is not likely to be for many years. Getting it right matters.
For good reasons, the government wants a framework that will make it easier for the Prudential Regulation Authority and the Financial Conduct Authority to regulate more flexibly. They are right that outside the EU’s cumbersome, consensus-based system of rulemaking, the UK ought to be able to move faster and more proportionately. To achieve that, the bill gives our regulators a great deal more independence and the ability to adapt the rules without having to change them through primary legislation each time.
But greater independence surely calls for greater regulatory accountability. Otherwise we risk replacing one system of unaccountable European regulation with a new system of unaccountable British regulation, which doesn’t feel much like progress. In the bill as drafted, does increased independence go hand-in-hand with increased accountability? I would say, not enough.
A good regulatory framework needs to be stable and predictable so that business can plan ahead with confidence. It needs to enable competition and innovation. It needs to be sufficiently flexible to adapt to changing circumstances or the unintended consequences of earlier legislation. Regulators need to be properly accountable for the decisions they take. Regulation must not be a secret garden, fenced off from scrutiny.
To make that work, you first need ministers to provide a clear political mandate. You need effective parliamentary scrutiny and challenge. And you need some reliable analysis of how the regulators have been doing that is as objective and dispassionate as possible.
It is this last element that is missing from the bill: a body that can provide some evidence-based analysis of how the regulators are doing against the objectives they have been set. Fortunately for the government, help is at hand. This week, the House of Lords is debating an amendment to establish a new Office for Financial Regulatory Accountability (Ofra), which would carry out this role.
The proposal has already attracted strong cross-party support, and it is easy to see why. By providing objective data, Ofra would help regulators by detoxifying the political debate about regulation. It would help parliamentarians by strengthening them in their scrutiny role. It would help the government by making the system of accountability more durable and evidence-based. It would help the financial services sector by ensuring that there was objective marking of the regulators’ homework. No one loses, everyone gains.
If we want our economy to grow, regulation matters. If we want regulation we can trust, accountability matters. There is a hole in the accountability mechanism set out by the government in the bill. It needs Ofra to fill it.
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