United Kingdom

Government veto on City rules would be ‘serious concern’, says Bank of England deputy

Giving the government a veto over measures taken by City regulators would be a “serious concern” and damage the competitiveness of UK financial regulation, a senior official at the Bank of England has told MPs.

Sir Jon Cunliffe, a BoE deputy governor, told a parliamentary committee on Wednesday that a mooted “call-in” power allowing ministers to review regulatory decisions risked undermining perceptions of the central bank’s 25-year-long independence.

“A power which would call in, or rewrite or veto, rules would frankly, give me serious concern,” Cunliffe said. “It goes to competitiveness . . . The credibility of the institutional framework is very important to the competitiveness of the UK.”

He added: “If this actually gives ministers the ability to make second judgments it would, yes, affect the perception of the independence of the regulatory part of the Bank of England.”

The Treasury’s proposed financial services and markets bill is part of a wider plan — dubbed “Big Bang 2.0” — to overhaul UK financial regulation post-Brexit to boost its global competitiveness.

Under the proposals, ministers would have the authority to challenge financial regulators over decisions they disagree with — although Andrew Griffith, City minister, has pledged to use this power sparingly.

The bill would also give regulators and the BoE a duty to ensure UK competitiveness. This is controversial because it was previously the mandate of the old watchdog, the Financial Services Authority, which was seen as acting as a cheerleader for the City of London in the run-up to the 2008 financial crisis.

During her leadership campaign, Liz Truss promised to review the BoE’s mandate, although later committed to safeguarding the bank’s independence, drawn up in 1997 under a Labour government.

Tensions between the BoE and the government flared up after former chancellor Kwasi Kwarteng’s announcement of the “mini” Budget last month.

A blame game between the bank officials and ministers ensued over whose policies lay behind a spike in the yield of long-dated gilts that followed the fiscal statement, which sparked a liquidity crunch for pension funds and made mortgages more expensive and harder to secure for would-be homeowners.

Cunliffe and Andrew Hauser, a BoE official, described the panic unleashed among pension funds and investment managers in the hours and days following the “mini” Budget.

It was a “full-scale liquidation event”, Hauser said, adding that traders had described conditions going from “more or less manageable to: ‘completely out of control’.”

The BoE said pension funds were more resilient than two weeks ago, and, generally, could withstand a 200-basis point move in gilt yields, Cunliffe said.

Cunliffe noted that the BoE had not been fully briefed on the “mini” Budget.

“Had we thought that there was a clear risk to financial stability ex ante (we did ex post) — and the market reaction is always difficult to forecast — but if we thought this was something to affect financial stability, we would’ve advised the government. But not on the composition of fiscal policy; it would’ve been on its knock-on effect,” he said.

Cunliffe added that the BoE wanted to unwind its emergency gilt-buying programme over a “rapid but not stupidly rapid” timeframe. The bank’s purchases of conventional long-dated government bonds stood at £12.1bn and £7.2bn of index-linked gilts, he noted.

Tulip Siddiq, shadow City minister, said: “The new chancellor should listen to the warnings from the deputy governor of the Bank of England, and ditch his dangerous proposed power to override decisions made by financial services regulators.”

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