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People in the UK financial sector are wondering if the new prime minister will change the regulatory landscape.
Jeff Jay Mitchell/Staff/Getty Images
As Liz Truss became Britain’s new prime minister on Tuesday, questions are being raised over her plans for the UK’s historic financial district – the City of London – as the country grapples with a worsening cost-of-living crisis and the ongoing conflict in Ukraine.
According to the Financial Times last month, City regulators could face major changes under Truss. It cited campaign insiders as saying that Truss would seek to review and possibly merge London’s three major regulators – the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Payment Services Regulator (PSR).
She has also suggested that the Bank of England’s mandate will be reviewed during her time as Prime Minister.
‘Change for the sake of change’
The FCA “regulates 50,000 firms in the UK to ensure our financial markets are honest, competitive and fair,” according to its website. The PRA, meanwhile, oversees the work of around 1,500 financial institutions, “to ensure that the financial services and products on which we all rely can be provided in a safe and sound manner.”
Their purveyors seem similar, but when the Financial Services Authority decided to regulate the city between 2001 and 2013, different entities were created, with multiple functions that could be better served by separate entities.
According to Matthew Noonan, a partner at law firm Gibson Dunn and former head of the FCA, the original authority’s main goals were good conduct and financial soundness across the sector. He said splitting it into two was seen as a way to give equal priority to those goals.
“Now the simple question to answer is: What will be achieved by rejoining the PRA and the FCA?”, Nunn wrote in an email to CNBC.
“If the answer is reform of the old Financial Services Authority, what was the question? Or is it just change for change’s sake?”
Governments should always “challenge the status quo,” Nunn said, but argued whether this would actually better serve the “changing needs of the nation” is a question.
“The point here is that instead of clarifying the problem and asking for evidence, the statements suggest answers to questions no one is asking,” he said.
Nunan also highlighted the difference between regulators and politicians, saying regulators would “never be allowed” to make proposals like Truss.
“Regulators are required by law to make evidence-based decisions on rule changes [and] A cost benefit analysis is needed before it is implemented… If it is true for regulators, why not true for politicians?” he asked.
‘Light Touch Regulatory Regime’
The “battle” to deregulate the banking sector is “like turning back the clock to the pre-2008 global financial crash,” Fran Boett, director of the campaign group Positive Money, told CNBC’s “Squawk Box Europe” last month.
That puts the country at risk of falling into a similar situation “or much worse,” Boyett said.
“Liz Truss’ proposal to merge the three key City watchdogs would risk recreating that light-touch regulatory regime – the regime we had pre-crash,” she said.
She also highlighted that it has been less than a decade since the institutions were originally established.
“It wasn’t that long ago that we set up a much larger regulatory system because there was a consensus that there was too much risk in the system, [that] Complexity in the financial sector needs to be managed properly,” she said.
‘Lack of Clarity’
Talks of a review or merger with any of London’s regulatory bodies remain speculative, as Truce has yet to make any official statements on the subject.
That causes a “lack of clarity” about the future status of the three regulators, according to Hargreaves Lansdowne analyst Susannah Streeter.
She said improving financial services for consumers should be at the forefront of any regulatory discussions.
“Whether they remain as a single or merged entity, it’s really important that the UK has dynamic regulators that make the most of Brexit freedoms,” Streeter told CNBC in an email.
Tackling scams, giving investors more opportunity to invest in IPOs and looking at how information is disclosed to potential investors should all be on the agenda for any proposed changes to the current regulatory system, she added.
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