Government Intervention in the Regulation of Independent Markets​

By Jake Rickman​


What do you need to know this week?

Bank of England policymakers are gearing up for a fight with the UK Government over its proposal to allow ministers to intervene on decisions traditionally reserved for the nation’s central bank and its under-departments.

A bill drafted by former Chancellor of the Exchequer and candidate for the Conservative leadership Rishi Sunak is to be published today, Wednesday 20 July. The Financial Services and Markets Bill will seek to implement proposals set out in HM Treasury’s Regulatory Framework review, which was commissioned following Brexit to assess “the legislative framework in which the financial services regulators operate”.

At the centre of the Bill is a contentious provision that enables ministers to review and challenge banking and finance regulators’ decision-making. The Government believes that independent regulators, which in addition to Bank of England policymakers include its sub-agencies, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), are not implementing proposed market reforms at the scale and speed necessary. This new Bill, if it becomes law, will enable ministers to review policy decisions by independent regulators to align them with the government’s agenda.

Why is this important for your interviews?

For over fifty years, the Bank of England has enjoyed independence from the government. This means that, while the government might set broad economic targets, such as maintaining inflation below 2%, the Bank of England has near-complete autonomy in achieving these goals. A similar situation exists for the Financial Conduct Authority and Prudential Regulation Authority both of which sit under the Bank of England and independently regulate the conduct of financial services and insurance firms.

Following Brexit, politicians were hopeful that Britain would benefit from a laxer financial markets regime since it would no longer have to comply with EU-wide market directives. For instance, EU laws under the “Solvency II” regime require all UK insurance firms to comply with minimum liquidity requirements so that in the event of a market downturn, insurance firms have not over-invested their clients’ cash and could meet all claims made of them.

You might wonder what the relationship between insurance firms and market performance is. Insurance firms are some of the biggest institutional investors in the market. This is because they handle immense sums of cash: clients pay firms money up front for coverage down the line. To turn a profit, firms invest this money in the market.

The government wants to liberalise liquidity requirements so that insurers can deploy more money in the market, thereby diverging the UK’s regulatory regime from the EU. Independent regulators are reluctant to embrace these reforms, fearing that too much liberalisation could threaten the stability of the market in the event of future recessions.

How is this topic relevant to law firms?

When the government undertakes financial regulatory reform, it relies on the advice of City law firms because of their expertise in advising all relevant stakeholders.

In December 2021, the government announced it had appointed seven City law firms to its Legal Service Panel. These firms, which include Ashurst, Dentons, DLA Piper, and Slaughter and May, advise government departments on “financial and complex legal services”. Government departments like HM Treasury will have sought the advice of such firms when undertaking research into regulatory reform.