People across the UK financial sector are questioning whether the new prime minister will change the regulatory landscape.
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With Liz Truss taking over as Britain’s new prime minister on Tuesday, questions were raised about her plans for the UK’s historic financial district – the City of London – as the country grapples with a deepening cost-of-living crisis and the ongoing conflict in Ukraine.
Regulators in the city could face a major shakeup under Truss’ leadership, according to the Financial Times last month. It quoted sources familiar with the campaign as saying Truss will seek to review and possibly merge three large London regulators – the Financial Conduct Authority (FCA), the Prudential Regulatory Authority (PRA) and the Payment Services Regulator (PSR).
She also suggested that the BoE’s mandate be under review during her tenure as prime minister.
Change for change
The FCA regulates 50,000 companies in the UK “to ensure that our financial markets are fair, competitive and fair,” according to its website. Meanwhile, PRA oversees the work of about 1,500 financial institutions, “to ensure that the financial services and products we all depend on can be provided in a safe and sound manner.”
Their jurisdictions look similar, but the different organizations were formed when it was decided that the Financial Services Authority, which regulated the city between 2001 and 2013, had multiple functions that could be better served by separate organizations.
The main objectives of the original authority were good conduct and financial safety across the sector, according to Matthew Noonan, partner at law firm Gibson Dunn and former division head at the Financial Conduct Authority (FCA). Dividing it in two, he said, was seen as a way to give those goals equal priority.
“The simple question to be answered now is: What can PRA and FCA accession achieve?” Noonan wrote in an email to CNBC.
“If the answer is to reshape the old FSA, what is the question? Or is it just a change for the sake of change?”
Noonan said governments should always “challenge the status quo,” but said it was a question of whether this would actually better serve the “changing needs of the nation.”
“The issue here is that instead of clarifying the problem and looking for evidence, the statements made seem to suggest answers to questions no one is asking,” he said.
Noonan also highlighted the difference between regulators and politicians, saying that regulators would “never be allowed” to make proposals the way Truss did.
“Regulators are obligated by law to make evidence-based decisions about rule changes.” [and] They require a cost-benefit analysis before they can be carried out… If this is true for regulators, why not for politicians? “
“Light Regulatory System”
The “battle” to liberalize the banking sector is like “turning back the clock to the pre-2008 global financial meltdown,” Fran Poyet, director of the Positive Campaigns Group, told CNBC’s “Squawk Box Europe” last month.
That risks the country falling into the same situation, “or much worse,” White said.
“Liz Truss’ proposal to merge three major city watchdogs would risk re-establishing this lightweight regulatory system – the one we had before the collapse,” she said.
She also indicated that less than a decade had passed since the organizations were originally established.
“It wasn’t that long ago that we created a much bigger regulatory system because there was a consensus that there was a lot of risk in the system, [that] The complexity of the financial sector needs proper regulation, she said.
‘Lack of clarity’
Discussions about reviewing or merging any of the regulators in London remain speculative, as Truss has yet to make any official statements on the subject.
This causes a “lack of clarity” on the future status of the three regulators, according to Hargreaves Lansdowne analyst Susanna Streeter.
She said improving financial services to clients should be at the forefront of any regulatory discussions.
“Whether they remain as individual or consolidated entities, it is really important for the UK to have dynamic regulators that make the most of the freedoms of Brexit,” Streeter said in an email to CNBC.
It added that tackling fraud, giving investors more opportunities to invest in IPOs, and addressing how information is disclosed to potential investors should all be on the agenda for any proposed changes to the current regulatory system.