Brexiters want a piece of the Bank of England
Former Chancellor of the Exchequer Rishi Sunak has pledged to spark an investment Big Bang by overhauling insurance rules without European Union influence. During a candidates’ debate last week, Liz Truss took an incoherent pop on the Bank of England’s inflation-fighting record and mystifyingly named the Bank of Japan as an inspiration. Others questioned the role and mandate of the central bank.
At the City of London’s annual Mansion House dinner on Tuesday night, now Chancellor Nadhim Zahawi, who is no longer in the running, repeated Tory pledges to cut EU laws and replace them with new ones. “agile” rules that promote flexibility and competition. He also said the government was still seeking to overrule decisions or rules by financial regulators. These so-called appeal powers could be added later to a financial services bill due to be read in parliament on Wednesday. The powers are highly controversial as they would offer a political shortcut for ministers wishing to interfere in regulation and undermine the independence of the Bank of England.
Speaking at the same dinner, Bank of England Governor Andrew Bailey avoided a direct confrontation and spoke only of monetary policy and the challenges ahead. But the bank pushed back against political interference.
At its core, it is a struggle for political influence in central banking and financial regulation. But it’s not a quick fight between superficial cartoons to watch over the popcorn. Some regulatory changes could be helpful, but they must be done deliberately and carefully. There are no quick fixes and no free lunches. I have already explained why there is no Brexit windfall in the insurance regulatory overhaul and how regulators’ focus on competitiveness and growth has caused problems in the past.
There is a broader economic and political picture. Brexit has done two things to British financial services: it has given Britain the freedom to do what it wants with its own regulations, but it has also erected a wall between Britain and one of its largest markets. And the more Britain deviates from European standards, the more it will reduce its access to European sources of capital, customers and trade. It’s just a fact and has been since before the 2016 vote.
Yes, the UK can simplify its current EU-influenced legislation, but it’s usually very uninspiring things, like removing unused apps or defragmenting your computer’s hard drive. The UK can ensure that its capital markets standards for prospectuses and share listings are as simple and user-friendly as other markets, such as New York or Amsterdam. But the UK should not try to become the global center of the next misguided craze for something like blank check companies, or repeat the mistakes of the previous rush for Russian quotes, for example.
There are also other facts to be faced. Within the global economy, the UK financial industry has grown internationally under two trends: globalization and the free movement of capital and cash; and financial deepening, or the process of extending more financial products to more people and businesses. The first trend is reversing with increased protectionism and the second is very advanced in the UK, so future growth is more likely to be in line with gross domestic product and demographics.
Finally, perhaps the most important story arc goes back to the UK, the US and others who conquered the last great inflation of the 1970s and 1980s. It was the end of an era where central banks were slaves to political whims: government spending and interest rates were geared more to election cycles than to inflation targets.
Gordon Brown, the Labor chancellor of the late 1990s, was eventually mocked for claiming that the independence of the Bank of England and its fiscal rules had ended boom and bust. The lightweight regulation he also helped create sowed the seeds of the financial crisis. But Brown’s changes were part of a pattern among advanced economies for reducing political interference in what generally works best as longer-term policymaking.
The low-inflation global growth of the two decades prior to 2008 was partly based on these changes. But a decade after the financial crisis Paul Tucker, former Deputy Governor of the Bank of England, wrote about how it went too far and left central bankers as the bearers of too much ‘unelected power’. as the title of his book had.
The institutional setup does not deserve all the blame. The excess of technocratic power reflected the abdication of responsibility by politicians after the financial crisis and the hope that monetary policy alone would save us all. All of this created an impersonal, managerial form of government which, in turn, helped foment a populist backlash, which brought us President Donald Trump and Brexit. We are still living in a period of transition trying to find a new balance between democratic accountability and responsiveness on the one hand and the management of a very complex economy and financial system by experts concerned with stability and solidity. long term on the other hand.
A Conservative government in a bitter leadership battle and reeling from scandals, still desperate to show the benefits of its biggest project in a generation – leaving the European Union – poses the risk of a rash mistake in changing the rules financial. The bill for such mistakes only comes years later, when ordinary people, as policyholders, retirees or investors, find themselves carrying the can of another crisis.
When changing regulations, countries must guard against making the wrong decisions, either because they are opportunistic and ill-informed or because they are driven by powerful industry lobbying. Britain gives its regulators a lot of power to write financial rules. The process for challenging their choices should be transparent and involve careful consideration. Appeal powers are a dangerous shortcut for a future electoral chancellor to wield over financial regulators.
Regulation is difficult: it should not be left entirely to technocratic experts without democratic constraints, but it should only be changed with caution and with all the due diligence that can be mustered.
More from this writer and others on Bloomberg Opinion:
• London doesn’t need a legal restart: Paul J. Davies
• Brexit takes the UK back to the bad old days: Niall Ferguson
• Britain’s aspiring leaders are too quiet on Brexit: Clive Crook
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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