Inside Westminster’s war with the FCA
The relationship between the Financial Conduct Authority (FCA) and the government has been fractious in recent years. Charlie Conchie takes a look at why Westminster went to war with the regulator
Back in the depths of Summer 2022, as Rishi Sunak and Liz Truss tore into each other in a weeks-long roadshow around the country, reports began to surface of a potential shake-up in the City.
Truss was looking to woo the right wing of the party and her team had briefed the press that a mega-merger was coming for the country’s financial watchdogs. In a hark back to the pre-financial crisis years, the prospective PM was drawing up plans to combine the Financial Conduct Authority with the Prudential Regulation Authority and the Payments Systems Regulator.
The suggestions triggered an immediate backlash among regulatory circles as compliance experts raised the alarm over a threat to regulatory stability. Some bank bosses warned we’d look “silly”. Former Lib Dem leader Vince Cable even said “if it ain’t broke, don’t fix it”.
For some, it marked something of a nadir in the relationship between government and financial regulators that threatened the authority of the Square Mile’s policemen.
But as Jeremy Hunt publicly waded into a debate on the Financial Conduct Authority’s controversial ‘name and shame plans’ last week, that relationship appears to have plunged to a new low.
“[Rathi] has done more for the Parisian financial services sector than he ever has for the UK”
A senior City source that is familiar with the FCA
Since 2022, the relationship between Westminster and the FCA has been fractious, marked by bitter barbs from SW1 and thinly veiled retorts from the regulator.
The government has mounted its pitch to the City on the basis of stripping back red tape and unleashing another “big bang” in financial services. But the regulator, under chief Nikhil Rathi, has been beefing up its enforcement teams and openly transforming itself into a more “assertive” force in the industry.
Much of the friction stems from a fundamental shift in the watchdog’s mandate over that time. Under its flagship package of Edinburgh reforms and facilitated by the Financial Services and Markets Act, the government last year expanded the FCA’s role to include a secondary objective of promoting the growth and competitiveness of the UK, alongside its main objectives of protecting consumers, protecting market integrity and competition.
However, that change itself resulted in a row. Then-City minister Andrew Griffith had to privately overrule the regulator to include the objective after protests from the FCA, City A.M. understands.
A year on, as the FCA pushes into areas like diversity and beefs up its consumer protection teams, some across Westminster and the City feel the regulator has abandoned all efforts to follow it.
“It seems pretty clear they have no intention of actually adhering to it,” says a senior City source that is familiar with the FCA. “Instead, they wade into agendas like diversity but those are amply covered by employment law already. The FCA Board is weak because which serious City figures would want to be associated with the damage they are doing?”
Rathi has “done more for the Parisian financial services sector than he ever has for the UK,” the source adds.
In a speech to a City conference last month, business secretary Kemi Badenoch struck a similar tone as she claimed the regulator’s plans to force firms into reporting on diversity would be “counterproductive” and her role involved “the killing of bad ideas”.
“At a time when Government is focused on driving economic growth through smarter regulation, the FCA should not be adding regulatory burdens which go well beyond the legislative framework in the Equality Act,” Badenoch wrote in a letter to Rathi weeks prior, seen by City A.M.
Similar tensions punctuated last summer as the regulator, mandated by government, introduced the “most significant change” in a decade: its stringent new Consumer Duty.
In a private meeting with City figures, Griffith was reportedly “scathing” of the duty and said the new rules were hampering the appeal of the UK just when it needed to be tempting in international companies. Alongside that came a spat over proposed call-in powers, which would have allowed the government to overrule the regulator: a battle ultimately won by the FCA and PRA.
The explosive comments from senior figures capture the tension felt towards the regulator from pockets of Westminster and the Square Mile. Just as ministers were hoping to realise a rare post-Brexit dividend by stripping back the regulatory burden, they feel the FCA has gone in the opposite direction, adding more cumbersome rules.
The City has also been plunged into crisis by an exodus of listed companies and fears that complex rules are driving businesses away. Insiders at the chipmaker Arm reportedly pointed the finger at the FCA’s listing rules as a primary reason for the decision to float in New York.
While the FCA has since committed to an overhaul, some feel it should now be focusing on reviving the appeal of London’s markets rather than bringing in new guardrails for consumers.
“From an international perspective it is becoming an outlier regulator, out of kilter with its international competition,” said Harvey Knight, a regulatory partner at law firm Withers. “We have moved beyond the ‘shoot first and ask questions later’ approach of the 2010s to a ‘publish and be damned’, whatever the consequences to the UK’s financial services industry and the UK’s wider economy.”
However, privately some regulatory officials feel the criticism ignores the FCA’s main priorities. While the regulator has to consider growth and competitiveness, it still falls behind consumer protection in terms of its objectives.
“It’s a secondary objective,” one FCA insider tells City A.M. “We’re taking on the biggest listing reform since the 80s, enacting the Edinburgh reforms, bringing in things like the consolidated tape, but we still have to balance those with the primary objectives as well – it’s a juggling act.”
An FCA spokesperson said: “We embrace our secondary objective to facilitate international competitiveness and growth alongside the primary objectives given to us by Parliament to protect consumers, market integrity and effective competition.”
Hunt’s ‘unusual’ intervention
For all the concern over mandates and objectives, the means by which Chancellor Jeremy Hunt waded into the debate over the controversial ‘name and shame’ plans last week has unsettled some.
The fury across the City has been near-universal, but the FCA is held to account by parliament and is in near-constant contact with the Treasury behind the scenes. For Hunt to therefore wade into a regulatory discussion via an interview with the Financial Times, just after a consultation on the plans had closed, was seen as an inflammatory move by insiders.
The move was “very unusual”, one former Treasury official told City A.M.
Matthew Nunan, a former senior FCA regulator and partner at law firm Gibson Dunn, added that while he agreed with the thrust of Hunt’s complaint, the method was concerning.
“There are well-trodden paths for communication between the Treasury and the FCA and there will be almost constant contact – that would seem the best way for any government to express its views on FCA proposals,” Nunan said.
The FCA has been wrong-footed by the scale of coordinated fury over the plans, with chair Ashley Alder admitting to the Treasury Select Committee yesterday that the agency was “not expecting such a stern reaction”. But much of that has been voiced directly to the regulator through the traditional means of a consultation. The FCA’s two top bosses themselves stressed in the grilling by MPs that “no decision” had yet been made.
Some fear that Hunt’s intervention threatens to disrupt the independence of the process as the FCA reviews the feedback to the consultation. The Treasury, however, has denied suggestions it is looking to strong-arm the regulator over the plans.
“We will listen carefully to the extensive feedback we have received, including from Government as we reflect on our next steps,” the FCA said.
Rathi is set for another summons from the House of Lords over the plans and will likely face further grillings behind closed doors from the City minister. In its own pitch to the City, Labour has taken at the scale of the FCA rulebook and says it will “modernise the regulatory burden” and cut “redundant” rules that have hampered the growth of the sector.
As Westminster shifts into election mode and both parties look to talk-up revitalising Canada, tensions with the regulator show little sign of cooling soon.