Yet another government U-turn – but there may be a sting in the tail for regulators

Much of the City will have left for home when the Treasury dropped a U-turn at 5.54pm on Tuesday night.

It was a big one. Don’t be fooled by the innocuous looking title: “Statement regarding the proposed intervention power amendment to the Financial Services and Markets Bill.”

Controversial “call-in” powers had been included in the bill, currently making its way through parliament, that would have given the government the power to amend or revoke rules proposed by one of the City’s watchdogs – the Financial Conduct Authority (FCA) and/or the Bank of England – and also to issue instructions with a view to “boosting competitiveness” and suchlike.

It was part of the government’s plans to create a freewheeling and buccaneering City of London through measures it has, with ludicrous hyperbole, attempted to characterise as a “second big bang”. These potential “call-in” powers have now been abandoned.

The City minister, Andrew Griffiths, said of the volte face: “We are of the view that the existing provisions in the bill are currently sufficient and will already allow us to seize the opportunities of Brexit by tailoring financial services regulation to UK markets to bolster our competitiveness.”

It is hard to conceal a smirk in response to the second part of that statement.

The intervention power was first mooted by Rishi Sunak, now the prime minister. That the plan has been dropped, in the face of the fierce and very public opposition of both the Bank and the FCA, is, I suppose, another favourable mark on chancellor Jeremy Hunt’s report card.

Let’s face it, far too many of their ministerial colleagues really aren’t very good at being ministers. Imagine the chaos if they tried to turn their hand to financial regulation, a difficult and delicate task at the best of times.

Mr Griffiths added: “We remain committed to the operational independence of the financial services regulators.”

Phew!

Except, worryingly, the notes below the City minister’s press release show there are still grounds for concern.

For a start, the threat hasn’t been completely lifted: “The government will keep this matter under review and return to the issue in future financial services legislation if it emerges that the regulatory framework is not able to fully support the government’s vision for the UK’s financial services sector.”

The bill also contains a “rule review power” under which the Treasury can tell regulators to look again “where it is in the public interest” however the government defines that. A report will then be laid in parliament. The final say will remain with regulators.

But will it ever get that far?

The bill clearly contains ample scope for arms-length meddling – and the arm really isn’t all that long.

Mr Sunak and Mr Hunt seem to have recognised that the job of a financial regulator is a thankless one, and seen the potential for getting egg all over the government’s face through directly interfering with their work. However, it appears that the government wants to be able to push regulators around without catching the flak for the consequences.

That isn’t so easy when it comes to the Bank. Its clout should give ministers pause. Its governor, Andrew Bailey, has demonstrated a willingness to face down government where he feels it to be necessary.

There is an argument that it was Mr Bailey who ultimately did for Liz Truss with his refusal to indefinitely prop up government bonds, which had been in free fall thanks to her and Kwasi Kwarteng’s disastrous mini-Budget. Mr Bailey’s refusal to bend certainly helped to bring things to a head.

The Bank’s regulatory work also usually attracts less attention than that of the FCA. Its Prudential Regulation Authority (PRA) handles matters related to financial soundness. It’s techie stuff, mostly way over the head of the average minister.

It’s tougher for Nikhil Rathi, the FCA’s boss. His watchdog has less prestige. Its decisions are more apt to attract public scrutiny, especially when things go wrong.

It is to be hoped that he also has strength to tell ministers “no”. I fear he’s going to need to buckle up.