Explainer-Britain and regulators clash over post-Brexit financial reform

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By Huw Jones

LONDON (Reuters) – The British government last month proposed a far-reaching Financial Services Act to exploit the “freedoms” to write its own capital market rules since leaving the European Union.

Approval of what is the biggest market reform in two decades is expected by May 2023.

Liz Truss, the favorite to become Britain’s next prime minister, would give ministers ‘appeal’ powers under the bill to override financial regulators such as the Bank of England, the Financial Times reported.

She also said she would review the Bank’s inflation-fighting mandate, raising concerns about its independence.

WHAT IS THE INVOICE?

Brexit means Britain can write its own financial rules instead of having to apply those agreed in Brussels. This could enable London, the world’s second largest financial center after New York, to attract and retain business, as it also faces new competition from European hubs like Amsterdam and Paris.

The Financial Services and Markets Bill is largely about giving the Bank of England, the Financial Conduct Authority and the Department of Finance the power to change existing rules inherited from the bloc and draft new regulations which follows the evolution of emerging markets and sectors such as crypto-assets.

The bill also gives the power to change the capital assurance rules known as Solvency II, speed up a company’s listing, attract more retail investors and to reduce restrictions on trading stocks in the “black” or far from more heavily regulated. Exchanges.

WHAT ARE THE POWERS OF APPEAL?

Ahead of the bill’s publication last month, outgoing Prime Minister Boris Johnson’s finance ministry indicated it could include a power for ministers to force regulators to change a rule, if it was in the public interest .

But just days before the bill was published, Bank of England Governor Andrew Bailey warned that maintaining regulatory independence was key to London’s position as a competitive global financial centre.

The appeal was left out of the bill, pending further consideration, but is now expected to be added if Truss becomes prime minister next month.

The bill already contains a provision allowing ministers to order regulators to review a rule, but stopping short of a waiver.

The Department and lawmakers say that given the BoE and FCA’s vastly increased powers to make rules in one of Britain’s most important economic sectors, they need to be more accountable to the Government and the parliament.

WHAT IS ABOUT COMPETITIVENESS?

Encouraged by the sector but facing opposition from the BoE, the bill already contains a new secondary objective for the central bank and the FCA to formally support the growth and international competitiveness of the financial sector, a mission of regulators in countries like Australia, Singapore, and Hong Kong have.

Their main objective remains to maintain the stability of banks, insurers and markets and to protect consumers.

However, some lawmakers fear the additional allocations could mean a return to the “light-touch” regulation that predated the global financial crisis more than a decade ago, when UK banks had to be bailed out by taxpayers.

The industry, however, wants lawmakers to clarify what benchmarks will be used to check that regulators are meeting the new competitiveness target.

WHAT IS SOLVENCY II?

Solvency II are capital rules for insurers inherited from the EU and their reform has become a test of the extent to which Britain will use “Brexit freedoms” to set its own financial rules.

The BoE says its rule reform proposals will free up billions of pounds of insurers’ capital reserves to invest in infrastructure while protecting policyholders.

The EU is also revising the rules and is further ahead of Britain, leaving the insurance industry and government frustrated.

Amanda Blanc, CEO of insurer Aviva, said the BoE’s proposals did not free up enough capital so far and Britain should “keep going”.

Appeal powers would allow the Ministry of Finance to force the BoE to make more generous proposals.

THE NEXT STEP?

Parliament will begin detailed deliberations on the bill in the autumn, after the new prime minister takes office, with final approval by May next year.

Making real changes to the rules will take time, as regulators will then first have to present formal proposals for public comment, which could take several months before they are implemented.

(Reporting by Huw Jones, Editing by Sinead Cruise and David Evans)

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