Sunak withdraws amid battle with Bank of England over financial regulation

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Rishi Sunak has backed down in his long-running power struggle with the Bank of England over plans to let ministers overrule City regulators and force them to take advantage of the “opportunities of Brexit”.

The Prime Minister had proposed a controversial new “power of intervention” for ministers, such as BoE Governor Andrew Bailey warned would seriously undermine the independence of financial services watchdogs.

Sunak wanted to loosen City rules so insurers would retain smaller capital buffers and hopefully free up tens of billions of pounds to spend on infrastructure, including green technology.

A senior minister had claimed the BoE was “reluctant” to proposed reforms to the EU’s Solvency II regime for insurance companies. The proposed “call power” was intended to force regulators to act.

But the Treasury announced on Wednesday that the new power, originally proposed by Sunak when he was chancellor, would be dropped.

The U-turn coincided with a compromise deal between the Treasury and the central bank on Solvency II reform, announced in last week’s Autumn Statement by Chancellor Jeremy Hunt.

Chancellor Hunt’s allies said this proved the BoE was willing to balance the need to generate growth with its mandate to maintain financial stability.

Cities Minister Andrew Griffith announced: “The Government has decided not to proceed with the power of intervention at this time.”

Griffith said existing provisions in a new financial services bill were sufficient to allow the UK to “seize the opportunities of Brexit by tailoring financial services regulation to UK markets to strengthen our competitiveness”.

“We have always been keen to strike the right balance between increased responsibility for regulators, with clear accountability, appropriate democratic input and transparent oversight,” Griffith added.

“We remain committed to the operational independence of financial services regulators.”

The decision will come as a big relief to the BoE, which feared confidence in city regulation would be undermined if ministers could simply overrule any decision they didn’t like.

The question came to the fore Brexit: Sunak wanted to loosen City regulation to demonstrate some tangible benefits of Britain’s exit from the EU, while the BoE warned that such a move could risk financial stability.

As Chancellor, Sunak intended to add a new “power of intervention” to the Financial Services Bill currently before Parliament – a position confirmed by the Treasury to the Financial Times this week.

But Bailey and Sam Woods, head of the BoE’s Prudential Regulation Authority, warned against the move, as did Nikhil Rathi, chief executive of the Financial Conduct Authority.

Woods told a city audience last month: “A power that allowed ministers to overrule regulatory decisions just because they took a different view of the issues involved would represent a significant shift away from a model of independent regulation.”

He added: “Some might argue that such a power would increase competitiveness. My view is that over time it would do exactly the opposite by undermining our international credibility and creating a system where financial regulation blew much more of the political wind.”

Sunak’s retreat marks an end to attempts by senior Conservative politicians to undermine the BoE’s authority. Liz Truss, former prime minister, said during her bid for the Tory leadership that she would review the central bank’s mandate.

Meanwhile, Hunt repeatedly refused to tell MPs on Wednesday about a Sunday Times story suggesting Britain could seek a “Swiss” relationship with the EU came from a finance minister, but he insisted it was wrong.

The chancellor said the government would not deviate from the basic “trade and cooperation agreement” negotiated by Boris Johnson and that he was committed to deviating from EU rules, such as with Solvency II, if it made economic sense.

But he added that it was his “public position” that technology could be used to mitigate physical trade barriers “in the way that is happening on the Franco-Swiss border”.

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