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Beware the City’s push for a new regulatory watchdog

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Should there be a regulator of regulators for financial services? That is the suggestion being increasingly discussed within the City and Westminster.

Except no one wants to describe it as that. It tends to go down badly with those currently charged with keeping the industry in check.

But it is hard to shake the impression that is the general idea, especially given other moves to prod regulators towards more “support”, as it were, for the sector after Brexit.

The City’s latest proposals, submitted privately to a government consultation last month, include the creation of an Office for Responsible Financial Regulation — a new statutory body to join the ranks of Ofgem and Ofwat, which would scrutinise regulators’ rulemaking.


At its core, the call for enhanced scrutiny has some merit. But the industry — ever quick to scent an opportunity — is also positioning itself to have greater influence over the reshaping of the post-Brexit rulebook.

Let’s take a step back. Brexit will reset how the UK handles financial regulation. Powers have returned from Brussels. But the reality is that the EU regulations were dumped into UK law in a hurry. Now the question is what to do with them.

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While the EU likes to enshrine reams of technical detail in primary law, the UK instead plans for parliament to issue broad directions to regulators such as the Financial Conduct Authority and Bank of England but let them thrash out the finer points.

The legitimate case for new oversight is this: to ensure proper accountability and avoid a democratic deficit, parliamentary scrutiny of regulators will need to be bolstered. This could fall to the Treasury select committee — or a new specialist committee, as suggested by the all-party group on financial services.

Either way, it would need regular meetings and expert input to ensure more wonkish oversight and less asinine grandstanding than your average House of Commons process.

So far, so uncontroversial. But the sector wants to go further. The International Regulatory Strategy Group, a lobby group, last year separately recommended the creation of an independent body to review proposed rules and take a potential role in “any legislative review mechanism”. 

That alludes to a long-held frustration that challenging regulatory rulemaking currently involves trading blows with your immediate, day-to-day supervisor. 

This idea has developed into the ORFR. (The acronym, for a start, needs work). 

Under the proposals, it could draw on expertise from the industry, academia, regulators and even charities to consider the analysis underpinning regulatory decisions and offer a view on whether they are meeting broader social and economic objectives.

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It would not, crucially, have any right of veto or any role in day-to-day enforcement. But it would have the chance to give its formal, public opinion before new rules came into force. 

Clearly, there is a danger this becomes a court of special pleading for the industry — a way to push back against regulation that is not to its liking and to influence the politicians and other interested parties to that effect.

Indeed, the Treasury’s consultation documents already raise the concern that a body openly challenging proposals could imperil regulators’ independence.

The backdrop is relevant here. Proposals by Lord Jonathan Hill, the former EU financial services commissioner leading the government’s review into the City, to change the UK’s listing rules have been welcomed by financiers keen to attract more flotations. But they have also been questioned by investors who fear the London market’s high standards are being compromised. 

The Hill review also recommended including “competitiveness” or “growth” in the FCA’s mandate — something that was removed from the regulatory framework following the financial crisis because of the potential for tension with other (more pressing) aims such as stability and consumer protection.

And there is a sense in the City that, thanks to Brexit or perhaps just the passage of time, the regulatory pendulum is starting to swing back in its favour; that there is a chance to undo some of the so-called gold-plating that finance feels has been slowing it down in recent years.

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Financial services undoubtedly deserves more care than it has been shown through the Brexit process and a better thought-out vision for its future. 

But there are already ways to challenge regulation under the current system. And other highly-regulated sectors manage without one regulator for the day-to-day and another body for the big picture.

It’s not entirely clear why the City can’t do the same.

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