Another week, another questionable historical throwback from Liz Truss’s campaign to be the UK’s prime minister. To date she has often focused on the 1980s, borrowing from Margaret Thatcher’s playbook (and wardrobe) to cement her rightwing credentials, and underpin her plan to overturn what she argues is the failed orthodoxy of the Treasury and the Bank of England. But Truss’s idea to review the remit of the UK’s financial regulators with a view to merging them, is one last tried by Labour in 2001. It was then unwound by a Conservative-led coalition a decade ago following the financial crisis.
It is a plan best consigned to the dustbin of history. Not necessarily because one organisational model is better; since 2001 the UK has tried two regulatory structures, with each having pros and cons. Rather, rearranging deckchairs achieves little other than uncertainty and cost, for both regulators and the regulated, when watchdogs and policymakers need more than ever to focus on the substance of their jobs.
The idea could be dismissed as yet another publicity stunt in the quasi-presidential contest between Truss and Rishi Sunak, the former chancellor. But Truss is polling 32 points ahead of Sunak in the latest survey of Tory party members, who select their new leader and thus the country’s prime minister. It is dangerously feasible that pledges made on the campaign trail by Truss — to differentiate herself from both Sunak and the status quo — actually take root.
The current UK regulatory system houses the Prudential Regulation Authority, overseeing the safety and soundness of big banks and insurers, within the BoE. Meanwhile, the Financial Conduct Authority focuses on consumer protection and professional behaviour across the financial services industry. This “twin peaks” model was created out of the old Financial Services Authority, split up following accusations that its light-touch approach exacerbated the financial crisis — which Truss seems to have forgotten.
It is reasonable to review regulators’ performance and remit. Consumer scandals, such as the London Capital & Finance minibonds episode, and low staff morale, continue to dog the FCA (as they did the FSA). Truss has already pledged a similar review for the BoE and its monetary policy. Andrew Bailey, the BoE governor (and former FCA boss) — who is in politicians’ crosshairs over the UK’s double-digit inflation — has said he would welcome such a review. But Truss has to be clear what problem she is seeking to solve, and how merging regulators yet again might remedy it.
There are intellectual arguments for both systems: a consolidated model should improve communication and joined-up thinking; a twin peaks model gives equal weight to both headline-grabbing enforcement fines and closed-door supervision of financial soundness. The latter in particular appears a success under the PRA. Yet the Financial Times argued against splitting the FSA a decade ago, not out of ideology but precisely because organisational reform distracts from thornier, and perhaps more incremental, changes that would actually make a difference.
Perhaps that is the point: Truss is critical of what she sees as regulatory over-reach and red tape. Both she and Sunak favour a competitiveness mandate for watchdogs, meaning that they regulate in a way to boost UK plc; an objective of the doomed FSA. This wrong-headed notion of regulatory responsibility, in combination with unnecessary organisational change, is a sure-fire way to prevent regulators from doing what they are actually there for: taming wilder animal spirits, protecting consumers and ensuring market stability. That is the history lesson Truss should really heed.