The new Prime Minister’s first words outside Downing Street made clear her immediate priorities. Liz Truss promised to “deliver, deliver, deliver” to boost economic growth, address the energy crisis and tackle the struggling NHS. Despite its reputation being much criticised by the new Prime Minister during the leadership campaign, much of the responsibility to deliver a higher rate of growth – and avoid the threat of recession – will fall on HM Treasury.
The very first day of the new Chancellor showed how he intends to put those intentions into action. He met the Governor of the Bank of England – no doubt to remind him the recent record on inflation has been less than impressive; he dismissed the Permanent Secretary of the Treasury, Tom Scholar; and he gathered together a group of City grandees to tell them he intended to shake up financial regulation. The following day, a Treasury minister announced the intention to amend the Financial Service and Markets Bill to empower the Government to have greater powers to direct City regulators. The Chancellor has followed this up by telling all Treasury civil servants that they need to focus entirely on growth.
What does this tell us?
First, that so many of the most the City’s important financial institutions – from Goldman Sachs to Barclays, Fidelity to Aviva – were called in at a few hours’ notice was a clear sign that the Government sees regulatory reform as a vital element in its plans to drive growth. It also reveals an unhappiness about the performance of existing regulations – and, importantly, regulators. During her leadership campaign, Truss signalled that regulations such as MIFID II and Solvency II were two key areas she feels are ripe for reform. More are likely now to be on the agenda.
Second, the axing of the popular Tom Scholar and the strengthening of, in effect, Ministerial powers over regulators and regulations (even if the meeting with Andrew Bailey was also set to reassure markets about monetary policy) highlights the new Government is serious about its wish to take on what they see as a Treasury orthodox holding back growth (and they may believe there is also a regulatory orthodox that needs tackling).
Treasury Orthodox?
We are likely to see a significant change in the relationship between Government and the various regulators, especially in trying to use post-Brexit freedoms to ensure the UK is at an advantage over EU competitors. It will be interesting to observe how regulators react to this renewed emphasis on the role of regulators to deliver growth. While it is certainly possible to balance the need for a regulatory system to enable growth and provide stability, regulators will also be conscious that if there are any subsequent failures, they will end up at their door. The legacy of the financial crisis remains strong with many regulators.
Addressing this dichotomy should be part of the new system. The prominent think tank Policy Exchange recently published a research report looking at re-engineering regulation – and regulators – and this seems to show the likely direction for what the Government intends. The report proposes that there should be more accountability to, and direction by, politicians in the regulatory framework. However, it also says that politicians should accept regulatory failures will happen and support regulators in taking risks if a more proportionate and efficient system is to emerge. While the Government seems to have decided that it is regulatory caution that is holding back UK growth and competitiveness, what will be fascinating will be whether politicians will stand behind regulators if things go wrong under a new approach. Without such a change, regulators will continue to tend towards caution and the old orthodox will remain. However, what is clear is that the balance of regulation is shifting.