Financial Services and Markets Bill – in a Public Bill Committee at 4:25 pm on 19th October 2022.
We will now hear oral evidence from Martin Taylor, former external member of the Bank of England’s Financial Policy Committee. For this panel we have until 4.55 pm. Will the witness please introduce himself for the record?
I am Martin Taylor. I have spent a lot of my life in finance and in policymaking work for the Government. What probably most interests you is that I spent seven years—until the end of March 2020—as a member of the Financial Policy Committee at the Bank of England, which is to do with macroprudential policy.
Q Thank you, Martin. It is relatively unusual to have individuals here, although we welcome your expertise. Do you have any party political affiliations to declare?
Q Have you acted as an adviser to any political party or Front Bencher?
I have acted as an adviser to Gordon Brown, Alistair Darling and George Osborne—eclectic, you might say.
Thank you; that is very helpful. Nothing else to add.
Q Thank you for coming to give evidence. My question is very simple. It is about the intervention powers being proposed by the Government, which you will know about. I would like your opinion on whether you think the intervention powers will in any way undermine the independence of the regulators.
Let me speak plainly, because it is late in the afternoon. I think this is a shockingly bad idea. I think it will certainly undermine regulatory independence —without any doubt—simply because regulators who are subject to the whim of Treasury officials or Ministers are not independent. It is a major erosion of the institutional framework. One could even say it is a corruption of the framework. For me, the institutional framework is hard-won and very precious. I can only suppose that those proposing the powers either do not understand it or do not care about it.
Q Good afternoon. That was a very clear expression of your views. I will ask three things. Do you think that we should wait and see how the intervention powers are actually defined, and how public interest is defined? Do you think there are other jurisdictions that use those powers? In terms of the definition, will it not matter how they are defined between “operational” and “strategic”?
The wording that I have seen is of course not final, but what I find strange is that it suggests the regulators are not acting in the public interest. If they have to be overruled in the public interest, clearly you think they are acting in some other interest. For me, the regulators are the public interest made flesh.
Q That is a possible interpretation. The other possible interpretation is that they have acted in the public interest and on their behalf, but the Government want to have a reserve power potentially for future consideration.
The Government have enormous influence over the regulatory process. Sometimes people characterise the regulators as living in an ivory tower or something like that, as if they are academics who sit, removed from the real world, and think up rules without any feeling for what impact they might have. In fact, if you think about it, first of all, the independence of the regulators, such as it is, is circumscribed—it is set by Parliament. It is all set by primary legislation; that is No. 1.
Secondly, the wider Government and particularly the Treasury have tremendous powers to influence regulation. The Treasury appoints all the independent members of committees. The Governor and the deputy governors of the Bank of England are Crown appointments, so effectively No. 10 and the Chancellor have a certain say. The Treasury representatives sit on these committees and let the regulators know the Chancellor’s view. The Chancellor, whoever it may be at the time, writes to the committee and sets out their views on the things they ought to take into account.
There are very close working relationships between the Governor, the Chancellor and the permanent secretary, and then all the way down the chain at the Bank of England. The regulators swim in the soup like everybody else.
Q I do not think that regulators are in ivory towers. I spent 20 years in financial services. They came to visit me and what they did with our firm never make me think they were in an ivory tower. I sometimes thought I had regulators who were trying to regulate businesses in which they did not necessarily have experience, but that is another story and we will get on to that later.
May I ask your views on the secondary objective?
I have a curious view that the fewer objectives you have the better, because the more likely you are to hit them. I have no objection to the secondary objective, if I can put it that way. It does not seem to me offensive. I was very pleased to hear the then Chancellor say in the Mansion House speech that there was a clear hierarchy of objectives, and that seemed to me to be fine. I don’t worry about that.
Q I think it has been explicit all the way through that there is a hierarchy of objectives. Would you agree that the Bill should ensure that there is a clear set of metrics and there is transparency for showing how that objective is being met or is not being met?
If that can be done, I would certainly welcome it. One of the difficulties that the Financial Policy Committee has always had is that if your job is maintaining financial stability, it is not always very easy to see if you are succeeding. One can see that recently, for example, the Monetary Policy Committee has not been meeting its inflation objective. That is an objective in hard numbers, and for the FPC and for other regulatory bodies it is harder.
Q Thank you, Martin, for your candour. What risk could the intervention pose to financial stability and to the UK’s reputation and global competitiveness if left as it is?
I do not want to exaggerate. I said this was a corruption of the system and corruptions work slowly, so it does not make us into Argentina or Turkey overnight but that is the direction of travel, if I can put it that way. Independent regulation is not an aesthetic choice; it is a practical one. I think the transparency of the regulatory process in London—the need for the regulators to explain themselves and especially the scrutiny by Parliament—is one of the cornerstones, along with the legal system and various other things we are familiar with, of London’s attraction as a financial centre. The UK’s reputation needs a bit of tender loving care at the moment, I would say, and bringing in unnecessary measures that risk damaging it seems to me unintelligible.
Q Would it be your recommendation to remove that from the Bill?
Q And do you think there is a risk that if the invention powers are left, they could be perceived by markets as a threat to the independence of the Bank of England or the PRA? We have seen such recent turmoil in the markets over concerns. Do you think it could have a similar impact?
One of the problems that led to the recent turmoil—a very English description of what has just happened—was that the Prime Minister and the former Chancellor chose not to subject the mini-Budget to the scrutiny of the Office for Budget Responsibility. Had they done so, the OBR might of course have objected to various parts of it, which is perhaps why they did not do so.
However, international investors looking at London will have noted this and it has a bad smell, if I can put it that way. I am not worried about the bond traders who price the market day by day. The volatility was extreme and very dangerous. It has been settled by the Bank for the moment, I hope. I am much more worried about the people running really big blocks of money—big foreign sovereign wealth funds or big institutional investors—who look at London and say, “Is it worth having an allocation to gilt-edged stock? Do we want to be exposed to sterling if this is the sort of thing that goes on?”.
These are the strangers on whose kindness Mark Carney told us we relied and we antagonise them at our peril. That is what worries me more than anything else: that we suppose that foreigners will always want to buy gilts. Why should they? You could run a huge international portfolio and have zero allocation to sterling at the moment. If you were in Singapore or New York, you might be more tempted to do that than you would have been a month ago. We should not do anything else to make this worse. Everything is being done by the new Chancellor to steady the ship—thank goodness—but moves like this proposed measure just go in entirely the wrong direction as far as I am concerned. I think it is very dangerous.
Q How effective has the UK been at keeping dirty money out of the financial services sector?
I do not know. I probably have the same suspicions that you have. London has a huge financial sector and dirty money is easier to hide in places where there is lots of money than in places where there is not very much. I have never worked in, or with, the Financial Conduct Authority, but sometimes it gets blamed when things go wrong, which is a bit like blaming the police for crime, if you know what I mean. There is a lot of dirty money in the world and a lot of it will try to come here. I think the regulators do their best.
Q If there is a long-term downtick in the world’s willingness to invest clean money in the United Kingdom, does that increase the risk that dirty money will replace it?
I would rather not accept the premise. We have to ensure that the world is happy to invest clean money in the United Kingdom. It is extremely important that we do that. No, I do not see us becoming a sort of sewer market—I mean, God forbid—but we have to be careful and we have to keep standards up. In taking out some European regulation—which we ought to do, because not all European regulation is good and valuable, and I am glad that the Bill allows us to do that—we need to be very careful. There are babies in the bathwater.
Q Is there a replacement risk with the EU legislation? Certainly a number of our witnesses from the big institutions said that there are parts of it that they would like to see removed or changed. Is it not the case that what it gets replaced with is vital? If it gets replaced by weaker regulation, does that threaten the stability of the markets in the longer term?
The FPC, for every quarter that I was a member of it—and I think it is still doing it—was saying that the intention was that the regulatory framework, when Britain left the European Union, would be a least as rigorous as the EU’s. In one or two places, it probably needs to be more rigorous than the EU’s, because there is some lowest common denominator there. In others, the EU has unnecessarily gold-plated things, but it needs to be done very precisely and carefully.
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witness on behalf of the Committee. The Committee will meet again at 9.25 am on Tuesday
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