In the wake of FTX’s spectacular boom, digital asset fans have quieted down a bit, complaining about the UK financial regulators’ cautious attitude towards crypto.
If the Financial Executive had been more welcoming to crypto companies, including FTX, many more British investors could have faced much larger losses.
Among those urging the FCA to be more conciliatory were government ministers. In March, John Glen, then City minister, told FCA CEO Nikhil Rathi that he told the regulator the need to be “more responsive” to crypto firms.
These comments raised concerns that ministers were putting undue pressure on regulators – concerns escalated in the aftermath. Financial News The Conservative party announced in February that it had received a £500,000 donation from crypto investor and lobbyist Christopher Harborne.
The Conservative party at the time refused to say whether this was a one-off or, as I was told, the first in a series of quarterly payments. Recent filings with the Electoral Commission show that Harborne did indeed donate another £500,000 in May. This brought his total payments in the first half of the year to £1m, making him the party’s largest donor.
The Conservative party insisted there was no link between donations and crypto support, but Labor accused the Conservatives of “seeking the interests of their wealthy donors”.
The revelation has again raised concerns about ministerial interference with so-called independent regulators. Some government critics argued that it underlined the danger of giving ministers the right to override regulators; this is a “mandate” that the government is proposing to add to the Financial Services and Markets Bill currently being passed by parliament.
The government has now abandoned the plan – to reassure regulators and many in the City who thought it had gone too far. Still, the proposal highlighted the need for regulators to have greater democratic accountability and the need for regulators and government to properly discuss legitimate disagreements in public.
There is no doubt that the UK has benefited from the perceived operational independence of industry regulators. But industry regulators are so important that it is unrealistic to expect politicians not to intervene from time to time for the right or wrong reasons.
Considering the larger postBrexit powers that regulators will receive, the new bill rightly aims to increase their democratic accountability. Their focus will remain on consumer protection and financial stability, but they will be given secondary objectives to advance international competitiveness, economic growth and a commitment to net zero.
However, you can imagine situations where regulators have established a rule based on a reasonable view of consumer protection and financial stability, but politicians feel that more weight should be given to other considerations such as economic growth.
This was pretty much the case in reforms to the Solvency II capital regime, when the government ignored calls for changes from the Prudential Regulation Authority, which deals with protections for policyholders. Sam Woods, head of the PRA, took up arms and forced the government to publicly reject it rather than accept a private compromise. Woods has been one of the most fierce critics of the proposed mandate for ministers to override regulators, which he said would undermine confidence in regulators’ independence.
However, in exceptional circumstances it would probably be better for ministers to override regulators publicly, rather than behind closed doors, after presenting appropriate evidence for their decision. There have been a few instances in recent years, such as peer-to-peer lending, where regulators have succumbed to private pressure from politicians and customers, investors, and taxpayers have been severely harmed.
When it comes to crypto, some big City firms have complained that FCA’s approach is hampering their efforts to make the UK a hub for the development of distributed ledger technology. Whether it’s these concerns that caused the crypto enthusiasm of ministers or the influence of donors, it would be healthier to publicly discuss major differences with regulators.
While there was cautious support for the proposed summons authority in the city, even supporters were a little nervous about its potential overuse. The reality is that the bill already gives the government the power to give regulators “direction on policies” and to request an independent review of new rules with which it disagrees. So maybe the overriding power was excessive.
Crucially, the new regime will lead the government and regulators to be more transparent and rigorous in bringing their cases. This will increase confidence that regulation is indeed being driven by the broader public interest rather than the interests of regulators, politicians or party donors.
To contact the author of this story with feedback or news, email David Wighton
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