New UK prime minister could shake up the City of London

Representatives of the UK financial sector are wondering if the new prime minister will change the regulatory framework.

Jeff J. Mitchell / Staff / Getty Images

As Liz Truss becomes Britain’s new prime minister on Tuesday, questions are being raised about her plans for Britain’s historic financial district – the City of London – as the country grapples with a worsening cost-of-living crisis and ongoing conflict in Ukraine.

City regulators could face a major shake-up at the Highway, according in the Financial Times last month. He quoted campaign insiders as saying that Truss would be looking to review and possibly merge London’s three big regulators – the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Payment Services Regulator (PSR).

She also suggested that the mandate of the Bank of England would be revised during her tenure as prime minister.

“Change for the sake of change”

The FCA regulates 50,000 firms in the UK to “ensure the fairness, competitiveness and fairness of our financial markets”, according to its website. In the meantime, the PRA is monitoring some 1,500 financial institutions to “ensure that the financial services and products we all rely on can be delivered in a safe and secure manner.”

Their mandates sound similar, but different entities were created when it was decided that the Financial Services Authority, which regulated the city between 2001 and 2013, had several functions that were best handled through separate entities.

According to Matthew Noonan, partner at the law firm Gibson Dunn and former head of the FCA division, the original body’s main goals were good conduct and financial sustainability across the sector. He said splitting it in two was seen as a way to give those goals equal priority.

“Now we need to answer a simple question: what will the reunion of PRA and FCA bring?” Noonan wrote in an email to CNBC.

“If the answer lies in reforming the old Financial Services Authority, then what was the question? Or is it just change for the sake of change?

Governments should always “challenge the status quo,” Noonan said, but said the question is whether that would actually better serve the “changing needs of the nation.”

“The problem here is that instead of framing the problem and finding evidence, the claims made seem to offer answers to questions that no one is asking,” he said.

Noonan also highlighted the difference between regulators and politicians, saying that regulators will “never be allowed” to make proposals like Truss did.

“Regulators are required by law to make informed decisions about changing rules. [and] require cost-benefit analysis before they can be implemented… If this is true for regulators, why is this not true for politicians?” he asked.

“Regulatory mode with a light touch”

The “fight” to deregulate the banking sector is like “winding back the clock to the global financial crash to 2008,” Fran Boait, Positive Money’s campaign director, told CNBC’s Squawk Box Europe last month.

This could put the country in the same situation “or much worse,” Boeth said.

“Liz Truss’s proposal to bring together three of the city’s key watchdogs could lead to the re-creation of that light regulatory regime — the regime we had before the crash,” she said.

She also stressed that less than ten years had passed since the founding of the organizations.

“Not so long ago we created a much larger regulatory system, because everyone agreed that there are so many risks in the system, [that] difficulties in the financial sector need to be properly managed,” she said.

‘Lack of clarity’

Discussions about revising or merging any of London’s regulators remain speculation as Truss has yet to make any official announcement on the matter.

This does cause a “lack of clarity” about the future status of the three regulators, according to Hargreaves Lansdown analyst Suzanne Streeter.

She said that improving financial services for clients should be the focus of any regulatory discussion.

“Whether they remain single or unified entities, it is critical that the UK has dynamic regulators who make the most of the Brexit freedoms,” Streeter said in an email to CNBC.

She added that combating fraud, giving investors more options to invest in IPOs and addressing how information is disclosed to potential investors should be high on the agenda for any proposed changes to the current regulatory system.

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