28 May 2018

Financial Times: Treasury and BoE clash over City of London regulation after Brexit

[...] The search for a Plan B has generated acrimony, with the BoE believing that Mr Hammond, in the hope of securing an EU trade agreement in financial services, is willing to sign up to a deal that would give Brussels significant sway over the City.

A number of officials have confirmed that Jon Cunliffe, the BoE’s deputy governor for financial stability, has fallen out with the Treasury on the matter. One BoE official said: “The fear is that the Treasury is going to give it all away.”

Another said: “It is very, very bad. The bank wants to have as much control as possible and doesn’t want to be a rule taker.”

Another official close to the Brexit negotiations said: “It’s terrible. Relations between the BoE and the Treasury on this are at new lows.”

Tensions were manageable for as long as both were able to unite behind a proposed system of “bespoke dynamic mutual recognition”, under which the BoE would agree with Brussels regulatory outcomes but have freedom to set its own rules to achieve them.

The bank wants autonomy to set its own regulatory regime because of the sheer size of Britain’s financial services sector. Mark Carney, governor, said last year: “We do not want to be a rule taker as an authority.”

Mr Hammond, backed by the Treasury’s head of financial services Katharine Braddick, is exploring ways of co-ordinating regulation with Brussels to try to secure an improvement for the UK to the EU’s equivalence regime, a limited deal currently offered to third countries such as the US.

The chancellor said in March that the EU had “legitimate concerns” about the future regulation of the City, saying he was ready to engage with Brussels. He has been careful to reject only “automatic” rule taking by Britain after Brexit.

The BoE denied there was any rift with the Treasury and insiders at the finance ministry said the two institutions had worked together closely on Brexit on a range of issues.

Decisions on the future regulatory regime for the City will be taken by the government. Prime Minister Theresa May hopes a free trade deal covering financial services, including regulation, can be agreed with the EU.

A Treasury spokesman said: “HM Treasury and the Bank of England are united in our aim to ensure the stability and prosperity of our economy, and we are working together to ensure that the UK continues to remain the pre-eminent financial services centre of the world.

“We agree the United Kingdom cannot be an automatic ‘rule taker’. We will start our first day outside the European Union from a unique position with full alignment.” [...]

Full article on Financial Times (subscription required)

© Financial Times