The UK regulatory furniture could face its biggest reorganisation in over a decade if Liz Truss replaces Boris Johnson as prime minister, potentially ushering in a period of deep uncertainty for the Bank of England.

A substantial reorganisation of the UK’s regulatory bodies would coincide with an already hefty workload. This includes developing a post-Brexit regulatory regime, overseeing new financial markets, such as ESG and crypto, and tackling rapidly evolving cyber threats. It could also worsen already strained relations between the government and the regulators, who fear that their independence is rapidly eroding. 

Foreign minister Ms Truss, the current favourite to be voted by the ruling Conservative party to become prime minister on September 6, is apparently thinking of merging the Financial Conduct Authority (FCA), the Prudential Regulation Authority and the Payment Systems Regulator into a new body. As these bodies currently sit under the Bank of England (BoE), this would be a blow to the central bank. 

According to the Financial Times (owner of Global Risk Regulator), Ms Truss is keen for a regulatory review because she is unhappy with the FCA’s performance and bemoans a lack of focus on economic growth. 

The UK’s financial services bill, announced on July 20, seeks to embed a competitiveness mandate into the financial regulators’ remit.  

The FCA has been strongly criticised for not properly protecting consumers from losing money due to high risk or fraudulent financial schemes. Meanwhile, the BoE has been slammed by some in the Conservative party for being too slow to raise interest rates to head off soaring inflation. Ms Truss would also apparently like to reform the UK Treasury and the Bank of England overall. 

However, the FT article, quoting a party insider, says no firm decision has yet been taken. 

Industry sources commented that Ms Truss’s plans sound like a resurrection of the Financial Services Authority (FSA), which was officially disbanded in 2013, because it failed to anticipate the 2007-2009 global financial crisis. 

The current regulatory structure was created to give the BoE greater insight into the financial system so as to head off threats to financial stability through prudential and monetary policy. 

“By giving ministers review powers over all regulatory decision-making, the independence of the regulatory framework is being completely stripped away, making it extremely vulnerable to prevailing political winds,” says Andrew Poole, director of UK regulatory consulting at ACA Group. 

He warns that this would create uncertainty for financial firms conducting cross-border business knowing regulatory changes could occur on a political whim. He fears that such interference could actually weaken the UK’s competitiveness, which partly relies on a strong and predictable rules. 

“Regulatory autonomy is essential to stable financial markets and politicians should tread carefully so as not to impinge on regulatory powers,” says Ben Richmond, CEO at regtech firm CUBE. “Of course, regulators must be accountable to government, but there is a fine line between accountability and interference.” 

Some industry sources think a regulatory reorganisation would be a waste of resources for already stretched regulators. Others worry that it could lead to a return to the FSA’s doomed ‘light touch’ approach to supervision. 

One industry source who asked to remain anonymous believes this is the start of a necessary deregulation that will unleash the City of London’s potential. He explains that pivoting the UK’s regulatory regime more towards common law rather than overly prescriptive rules will make the country’s financial services sector more nimble and competitive without necessarily compromising financial stability. 

If a reorganisation is pursued, the government will need to tread carefully because undermining regulatory credibility could damage the City of London’s attractiveness.