Andrew Bailey’s focus last week was on high-cost credit and measures to curb the gouging of vulnerable consumers. This week the chief executive of the Financial Conduct Authority will be centre stage as he defends – or not – his plan to water down London’s stock market rules for the likes of the oil behemoth Saudi Aramco, an issue that deeply divides the City.
Already this year Bailey has fought a protracted battle over the publication of the FCA’s report on how the Royal Bank of Scotland mistreated small business customers. The “whistleblower” affair at Barclays, where the chief executive Jes Staley was fined £642,000 but cleared to stay in his post, was equally high profile.
It goes to show what a varied life Bailey leads at the top of the regulatory tree. It is one that has made him favourite with the bookies to be the next governor of the Bank of England when Mark Carney departs next year, which probably reflects a few factors.
First, he is now the country’s most widely experienced financial regulator. After a long career at Threadneedle Street, he was switched to the FCA in 2016 to fix an organisation seen as lacking credibility and clout.
Second, for all the criticisms that the FCA was slow and soft over RBS’s Global Resructuring Group (GRG), Bailey retains respect in the market. When senior bankers gossip at City dinners over Carney’s successor, they usually conclude that Bailey’s front-runner status is deserved: he has run the FCA, a vast organisation that regulates 56,000 companies, without causing serious headaches for government. Third, he knows the European regulatory landscape backwards, a useful quality as Brexit approaches.
So what does he make of reports this week that the Treasury and the Bank are quarrelling over the best Brexit strategy for the City? Chancellor Philip Hammond, it is said, wants to maximise UK firms’ access to the EU market whereas Bank officials think the UK must not offer so many compromises that it ends up becoming “a rule-taker”.
“If you put us [the FCA], the Bank of England and the Treasury into a room you would not find differences of view on basic planks of this,” Bailey replies. “Do we believe in open markets? Yes. Do we think it is to the benefit of everybody, including the EU, that we have open markets? Yes. Are we concerned about what we could call ‘narrow’ rule-taking? Well, it would be a problem.
“But I think some of this is overblown. We can’t have automatic rule-taking and I don’t think any of us could be comfortable with that because Brussels rings you and tells you what the answer is. That is not a proposition any of us could live with. I don’t think there is a sliver of difference between us on that one. I think we have made some progress. I think we have pushed back on the argument that you can’t have financial services in any trade agreement.”
Bailey’s frustrations are directed at the EU side. On transition arrangements, he says “it is proving a bit hard to get engagement on the common technical solutions”. The problem, he argues, is that “if the EU says nothing is agreed until everything is agreed, then whatever is said you can’t be certain.”
Quick guide What are Brexit options now? Four scenarios
The UK could sign up to all the EU’s rules and regulations, staying in the single market – which provides free movement of goods, services and people – and the customs union, in which EU members agree tariffs on external states. Freedom of movement would continue and the UK would keep paying into the Brussels pot. We would continue to have unfettered access to EU trade, but the pledge to “take back control” of laws, borders and money would not have been fulfilled. This is an unlikely outcome and one that may be possible only by reversing the Brexit decision, after a second referendum or election.
Britain could follow Norway, which is in the single market, is subject to freedom of movement rules and pays a fee to Brussels – but is outside the customs union. That combination would tie Britain to EU regulations but allow it to sign trade deals of its own. A “Norway-minus” deal is more likely. That would see the UK leave the single market and customs union and end free movement of people. But Britain would align its rules and regulations with Brussels, hoping this would allow a greater degree of market access. The UK would still be subject to EU rules.
A comprehensive trade deal like the one handed to Canada would help British traders, as it would lower or eliminate tariffs. But there would be little on offer for the UK services industry. It is a bad outcome for financial services. Such a deal would leave Britain free to diverge from EU rules and regulations but that in turn would lead to border checks and the rise of other “non-tariff barriers” to trade. It would leave Britain free to forge new trade deals with other nations. Many in Brussels see this as a likely outcome, based on Theresa May’s direction so far.
Britain leaves with no trade deal, meaning that all trade is governed by World Trade Organization rules. Tariffs would be high, queues at the border long and the Irish border issue severe. In the short term, British aircraft might be unable to fly to some European destinations. The UK would quickly need to establish bilateral agreements to deal with the consequences, but the country would be free to take whatever future direction it wishes. It may need to deregulate to attract international business – a very different future and a lot of disruption.
The UK has committed to a “temporary permissions” regime for financial companies that would replace the current “passporting” set-up. At a basic level, that will allow UK consumers to know that their car and home insurance policies with EU insurers such as Axa and Allianz will be be valid after Brexit. “Obviously we can’t say that to EU consumers who have taken policies off UK firms because the UK government can only legislate in the UK ... It would be much better if we could do that across the board and say ‘no, we are not going to put you at risk’ and let the negotiation go on.”
On what he calls the eventual “steady state” arrangements, Bailey invites the EU to think again about “mutual recognition”, one of the UK’s preferred options but not popular with EU negotiators. “It’s a two-way process,” he says. “I’m always interested when I hear them say ‘We don’t like mutual recognition.’ I think you probably do want us to recognise you, actually.”
In other words, it might be in the EU’s interest to look at “outcomes”, in the negotiating jargon, rather than equivalence in rules. Bailey points to Mifid II, the huge pan-EU set of financial rules that came into force at the start of this year and set transparency and risk thresholds for shares, bond, commodities, derivatives and more.
“All those things were calculated on the basis of an EU single market with the UK as part of it,” he says, “and the UK is the biggest part.” If markets were split but the same Mifid rules were applied “you will not get equivalent outcomes because we have different size markets” and the “there would be a big incentive for business to move one way or another at that point.”
The risk for the EU, in effect, is that more non-EU financial trade could gravitate to the City. “So I think you [the EU] want equivalent outcomes because that it is how you get protection on the level playing field, as it were.” He concedes, however, that “we are still in the foothills of that argument”.
Any regrets about handling of the GRG affair? The tangle flowed from the fact that the investigation was commissioned by the FCA in 2014 as a “section 166” report, meaning its contents were supposed to be confidential. That position became near-impossible last year when leaks revealed the scale of RBS’s mistreatment of small businesses. The FCA published a summary of the findings but demands for full disclosure were unrelenting. The stand-off ended only when the Treasury committee used parliamentary privilege to publish the whole report.
“There were two things we were not prepared to do,” says Bailey. “One, water down the report. And, two, break the law. I know this gets interpreted outside as ‘we caved’ but we can’t break the law.” The report itself, he argues, was “tough but fair” but the real answer would have been to hold a public inquiry in the first place, thereby forcing everything into the open. “The problem is that, if you look at the post-crisis history, we have had several governments in that period and none has wanted to go down the public inquiry route,” he argues.
As for the whole year it took to resolve the Staley case, he pleads the sheer volume of evidence in the email age and the need to interview a lot of people. “I am keen that we speed up our processes where we can do so, but you are always balancing that against how much legal risk you are prepared to take,” he argues.
As for the big Bank gig, he’s an old hand who knows not to offer a word out of line: “I have got my hands full. I love this job.”