UK regulatory framework being tested (22/144)

This is the latest in the series of daily blogs on financial regulation that I began posting on my first day of Covid wfh, 16 March 2020. I hope you enjoy and find useful...

I've always believed that it was too soon to declare success on the twin peaks' framework that was put in place in 2013, that it hadn't really been tested.

With a cost-of-living crisis now being compounded by a crisis in the markets, that seems about to change.

And the passage of the Financial Services & Markets Bill will be refracted through the lens of the parallel events happening on the ground.

I'll be writing about this frequently over the next few weeks, so I'll flag my main sources now, so I don't have to link to them repeatedly: the October FPC Record (i); Deputy Governor, Jon Cunliffe's (5/10) letter to the TSC (ii) on the Bank of England's intervention in the gilt market; and independent economists' (12/10) evidence to the TSC (iii). I'll add to this mini library over time.

As background to gilt market events, I've also found the FT's brief history of LDI (liability-drive investing) useful, though there'll other versions.

The gilt market dysfunction was clearly a material threat to financial stability (ii, p6), so it's important that the FPC (Financial Policy Committee), which had a low profile during the pandemic, was "engaged" ahead of the intervention. But the Bank's executive was evidently in operational control, and I do wonder where the real decisions were taken and what was the practical involvement of the FPC, FCA and TPR.

As part of this, it's also notable that, while TPR (The Pensions Regulator) regulates LDI funds - the focus of the problem - it's not represented on the FPC.

The situation is still playing out, of course, with the Bank's market operation due to end this afternoon, but at some point there should be a proper review of "who did what, why, when and how". Hopefully, the intervention will prove successful, but that wouldn't be a good reason not to evaluate how the system responded under stress.

All this raises other important questions, including about the structure of pension regulation in the UK and the role of non-banks in financial stability. I'll take a look at these next week.

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