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Published 17 November 2022
© Crown copyright 2022
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This publication is available at https://www.gov.uk/government/publications/remit-and-recommendations-for-the-financial-policy-committee-autumn-statement-2022/financial-policy-committee-remit-and-recommendations-autumn-statement-2022
Andrew Bailey Governor Bank of England Threadneedle Street London EC2R 8AH
17 November 2022
This letter and the accompanying annex constitute the remit and recommendations for the Financial Policy Committee (FPC) for the coming year. Below I set out my perspective on the current economic context and its relevance for the FPC’s priorities for the year ahead.
I am committed to ensuring the UK’s economic stability and delivering economic growth. The government’s commitment to financial stability, and the Bank of England’s operational independence also remains absolute. A strong UK economy has always depended on a strong and stable financial services sector, which underpins the UK’s position as a global financial centre. The FPC’s main contribution to this goal is therefore protecting and enhancing financial stability in the UK, working in tandem with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
As the Committee has noted, the global economic outlook has deteriorated significantly, while geopolitical risks remain heightened. I welcome the action taken by the Bank, under the guidance of the Committee, to address recent disruption in financial markets. Volatility in financial markets – both globally and domestically – continues to highlight the importance of improving the resilience of market-based finance, and I am very supportive of the long-standing work programmes being undertaken by the Bank and the Financial Stability Board to address the vulnerabilities identified by the Committee. The Committee should continue to attach a high priority to supporting this work and ensure that the Bank continues to coordinate with the relevant regulatory authorities and across jurisdictions to take this forward. As global financing conditions continue to tighten, the close coordination of macroprudential and monetary policy will also continue to be of heightened importance in the coming months.
The Committee should also seek to act to support the government’s economic objectives, and thereby the Committee’s secondary objective, where doing so does not conflict with the achievement of the Committee’s primary objective. The government is committed to making Britain more globally competitive. There are too many barriers for enterprise, and we need a new approach to break them down. That means reforming the supply side of our economy.
The government is determined to unleash the potential of the UK financial services sector and, through the Financial Services and Markets Bill, will repeal retained EU law and establish a comprehensive domestic model of regulation. The Bill unlocks the opportunities to tailor financial services regulation to UK markets in order to bolster the competitiveness of the UK as a global financial centre and to deliver better outcomes for businesses and consumers. I expect the Committee to make use of these opportunities when exercising its functions with a view to supporting the government’s economic policy towards the financial services industry, consistent with its secondary objective.
It is more important than ever that the UK financial system serves the people of this country, creating jobs, supporting businesses, unleashing investment and powering economic growth. The FPC has, and will continue to have, a central role in helping to achieve that outcome.
I look forward to working with the Committee in the year ahead.
RT Hon Jeremy Hunt MP
Chancellor of the Exchequer
The Bank of England Act 1998 (“the Act”) sets out the objectives of the Financial Policy Committee (FPC). The Committee is to exercise its functions with a view to:
Section 9C of the Act makes clear that it does not require or authorise the Committee to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term.
Section 9D of the Act allows me to specify what the economic policy of the government is to be taken to be. Section 9E of the Act also allows me to make recommendations to the Committee about:
This document contains the Treasury’s recommendations to the Committee and specifies the government’s economic policy.
The government’s economic policy objective is to achieve strong, sustainable and balanced growth. Price and financial stability are essential pre-requisites to achieve this objective in all parts of the UK and sectors of the economy.
To achieve this objective, the government’s economic strategy consists of:
The FPC is charged with contributing to the Bank’s Financial Stability Objective primarily by identifying, monitoring and addressing risks to the resilience of the UK financial system as a whole. It should ensure that it considers all parts of the UK financial system, prioritising as appropriate. It should also ensure that it considers all types of risks to the stability of the UK financial system as a whole or a significant part of that system, including financial and non-financial (such as cyber and operational) risk, prioritising as appropriate. The purpose of preserving stability is to contribute to avoiding serious interruptions in the vital functions which the financial system as a whole performs in our economy: notably, the provision of payment and settlement services, intermediating between savers and borrowers, and insuring against risk (for individuals, businesses and financial market participants).
In order for the FPC to carry out its responsibilities, it is essential that the appropriate risk oversight and mitigation systems are in place for non-bank financial institutions. Given the inherent international nature of the risks posed by non-banks, the Committee should place a high priority on building on the ongoing work at the Financial Stability Board and across jurisdictions, to contribute to the development of robust regulatory frameworks for non-banks. Furthermore, while it might not be reasonable to expect market participants to insure against all market outcomes, it is important that lessons are learned from the recent dysfunction in the gilt market and the vulnerabilities associated with leveraged funds that this exposed. The Committee should seek to support this work such that appropriate levels of resilience in the UK financial system are ensured.
The Committee should also continue to regard risks from climate change as relevant to its primary objective. Climate change may pose risks to the stability of the UK financial system, including physical risks, and transition risks, resulting from a transition towards a net zero economy that is sudden, disorderly or more generally fails to appropriately balance environmental and economic factors.
Finally, the role of the Committee is a crucial complement to, but distinct from, those of the regulators. The Committee should also continue to work closely with the Prudential Regulation Committee (PRC) and the FCA to ensure coordination between microprudential and macroprudential policy, so far as it is possible while complying with its objectives. In ensuring it considers all parts of the financial system, the Committee should seek to work in an open and collaborative fashion with other bodies, such as The Pensions Regulator and the Payment Systems Regulator, to identify and seek to address systemic risks and vulnerabilities.
i. Recommendations as to the interaction between the FPC’s objectives
The FPC’s objectives can interact in different ways and over different time horizons. It is therefore important that the Committee gives consideration to this during its deliberations, decision making and communications:
The Act requires the Committee to explain the use of its powers. The Committee should set out publicly how its actions are assessed to contribute to its objectives, including its judgement as to the balance of risks to those objectives, how those risks are judged to have evolved and how they are expected to evolve. Further, when publicly setting out its assessment of any conflicts between the primary and secondary objectives, the Committee should highlight where, in its opinion, its decisions may result in significant conflicts between its objectives, including in the short term, and consider these in light of each of the recommendations made to it in this remit.
ii. Recommendations regarding support for the government’s economic policy towards the financial services industry
The government is committed to securing a financial sector that is both secure and globally competitive over the long term. This includes taking forward an ambitious agenda to unleash the potential of the UK financial services sector. Protecting and enhancing UK financial stability, the Committee’s primary objective, is an essential prerequisite for achieving that ambition.
The Committee should act with a view to supporting the government’s overall strategy for financial services, where doing so does not conflict with the achievement of the Committee’s primary objective – covering, in particular:
The Committee should regularly review how it is able to proactively support the areas highlighted above in a manner that is consistent with its objectives. In its assessment of the costs and benefits of its policy actions, the Committee should, wherever practical and relevant, take these considerations into account.
iii. Recommendations regarding facilitating finance for productive investment
The FPC should act with a view to facilitating the supply of finance for productive investment provided by the UK’s financial system, where doing so does not conflict with the achievement of the Committee’s primary objective. This includes, but is not limited to, venture and growth equity to support the UK’s scale up companies, and finance to support the UK’s energy security and the pathway to net zero. The FPC should consider the impact of its policy actions on the ability of the financial sector to provide finance for productive investment. The Committee should also consider the impact on finance for productive investment when making any judgements for the purposes of compliance with section 9C (4) of the Act.
In line with the recommendation above, the Committee should continue to build upon its work examining how financial regulation and changes to the structure of the financial system may have affected the balance between financial stability and the supply of productive finance, in all parts of the UK. The Committee should, where possible and appropriate, act with a view to supporting the supply of long-term capital and the successful delivery of the Long-Term Asset Fund structure.
i. Recommendations as to the interactions between monetary policy and macroprudential policy
In general, the objectives of price stability and financial stability will be complementary over the longer term. There may, however, be occasions when there are short term trade offs to be made between these objectives. The FPC should continue to have regard to the MPC’s actions, and thereby ensure coordination between monetary and macroprudential policy. To enhance that coordination, where appropriate, the FPC should note in the records of its meetings, its policy statements and its Financial Stability Reports (FSR) how it has had regard to the policy settings and forecasts of the MPC.
ii. Recommendation that the FPC have regard to risks to public funds
The FPC should, in exercising its responsibilities and functions under the Act, have regard to whether there is a material risk of public funds being required, such that the Bank’s obligation to notify the Treasury would be triggered. The Committee should seek where possible to minimise such risks whilst recognising that it will be for the Chancellor and the Treasury to determine whether any use of public funds would be in the public interest. Where it identifies such a risk, the Committee should take it into account in its assessment of the costs and benefits of its actions, and should reflect its assessment in its publications and wider communications (subject to deferred publication on public interest considerations).
iii. Recommendations to the Treasury on legislative changes
The Act allows the FPC to make recommendations to the Treasury on the need for legislative changes. In order to aid the Treasury’s assessment of the case for making these legislative changes, the Committee should provide, along with its written recommendations, evidence that:
iv. Recommendations regarding enhancing the accountability of the FPC
The Committee should attach high priority, in so far as consistent with its statutory objectives and functions, to reducing uncertainty and boosting confidence in the UK financial system through its communications. This includes continuing to develop the set of published indicators that it uses to monitor and assess risks to financial stability. It should provide clear, focussed and consistent messages about the planned regulatory response to identified financial stability risks and ensure that its policy actions are as predictable as possible.
v. Recommendations as to engagement with financial sector participants and other external experts
The FPC should endeavour to fulfil its statutory responsibilities in an open and collaborative fashion, seeking the views of industry participants, academics, other regulators and the public, as appropriate, to supplement the Committee’s own expertise.
When seeking the views of external experts, the FPC should ensure that:
The length of any public consultation should be proportionate to the complexity and impact of the proposals, and the FPC’s consultation periods should match best practice in the public sector. These recommendations should not prevent the FPC from making a direction or recommendation without, or with a more abbreviated, consultation where it considers it necessary to do so, by reason of urgency, in order to protect and enhance the resilience of the UK financial system.
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