Earlier this year, Aviva’s announcement that it would cancel its preference shares at par caused uproar in the market for bank capital instruments.
But just three days after member of Parliament Nicky Morgan wrote to the UK’s Financial Conduct Authority to ask whether Aviva’s communication was consistent with the rules, the insurance firm announced it would take no action over the shares after all.
It later went further by compensating investors who lost out by trading out of the shares when their value fell. The role Morgan played in this spectacular U-turn is unclear, given the intense pressure it also faced from investors. But as a high profile politician, her voice carried significant weight.
When it comes to financial regulation, the UK Parliament’s Treasury Select Committee, which Morgan chairs, continues to demonstrate its heft.
Made up of 11 MPs from various parties, the committee has no power to create or modify legislation or financial regulation. Instead, it scrutinises policy and makes recommendations to Parliament.
It also chooses its own subject of inquiry. With all MPs involved in electing the chair, it retains considerable independence from government.
Its ability to call for witnesses to give evidence also gives ambitious politicians a chance to grill people like Bank of England governor Mark Carney.
“It’s taken seriously by the press and also the government,” said Michael McKee, partner and head of financial services regulation at DLA Piper. “If the committee is concerned about an issue and looking at it that will tend to get a higher priority from the FCA.”
After the last election, Conservative MP Morgan took over from her retiring colleague Andrew Tyrie, gaining backing from left wing MPs to defeat the hard right Jacob Rees-Mogg for the position.
The committee’s impact has also been seen in its report on EU insurance regulation in view of the UK leaving the EU, published in October 2017. It criticised the Solvency II framework and urged the Prudential Regulation Authority (PRA) to change the way it regulates insurers.
With little other detail from government of how insurance regulation will look after Brexit, this report caught the attention of the market.
The PRA felt forced to contest some of the claims, but could ultimately lose out.
Brexit power?
Working out who wields political clout in the UK is a tough task for the market.
The Conservative Party remains in government after the 2017 election thanks to the support of the Democratic Unionist Party, a small Northern Irish party that was relatively unheard of on the mainland until last year.
Given this weak electoral arithmetic and the difficulty of reaching a Brexit agreement that will please both Conservative MPs and Parliament in general, a new election before the next scheduled one in 2022 is entirely possible — which could easily result in another Parliament with no party holding an overall majority.
And even without another election, if Theresa May were forced to resign her party would face pressure to let its members decide who the next leader would be this time around — when May took power in 2016 they did not get a chance to vote.
The next prime minister would therefore be decided by around 120,000 people, whose views aren’t shared by the rest of the country. On Brexit in particular, the Tory membership largely believe the harder it is, the better. The bookmakers’ two favourites to be next prime minister are hard left Jeremy Corbyn and Rees-Mogg: quite the inverted bell curve of potential outcomes.
Such uncertainty creates the opportunity for other bodies to exert firm influence, beyond simple scrutiny, over the direction of policy. Backbench MPs, such as those on the committee, are more likely to pick up on issues that play well with voters. The Aviva debacle was clearly in part more salient for Morgan than other redemption announcements because retail investors faced losses as well as institutional ones.
Members may also look at issues through a lens that is less forensic than policy wonks, but more political.
For example, in its report on EU insurance regulation, the committee urged the PRA to consider its duties with a “post-Brexit mentality”, appearing not quite to grasp that the UK remains bound by European Union regulation for the time being and that the negotiations over exit terms go well over the PRA’s head.
But if the market wants to understand how financial policy will ride out the Brexit process, it needs to look beyond the traditional structure of executive government — and pay attention to Morgan and her colleagues.