08 December 2021
How has the Financial Policy Committee's objective changed since its inception?
Professor David Aikman, Director of the Qatar Centre for Global Banking and Finance written for MacroprudentialMatters.com
In this article, we take stock of the cumulative effect of the various changes that have been made over time to the Financial Policy Committee (FPC)’s mandate via the Chancellor of the Exchequer’s annual “remit and recommendations” letter. Our focus is on what impact has there been on the relative balance between promoting resilience and stability versus pursuing other government policy objectives, including promoting financial innovation, the role of the City of London and so on.
TL/DR: The FPC’s mandate has been expanded significantly since the first of such letter in 2013. This partly reflects a clarification of the types of risks and vulnerabilities the FPC should concern itself with in pursuing its primary objective, e.g., risks associated with climate change. But there has also been a marked rebalancing of the FPC’s remit, away, in relative terms at least, from maintaining systemic stability and towards its secondary objective – which includes supporting economic growth, but also increased financial sector competition, international competitiveness, and expanding the supply of finance for productive investment.
A concern this raises is whether these changes risk diluting the FPC’s focus on stability and its independence from day-to-day politics – either directly, or indirectly, by overburdening a committee with already much on its plate. This risk is heightened because the FPC’s stability mandate is imprecisely defined and open to numerous interpretations in terms of what constitutes success (see the blog published on this website by my colleague Richard Barwell on 27 September).
The objectives of the FPC are set out in 2012 legislation amending the Bank of England Act 1988 to create, for the first time, a body unambiguously responsible for preserving systemic stability.
The Committee’s primary objective is to protect and enhance the stability of the UK’s financial system. Subject to this, it has a secondary objective to support the economic policy of the Government. And in pursuing its objectives, the FPC is not authorised to take actions that would in its opinion likely 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”.
The Act requires that the Treasury specify the Government’s economic policy at least once in every calendar year. It also allows the Treasury to make recommendations to the Committee about risks it should regard as relevant for pursuing its primary objective, its responsibility in supporting the government’s economic policy, and other matters it should have regard to in its policy deliberations.
This is all set out in a public letter from the Chancellor of the Exchequer to the Bank’s Governor. The letters are published on the Bank’s website (click here for the 2021 version). There have been ten such remit letters to date since the first in 2013.
In analysing these documents, it should be noted that, in practice, these letters are published only following comments from the Bank, so their contents reflect a two-way process from both the Treasury and the Bank.