The Bank of England has a new Governor: So who is Andrew Bailey?
Despite a rich career in resolution and prudential regulation, Andrew Bailey's latest role at the Financial Conduct Authority could pose an issue of trust for the Bank of England, writes Dods Monitoring's Maria Busca.
In December, Andrew Bailey, the head of the Financial Conduct Authority (FCA), was appointed by the Chancellor to be the new Governor of the Bank of England. He is due to start his term on 17 March 2020, never having sat on the Monetary Policy Committee. So, what were his former roles? What kind of Governor is Bailey likely to be?
Grammar school educated, Andrew Bailey studied history at Queen’s College, Cambridge, going on to achieve a PhD in economic history. He became a research officer at the London School of Economics before joining the Bank of England in 1985, where he spent over 30 years of his career. One of his roles was as private secretary to then Governor Eddie George, during the period Chancellor Gordon Brown granted the Bank independence to set monetary policy.
Financial stability will be his priority
Bailey worked extensively on bank recovery and resolution, making him one of the few people who truly understands the costs of bailouts - an outcome which he will surely unreservedly strive to prevent. As chief cashier, he played a key role in the state bailout of RBS and Lloyds Bank during the financial crisis and lead up the Special Resolution Unit (SRU), a new entity created to deal with distressed banks and building societies.
Mr Bailey enjoys a reputation for having an uncompromising attitude when it comes to financial stability. In a speech in January 2011 on financial regulation, he said that whilst there are other objectives to keep in mind, such as competition and consumer protection, financial stability should be prioritised. His view is useful to keep in mind the context of the Bank’s review of MREL (minimum requirement for own funds and eligible liabilities) calibration, which acts as a buffer to absorb losses in order to support an effective resolution. In the UK, MREL requirements apply to smaller lenders as well - a barrier to their competitiveness.
Senior management accountability and culture stay at the basis of financial stability
One of the key authorities working on our current regulatory framework after the financial crash, Andrew Bailey became Managing Director of the Prudential Business Unit, Financial Services Authority, in 2012, paving the way for the creation of the Prudential Regulation Authority (PRA), which he later headed. Under his helm, the PRA together with the FCA developed the SM&CR - the Senior Managers Certification Regime, which enhanced the accountability of senior management in financial institutions and has now been extended from banks and building societies to insurers and financial advisers.
A strong believer in the role of culture in financial stability, he said in a speech in 2016 when head of the PRA, “there has not been a case of a major prudential or conduct failing in a firm which dd not have among its root causes a failure of culture manifested in governance, remuneration, risk management or tone from the top".
One thread in his public engagement is his belief in setting the right incentives and reducing moral hazard. Accordingly, he does not support the introduction of a bonus cap, which he sees as reducing the ‘right incentives’; this clashes with the view of the European Union and could also be an area to watch in terms of his future relationship with the UK Government.
His reputation at the FCA may pose a challenge for the Bank
Despite his great domestic and international reputation in financial circles, Andrew Bailey’s stint as CEO of the FCA since July 2016 has led him to develop a bad reputation with consumers bodies and individual investors. Under his leadership, the FCA garnered acclaim for some reforms, including easy access rates for cash rates and capping of rent-to-own products. However, the regulator also faced criticism for being too slow to react to scandals such as the collapse of London Financial & Capital and the Neil Woodford’ fund’s fiasco. This decidedly mixed reputation with regards to consumer protection could ultimately affect the Bank’s credibility going forward.
In his latest podcast at the FCA, Bailey said one of his biggest worries was a fall in asset prices, to which many individuals, he claimed, were exposed due to the pension freedoms - a reform he did not shy away from criticising. Any potential assets downturn is again likely to affect his reputation and the trust in the institutions he has represented, including the Bank, even if the root causes may be proven to be consumer misinformation or government policy.
In his later role, Bailey also had a chance to put forward his views on a post – Brexit regulatory framework. He spoke in no uncertain terms that the UK should not become a ‘rule-taker’, expressing his support for a principle-based regulatory arrangement with the EU. This is something that Mark Carney had been also vocal about and appears to be in alignment with the Government’s approach. This view could put at risk obtaining equivalence, if the EU renders the UK’s regulator approach missing detailed outcomes the bloc has in mind.
An official guided by pragmatism, with a deep understanding of economic history and politics, who prioritises financial stability and has a ‘never again’ attitude to bailouts, Andrew Bailey makes an appropriate governor of our challenging times. His predecessor, Mark Carney, steered the Bank through some choppy political waters, but Bailey’s chequered record at the FCA could mean the Bank of England’s worries are not yet over.
To read an exclusive briefing on the Bank of England, click HERE.
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Hosted by News Editor of PoliticsHome, Matt Honeycombe-Foster, listen in on Dods Financial Services Consultant, Maria Busca, as she takes a look back over Mark Carney’s career as Governor and the challenges facing Andrew Bailey as he takes over the role.
You'll be able to participate in the discussion on:
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