City watchdog rules out market abuse probe into Rachel Reeves

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The City watchdog has dismissed Conservative requests for a market abuse probe into Rachel Reeves over claims the UK chancellor gave misleading information about the public finances ahead of last week’s Budget.

Nikhil Rathi, head of the Financial Conduct Authority, said the purpose of Britain’s market abuse regulation was “not to make judgments on political discourse, even though that discourse may on occasion have an impact on markets”.

In a letter to the House of Commons Treasury committee, Rathi said: “How the government publicly communicates its position in advance of a fiscal event or similar is a matter for parliament through its accountability mechanisms.”

Wednesday’s letter marked a rejection of a request last week by Sir Mel Stride, Tory shadow chancellor, for a “full investigation by the FCA into possible market abuse”, including into the role of Reeves.

However, Rathi said the FCA would consider the results of a leak inquiry announced on Wednesday by the Treasury over the “alleged inappropriate disclosure of market-sensitive information by government officials”.

The watchdog, which reports to the Treasury, would also be speaking to the Office for Budget Responsibility over the accidental publication of its forecasts 45 minutes before Reeves gave her Budget speech on November 26, he added.

The FCA wants to stay out of the political fray, according to officials briefed on its thinking, although concerns have been raised internally in the past over the handling of market-sensitive issues by the finance ministry.

“This shines a spotlight on the need for tight procedures and respect for what is rightly seen as sensitive information,” one official said.

The officials said the FCA was more likely to remind the Treasury of the need to handle sensitive financial information carefully in future, rather than take any formal action.

Simon Morris, partner at City law firm CMS, said it was “politically embarrassing for the FCA, answerable to the chancellor, to start investigating her for improper conduct or deceit”.

It was “difficult to see how political statements relating to the economy as a whole, rather than specific shares, fall within the definition of market manipulation”, he said. “The same applies to leaking a complete Budget.” 

In his letter to Rathi, Stride said “confidential market-sensitive information appears to have been spun, leaked and misused” and pointed to Reeves’ unusual speech in Downing Street on November 4.

In her early-morning televised address, Reeves gave a gloomy picture of the state of the public finances and opened the door to a manifesto-busting increase in income tax rates. Stride has claimed her account misled the markets.

Detailed policies from the Budget were disclosed in the media before her speech, while the Financial Times revealed on November 13 that Reeves had abandoned the plan to raise income tax.

The report created market turmoil on November 14 and hit investor confidence in the fiscal event, in which Reeves ultimately raised taxes by £26bn.

James Murray, chief secretary to the Treasury, on Wednesday said the department’s permanent secretary James Bowler would look into “security processes” and learn lessons for future events as part of the inquiry.

Meanwhile George Osborne, who set up the OBR as Tory chancellor in the Conservative-Liberal Democrat coalition government, defended the forecaster in spite of its “huge mistake” in publishing its Budget report early.

Osborne told the FT that the fiscal watchdog had become “more and more important in how people hold politicians to account” and that he had been “sorry” to see Richard Hughes resign as OBR chair, after what an internal report described as the “worst failure in [its] 15-year history”.

But he added: “The OBR is bigger than any one individual or any one chancellor because OBR directors and chancellors come and go.”

Additional reporting by Martin Arnold in London