The Financial Policy Committee (FPC) was established in 2013 as part of the new system of regulation brought in to improve financial stability after the financial crisis.
The Financial Policy Committee (FPC) leads our work on financial stability. It identifies and monitors risks that threaten the resilience of the UK financial system as a whole. It also has power to take action to counter those risks. An example of such a risk is unsustainable levels of debt and credit growth.
The FPC also has a secondary objective to support the economic policy of the Government. At least once a year, the Chancellor makes recommendations about the FPC’s responsibilities for financial stability and also about the Government’s growth and employment objectives. These are set out in a remit letter.
The 2008 global financial crisis showed how important financial stability is. At that time, the Government had to ‘bail out’ some banks to protect the UK’s financial stability. This exposed a gap in the oversight of the financial system as a whole, and policymakers recognised that focusing on supervising individual banks was not enough.
The FPC was created in 2011. In contrast to the Prudential Regulation Authority (PRA) – which looks at the safety and soundness of individual institutions – the FPC works to make sure the UK financial system as a whole is safe and sound.
The committee usually meets four times a year. We publish these meeting dates in advance. After each meeting, we publish the FPC’s views of the risks to the UK’s financial system and how to tackle those risks in a Summary and Record.
Twice a year (in Q2 and Q4) we also produce a more detailed Financial Stability Report. The Financial Stability Report sets out the FPC’s view on the stability of the UK financial system and what it is doing to remove or reduce any risks to it.
The Financial Stability in Focus publication complements the Financial Stability Report and sets out the FPC’s view on specific topics related to financial stability.
If the Financial Policy Committee identifies a potential risk, it has the power to act. It can use its power of direction or its power of recommendation.
Its directions are binding instructions it can give to the Prudential Regulation Authority (PRA) and Financial Conduct Authority. The FPC can issue a direction to the PRA to make banks, building societies and large investment firms carry out certain actions.
For banks, this includes powers to set capital requirements (i.e. to change the financial resources they have that act as a cushion against unexpected losses). You can read more about capital in our guide on What is Capital?
The FPC can also make recommendations. It can make recommendations on a ‘comply or explain’ basis to the PRA and to the FCA. This means that if the regulators decide not to implement a comply-or-explain recommendation, they must explain publicly their reasons.
For example, the FPC uses it recommendation power to restrict the proportion of risky mortgages banks take on. The FPC can also make general recommendations to other bodies.
The FPC publishes policy statements for each of its powers of direction to explain how it plans to use them and why.
The FPC normally has thirteen members. Six of them are Bank of England staff: the Governor, four Deputy Governors and the Executive Director for Financial Stability Strategy and Risk.
There are also five external members who are selected from outside the Bank for their experience and expertise in financial services.
The committee also includes the Chief Executive of the Financial Conduct Authority and one non-voting member from HM Treasury.