Mark has written the following article for this morning’s Daily Telegraph on financial regulation.
“When the crunch came, no one knew who was in charge.” It was with those words that George Osborne laid to rest the tripartite system of financial regulation at last year’s Mansion House dinner.
At this year’s banquet, the Chancellor set out details of a “new settlement” between Britain and its banks, and last month he published a White Paper containing the draft legislation that will bring this brave new world into being.
Yet as the City’s great and good digest the details, there is increasing unease, bordering on alarm, that the Coalition’s proposed framework will only further muddy the waters. Osborne’s reforms, which involve transferring the FSA’s powers to the Bank of England and creating three new financial authorities, are the product of painstaking, innovative analysis.
But given certain compromises which have been made to keep the big industry players happy, the result may be yet another system in which it is impossible to see where the buck stops.
The plan to entrust the monitoring of economic and financial stability to the Bank of England, under the guise of an independent Financial Policy Committee (FPC), has come in for particular criticism.
Whatever the apparent safeguards to protect its independence, it is difficult to see how the FPC would not be influenced by a government’s broader priorities in the run-up to an election – or worse, find its considerations overruled by a chancellor with a decidedly short-term outlook.
Questions of independence also shade into questions of expertise. The Treasury Select Committee has refused to endorse one of the FPC’s “external” appointees, on the grounds that his 40-year career had been spent entirely at the Treasury and Bank of England.
Indeed, there is persistent criticism that the architects of the system – Treasury civil servants – are too generalist in their experience, given how complex and specialised financial services are today.
Naturally, none of Mr Osborne’s new regulators will come cheap. A tougher, more intrusive approach to compliance will require extra resources – a phalanx of risk experts to judge the viability of financial products; burgeoning numbers of administrative staff and relationship managers; the cost and bureaucracy of annual inspections and so on.
The Financial Conduct Authority – which will police the City and banking sector – has been singled out over such fears.
Senior figures at the FSA have suggested that closer supervision of firms could cost an additional £200 million a year, an increase of around 50 per cent on the current organisation’s budget.
This bill will be met by the taxpayer. But consumers will inevitably bear an additional brunt as financial institutions seek to recoup higher compliance costs and innovation diminishes.
Many argue that an increased cost burden is a price worth paying for stability. But intrusive and costly regulation may prove no more effective than that which has gone before.
We will only get reform right if it is accompanied by a crystal-clear vision of the preferred place and role for the financial sector. To date, such clarity is notable only by its absence. Instead, we seem to have fallen into the trap of creating a system designed to solve the last crisis.
Our problems owe more to the impact of an unchecked, old-fashioned debt and credit bubble, accentuated by the impact of globalisation within the banking sector, than flaws in the regulatory model.
Yet it has remained politically expedient for the Chancellor to pin much of the blame on Gordon Brown’s removal of supervisory responsibilities from the Bank of England.
Andrew Tyrie, the independent-minded chairman of the Treasury Select Committee, has expressed concern “that we are going down a route which in the long run will stifle competition. We should use the opportunity to make sure there are pressures to cut away otiose regulation rather than a one-way ratchet.”
Worryingly, the impact on the competitive position of the City and the UK will not be regarded as a relevant factor in interpreting the impact of new legislation.
In short, while the Government signals its urgent desire to dash for economic growth, its new regulatory regime could do little to help, and much to harm.
Most of our competitors are desperate to break into the developing markets of the East, where the increased wealth of the middle classes will ensure the rapid expansion of their financial sectors for decades to come. This nation already has a competitive advantage in such areas, so should we be hobbling it?
Whatever the distaste for bankers’ remuneration, it is firmly in the national interest that the City maintain its pre-eminence in the highly mobile world of financial services. The response to the Coalition’s draft legislation suggests that the battle over the regulatory landscape will be fiercely fought. Britain’s future is at stake.