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Don’t bank on a magic bullet

Years ago, in the dying days of the last Tory administration, I was covering the financial services industry for a newspaper based in Canary Wharf, along with other journalists on the same beat.

Half the time, we were reporting events taking place a few floors down from me, in the Personal Investment Authority offices, based as I was in the main tower itself. The remainder of our time was spent sucking up to various Labour politicians in the hope they might feed us stories about their future intentions in the increasingly likely event of them being elected into office.

I recall several of us traipsing to some ridiculous conference in a godforsaken hall in the middle of nowhere, so we could report a few anodyne comments by Alistair Darling, then a mere opposition financial services spokesman, on an exciting new replacement for Peps, called individual savings accounts. Little did we know that, to all intents and purposes, Isas would be almost an identical tax wrapper, albeit with fewer benefits than the product it replaced.

Back then, the PIA was on its last legs, thoroughly discredited over its failure to speed up the personal pension review. The place was a colander, with journalists being leaked stories almost every week, including how the regulator spent tens of thousands of pounds to host a Christmas party for its staff, including flying down all its Edinburgh office and putting them up in a hotel.

You could smell the regulator beginning to putrefy, even while still formally alive, everyone knew the PIA was not long for this world. And so it proved, with the announcement within days of Labour winning the 1997 general election of a new super-regulator, initially called Newro, to take its place.

Twelve years on and we are almost back to where we started – the Conservatives now look as if they will win the next election and, true to form, they are talking about abolishing the current regulator in its present guise and replacing it with something different.

This time, the Tories want the oversight of banks and insurers to pass from the FSA back to the Bank of England. The aim would be to ensure that excessive risks can no longer be taken. For example, the Bank of England might be able to tell a bank how much it can lend as a proportion of its assets.

Meanwhile, the FSA would be reduced to overseeing rules on credit card charges and mortgages, much more of a consumer protection role. Its name would change to the Consumer Protection Agency, which would also take over some of the duties currently undertaken by the Office of Fair Trading.

It all sounds wonderful, except I can’t see what difference all this merry-go-round will make. Yes, it is undeniably true that for far too long, the UK’s big banks were allowed to take massive risks with their customers’ money – our money, actually – and when several of them went bust, we then had to pay tens of billions of pounds to bail them out.

Most of the responsibility for the way these institutions were meant to be regulated belongs to the FSA. The plain truth is that in many key areas of consumer protection the FSA has simply not been up to the job.

Its long-running attempts to reform the financial services industry by scrapping polarisation and then reintroducing it in its RDR proposals for example, have been laughable. It would be fair to describe what happened as the FSA’s lost decade.

It is also clear the reforms are necessary. But for the Tories to suggest the Bank of England is a magic bullet that can resolve the FSA’s failures is to not understand what has actually gone wrong in the past decade. It was the bank, as much as the FSA, which failed to act quickly enough when Northern Rock was going to the wall – the former building society was begging for financial help weeks before it actually received it.

More fundamentally, what the Tories also forget is that back when they were in office in the 1990s, the Bank of England was responsible for the financial stability of institutions like banks and insurers.

Yet a number of reports into the problems at giant insurer Equitable Life in late 2000 found that the bank’s own officials were woefully not up to the task of regulating the company.

When the Bank of Credit and Commerce International collapsed in 1991, the Bank of England was accused in an official Government report of failing to protect thousands of small savers here in the UK.

As much as anything else, both the FSA and the Bank of England share responsibility for a whole succession of regulatory failures with their political overlords at the Treasury. Which is why replacing the FSA’s name on staff T-shirts with that of the Bank of England will not make a bit of difference unless the people wearing them are any good.

Yet by telling us of their plans in advance, the Tories have ensured the FSA is seen as a lame-duck regulator for the last two years of its demoralised existence. That is not the way to protect consumers.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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