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Keep power in reserve for a crisis

The Government is being urged to have a reserve power it can use to intervene if it thinks regulators are failing to act in the face of a crisis.

The Treasury’s consultation paper on the regulatory changes, published in July, says when emerging risks become a crisis the Government would have overall responsibility for decisions affecting public funds and international obligations.

But the Treasury select committee report on the proposals says the boundary between emerging risks and crisis mode is often unclear, citing the speed at which Royal Bank of Scotland and HBOS had to be rescued.

It says: “There has to be some mechanism that will allow the Government to intervene if, in its view, a crisis is developing and other authorities are unwilling to act. It will bear the responsibility for any errors, it must have the information and the freedom in needs to choose its position.”

The reserve power would be similar to one currently held by the Treasury over the monetary policy committee which allows it to set monetary policy in extreme circumstances.

Under the Treasury’s prop- osals to deal with failed institutions, the Bank of England will design and execute the special resolution regime which will resolve failed institutions, the Prudential Regulation Authority will decide whether to put an institution into resolution and the Government will decide if and when to spend public money.

The select committee report says: “We have some doubts about that system.”MPs have called on the Government to scrap plans to promote the new Consumer Protection and Markets Authority as a consumer champion.

In its report on regulatory changes, published last week, the Treasury select committee says using the phrase could mislead consumers.

It says: “We strongly urge the Government to drop the title of consumer champion from the CPMA.

“If a regulator is promoted as a consumer champion, consumers may falsely believe all financial products are risk free, creating moral hazard. It is simply not possible to protect every interest at all times.”

But Financial Services Consumer Panel chairman Adam Phillips does not think the title should be dropped.

He says: “The panel is concerned that memories are already fading of the major misselling scandals, when too little was done too late to stop the sale of harmful products.”

Annuity Direct chief executive Bob Bullivant says: “Consumer champion suggests a bias and implies that consumers do not need to worry about their financial decisions. The question here is to what extent should the regulator try to save the consumer from themselves.”

The select committee report says effective regulation should be in consumers’ best inter- ests and regulators should ensure regulation is effective and proportionate.

It adds the CPMA should have competition as a primary objective as it is an effective way of protecting consumers.

Derbyshire Booth Financial Management managing dir- ector Greg Heath says competition will provide better outcomes if companies causing problems face stiffer regu- lation and higher fees.

He says: “At the moment, the regulator is treating everybody the same but it should take a more hands-on approach with firms that cause problems, for example, by looking at where the complaints to the Financial Ombudsman Service come from. It is a carrot and stick approach and right now they seem to be using just a stick.”


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