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That sinking feeling

In estimating the cost of statutory regulation, most people would point to the cost of the FSA. Their beautiful offices and almost 3,000 well-paid staff cost the financial services industry over £300m per annum. The compensation scheme has during its existence paid out £1bn and has a payroll of £25m a year. That does not include bailing out Northern Rock, Icelandic banks, etc. Billions have been borrowed which the banking industry, if not nationalised, will have to repay.

When a Government takes over regulation of an industry it becomes responsible for that industry. Would the Government have bailed out the Icelandic bank if it had not been regulated by them? BCCI was not bailed out when it went bust in the 1980s. The Icelandic bank did not even have a constituted British company.

The Audit Commission, which audits local authorities, had blessed it, depositing £10m of its own bloated budget, enticing local authorities to “lose” a further £858m. The Audit Commission tells us it was a compliant financial arrangement. In other words, it ticked every box except the commonsense box.

Should we have bailed out Northern Rock? In the good old days of the building society movement, members who got in difficulty were “absorbed”. When you have to bail out an errant member breaking the first rule – lending long and borrowing short – you draw it to their attention. When you see them offering 125 per cent mortgages, you sit down and point out the errors of their ways.

If the Government is regulating it – you think if they are getting away with borrowing commercial money financing 125 per cent mortgages at nine times income the Government have blessed it and we must have some of that.

If a Government wants to really blunder, spread the job of regulation. “Think” that the FSA might be regulating it but it could be the Bank of England but you know the Treasury have got their eye on it.

Each one thought it was the other two. Net result – no one was regulating it, not that anyone would have understood it in the first place. The banks did not understand what they were doing. Our Prime Minister did not even know 80 per cent of bank lending was overseas.

I was fascinated at the FSA chairman Adair Turner’s edict that: “The FSA will in future require banks to build up substantial capital buffers in good economic times.”

Good advice for our Chancellor 11 years ago. I suppose it is divine for a Chancellor to err but the banks will not be forgiven.

The sad thing is that the opposition also does not understand the depth of debt that the banks and Government have incurred and continue to incur. In case you are in any doubt, we are in deep and sinking deeper. Perhaps The Sun got it right on election night May 1992: “Will the last person to leave Britain switch out the lights”. This time, they won’t have to, thanks to the lack of an energy policy.

Peter Hargreaves is chief executive of Hargreaves Lansdown


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