UK Financial Regulators Become Pawns on Political Battleground

On Monday (June 20,2009), Shadow Chancellor George Osborne laid out Conservative proposals for the abolition of the FSA and an "end to the failed tri-partite system of regulation".

With a General Election being held by 2010 at the latest (and reports Prime Minister Brown is still considering calling an early election in 2009), the political landscape can alter completely, leaving existing regulators without their current political patrons.   The Conservative Party is proposing the complete dismemberment of the Financial Services Authority with adviser and retail regulation falling under a new body - the Consumer Protection Agency (CPA). The CPA will have more regulatory power across a narrower remit leading to more focused consumer regulation and transparency - we've all heard that one before though.   Other FSA responsibilities will be divided up after consultation with 'surviving' industry regulators, but the rumour mill favours handing market and securities regulations to a further new body. The proposed new regulator will also comprise the Takeover Panel and the Financial Reporting Council, bringing the UK into line with many other EU partners with a single, very powerful market regulator.   The Bank of England will also receive responsibility for financial stability in addition to new powers to control pay structures.  

A Week in Politics is an Eternity  

Last week I reported on the challenges to the Bank of England posed by the FSA; Turner and King circle each other like well-oiled wrestlers in the ring, one seeking to establish a grip on the other while not getting caught themselves.  Mervyn King fought a determined holding-action in the Common's Committee Rooms last week, winning a delay on the proposed Banking Bill which will further strip power from the Bank and into the waiting arms of Lord Turner's FSA.  

When Two-Tribes Go to War?  

While King has been remarkeably silent on the regulatory turf-war, his studious diplomacy belies a simple fact - given the Bank's leading competitor faces annihilation if the Conservatives win at the next election, King does not seem to need to do much of anything ... yet.   Prime Minster Brown reacted to the news of the Opposition's proposals with lofty scorn - he was a very successful Chancellor of the Exchequer for three terms and has a firm grasp of economic principles. Yesterday in London, Brown stated it was "the wrong thing to do to allow the Bank of England to control the financial services sector and also wield fiscal control".   The Labour City Minister, Lord Myners went much further in condemning the proposals claiming the Bank of England, the Financial Reporting Council and the Takeover Panel did not want the new powers.   Further, in a direct jab at the Bank, Myners went on to add, "The Bank is a very academic institution. It is not actually about doing things." and took the opportunity to point out the pre-1997 regulatory fiascos of the Barings collapse and the BCCI scandal.  Talk about rubbing salt into old wounds.   I think it is clear which side the Labour Government's bread is buttered; a very crystallised view of an impotent pre-1997 Bank of England, emasculated under the current regime, and now, awaiting the coup-de-grace perhaps?   The current Chancellor of the Exchequer, Alistair Darling is notable for his silence but this is part of his style, after all, he has two regulatory heavy-weights in play with King and Turner allowing him to play aloof referee if the end of the Bank is the ultimate objective - Darling may want to see the end of the Bank but who would like to go down in history charged with dismantling a pivotal plank of British sovereignty?    

Best to let someone else do the dirty work but that can now all change with an Election.   As Lord Turner said today at the FSA's annual public meeting, the "financial uncertainty being created is not good for the industry" but political uncertainty was simply a "fact of life" in a democracy.   Lord Turner is being coy; the financial services industry has experienced uncertainty for decades and has generally weathered well under Conservative Governments compared to Labour. If you accept this position, the uncertainty being created is not by the right-wing opposition who are likely to be good news for the financial services sector if they get into Number 10.  The residual uncertainty is that created by leadership failure and especially, the politicisation of regulatory bodies ... notably the FSA.   Probably why the Conservatives have it down as their prime target.