The Tories' plan for regulating the banks
Peter Hoskin 12:10am
I've just flicked through the Tories' new White Paper on banking regulation, which Osborne & Co. are touting as their "plan for sound banking". There's much in there which has been trailed or suggested over the past few weeks, but a few new ideas as well. I'll refrain from going too far into the nitty-gritty, but here are my take-home points:
Attack, attack, attack. Ok, it's to be expected of a White Paper put together by Her Majesty's Loyal Opposition, but the language used in the document is strikingly robust. Entire sections (e.g. Part 1: What Went Wrong, pp.8-18) are devoted to atacking Gordon Brown's handling of the economy, his tri-partite regulation system, and the debt bubble which expanded on the back of it - with the subsequent emphasis being on Not Letting It Happen Again. At times, they slightly overplay their hand: for instance, using a Peter Lilley quote from 1997 as evidence for the Tories' opposition to Brown's regulatory system, without - of course - letting it be known that they didn't complain too loudly for the next ten years. But these attacks are better made late than never, I guess.
Note to Europe: quit meddling. Speaking of robust language, the paper is surprisingly strong when it comes to Europe. The message, at least, is that the Tories won't abide EU financial directives which could harm the British financial industry's growth and competitiveness. To that end, they pledge to "enhance" the Treasury team that does business in Brussels, and to "fight any new attempt to create an executive pan-European supervisor". A further pledge that "we will ensure that the Chancellor regularly attends meetings of European finance ministers," feels like a dig at one G. Brown, who notoriously used to avoid meetings with his European counterparts.
Dumping the tri-partite system into the rubbish bin of history. Long story short, the Tories say that they'll ditch the tri-partite system. In effect, this means greater powers for the Bank of England, no more Financial Services Authority, a new Consumer Protection Agency and few little tweaks involving the Office of Fair Trading. Here are some more details:
Bank of England. The Bank is the big winner, so to speak, from the Tories' proposed changes. Under Prime Minister Cameron, it would keep all its existing powers, but also be granted "responsibility for maintaining financial stability" and "monitoring the overall level of credit and debt in the economy". This effectively means that it would oversee all the banks, building societies, insurance companies etc., and could step in when it feels they may be taking undue risks. Some of its new powers would include demanding certain capital requirements of financial institutions that are engaging in particularly risky transactions, as well as restricting "risky bonus structures".
Financial Services Authority / Consumer Protection Agency. So bye-bye, FSA - it was was nice knowing you. According to the White Paper, a Tory government would scrap this third wing of the tri-partite system - passing many of its functions over the the Bank of England, and putting in its place a new, beefed-up Consumer Protection Agency, which would "take responsibilities to protect the consumer that are currently and confusingly divided between the FSA and Office of Fair Trading".Office of Fair Trading. Despite losing, one assumes, much of its power to the new CPA, the OFT remains. Why? Well, for one thing, the paper says: "We will ask the Office of Fair Trading and the Competition Commission to conduct a focused examination of the effects of consolidation in the retail banking sector. The findings of the OFT and the Competition Commission will help to inform a Conservative Government’s ongoing strategy for disposing of its banking shares." It's not quite clarified in the paper, but you imagine this means the OFT will hang onto its competition-monitoring powers. It's worth noting, too, that this nod to the Government "disposing of its bank shares" makes no mention of splitting the banks up into smaller chunks.
So does the Tory system eradicate the flaws of Brown's tripartite regime, which they describe as "confused and fragmented, with responsibilities, powers and capabilities split awkwardly between competing institutions"? Hm. As with all regulation, the proof of the pudding is often in the eating - but many of the proposed changes look sensible enough on paper.
Hand of friendship for Mervyn King. Quite aside from improved powers for the institution he heads, there's plenty in the paper to flatter the Governor of the Bank of England. It quotes him - approvingly - on a regular basis. It proposes to involve him in more policy decisions. And it even sympathises with him: at one point saying that, "it is shocking that the Governor of the Bank of England was not shown a copy of the Government’s recent White Paper on financial regulation until just days before it was published". Given the dificulties that Merv has had with Brown and Darling, it does rather feel like an effort to get him on side with the Tories.
Inflation-targeting. Seems like the Bank would keep this responsibility under a Tory government, but it's left undecided what measure of inflation they should use: the Consumer Price Index (which doesn't account for changes in house prices) or the Retail Price Index (which does). The prevailing view is that if the Bank had used RPI, rather than CPI, over the past few years, then they'd have stood a better chance of spotting the debt bubble. It seems the Tories share this opinion, as their paper frequently criticises the "narrow" CPI targeting. But their final word on the matter reads thus: "We will conduct a review in government, involving the Governor of the Bank of England, to consider the case for putting housing costs back into the inflation target. Given the fragility and uncertainty in financial markets, any change to the measure of inflation should be carried out in a careful and considered way, with extensive consultation."
No British Glass-Steagall Act (or is there?). Quite a few folk - including Lord Lawson, here - have called for a British Glass-Steagall Act, which would formally separate the commercial banks, which hold our cash, from the investment banks, where the Masters of the Universe get up to all kinds of risky business. The White Paper says No! to this idea, claiming that it would harm the global competitiveness of British banks. But, intriguingly, it also hints that new powers for the Bank of England could bring about a de facto Glass-Steagall - or at least that's what I read into this passage: "A Conservative Government will empower the Bank of England to impose much higher capital requirements on high risk activities such as large scale proprietary trading carried out by banks that also take retail deposits. In practice this could prevent banks that take retail deposits from engaging in many of these high risk activities by making them more expensive."
Anyway, I think that's enough for now. I'll post a link to the White Paper as soon as it shows up online. If any CoffeeHousers spot anything else particularly noteworthy in its pages, do shout out in comments section below.
UPDATE: Robert Peston's thoughts here.
Previous
mitch
July 20th, 2009 5:01am Report this commentThe Tories should just repeal everything nulab did since 97 except taxing your car online,cant think of anything else I would keep.
David
July 20th, 2009 6:15am Report this commentYou are aware that the OFT more than consumer regulation?
CCTV
July 20th, 2009 6:17am Report this commentUsury Laws are essential to stop wild credit expansion using high interest rates to cover bad debt. Make banks evaluate ability to repay properly rather than reducing statistical default rates by expanding credit cards in ciculation
Pete Hoskin
July 20th, 2009 7:32am Report this commentDavid: yep, but I think I overstated my point above. Was half-asleep when I wrote this! Have amended the text accordingly...
The Laughing Cavalier
July 20th, 2009 8:27am Report this commentPeston is worth reading for the No 10 reaction; he is a Brownite moutpiece.
Flemingcrag
July 20th, 2009 9:08am Report this commentThe Conservatives are not re-inventing the wheel when it comes to regulation of the banks, their policy has been consistent since 1997 when Gordon first floated the idea of taking the role away from the BoE which had hundreds of years of faultless administrattion of these institutions and handing it over to a novice Quango.
Their attitude then, proved right by events, was if it ain't broke don't fix it. In their opposition the Conservatives argued that to leave the BoE in control of interest rates only was a recipe for disaster. They also questioned the wisdom of discarding the BoE's undoubted experience in favour of the counsel one could expect from a new Quango full of greenhorns. In their opposition how could they have known that in the decade leading up to financial meltdown the tri-partite bodies would not meet once to discuss the trends in the economy. Once Parliament in the guise of all political parties bar the Conservatives and DUP had passed the 1998 Finance Bill any further opposition would have been viewed as sour grapes.
The irony is, it was not Gordon Brown's idea to take control away from the BoE, it was the banks. Eddie George the then Governor of the BoE knew this and advised strongly against such irresponsible change. Good luck to another George then in all his attempts to re-establish something that patently worked in favour of that which spectacularly failed.
Ian C
July 20th, 2009 10:43am Report this commentOsborne made a sound case on Marr yesterday for their sacking of the current system. I assume that this is the sort of meat on bones that many are yelling for.
Bear in mind that Thather, who won in '79 with just a 40 odd majority, and Cameron cannot expect more than this even if it looks likely, provided none until her 2nd term by which time she was able to sack the wets - the equivalent of the old guard today.
Denis Cooper
July 20th, 2009 10:57am Report this commentSurely the Bank should have responsibility for the "prudential supervision" of banks, rather than just "responsibility for maintaining financial stability" and "monitoring the overall level of credit and debt in the economy"?
Recalling this Memorandum of Understanding, bearing the names of Gordon Brown, Mervyn King and the then Chairman of the FSA:
http://www.bankofengland.co.uk/financialstability/mou.pdf
"The FSA's responsibilities
3. The FSA's powers and responsibilities are set out in the Financial Services and Markets Act 2000. Within the scope of the Act, it is responsible for:
i. the authorisation and prudential supervision of banks, building societies, investment firms, insurance companies and brokers, credit unions and friendly societies;"
If a bank or building society etc was allowed to operate in such a way that eventually it became insolvent and needed to be bailed out by the taxpayer, wasn't that a failure of "prudential supervision" on the part of the FSA, and shouldn't that responsibility be explictly passed to the Bank?
As far as the Bank was concerned, "The Bank contributes to the maintenance of the stability of the financial system as a whole ... " in terms not entirely dissimilar to those used above, but also potentially overlapping with some of the Treasury's responsibilities ...
Denis Cooper
July 20th, 2009 11:17am Report this commentOn the matter of "risky bonus structures": the problem with bonus schemes for directors and senior executives really centres on their preferred definition of "long-term".
A "long-term incentive plan" which runs for just 3 years is not "long-term".
If those running a bank or any other company are going to be rewarded on the basis of its success, then that should be its success during bad economic times as well as good; and that means that their incentive plans should run for a period which is significantly longer than the typical economic cycle.
Denis Cooper
July 20th, 2009 11:47am Report this commentOn the matter of breaking up the banks into smaller chunks: it seems that the government may stymie any such moves by selling convertible bonds:
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5852797/UKFI-lines-up-banks-to-help-in-Lloyds-and-RBS-sale.html
"Although UKFI stressed that it "is not currently planning any immediate transactions", the move will be seen as an attempt to recoup some taxpayer money as early as this year."
"With the state's investment under water, the bankers are currently only considering exchangeable bonds, which would be sold at a small premium to the state's entry price and pay a minimal interest rate for a fixed term, likely to be three years. The buyer would then take ownership of the shares if they have risen above the initial sale price, pocketing a profit."
Such bonds could certainly be set up to anticipate the possible break-up of each bank, eg the RBS bonds could entitle the buyer to either shares in RBS if it was still intact three years later, or to equivalent numbers of shares in each of its de-merged components if it had been broken up during the three years; but that would have to be written into the terms of the bonds before they were sold.
Victor, NW Kent
July 20th, 2009 12:16pm Report this commentPeter Lilley did indeed lay out very succinctly the reasons why Brown's tripartite structure would fail and it was in 1997.
At that time nobody was listening to the Conservatives as Blair was No.1 in every hit parade.
The errors in Brown's thinking and methodology have been clearly exposed now for the best part of two years. The cost to the nation and to our economy is frightful.
Every day that Brown hangs onto power adds a half-billion Pounds to the National Debt virtually £10 per man, woman and child. The struggle to stabilise this, reconstruct our economy and reform public services will take more than one term of a Tory government. It is far worse than Thatcher's inheritance.
David Cameron is lucky to have clear thinkers such as Lilley, Redwood, Flight and Fallon to call upon - four briliant men. One can only hope that he takes their advice rather than that of Lawson and Clarke.
Verity
July 20th, 2009 12:41pm Report this commentCameron's people have been reading the blogs and the correspondence columns and have cleverly noted that there is universal abhorrence for Cameron's pro-EU Weltanschuuang, so now he's making showily robust comments to Europe - "Note to Europe: Quit Meddling" - which is supposed to signal that Cameron is his own man in Europe. Ha ha ha ha ha! David Cameron has great faith in public relations tricks.
Lola
July 25th, 2009 8:53am Report this commentThere is a clear and present danger created by Osbornes paper, and that is the behaviour of the FSA between now and its scarpping, assuming the Tories win, of course.
I have had contact with the FSA and its senior management recently and they know that they have faled. They know the RDR is useless and will fail. But they do not care. What they are now working on is above all else is to protect their reputations. They do not care at all how much dmage they do or what they implement. Furthermore like all failed bureaucracies they are metaphorically setting about shooting as many of the people they regulate as possible.
To stop this damaging behaviours Osborne needs to make clear, now, that he will be keeping a very close eye on this and will hold to account, personally, all the FSA / FOS / FSCS senior management between now and when (if) he comes to power. I really cannot emphasise enough just how dangerous this next 10 months will be for all of the UK FS industry whilst the FSA is in authority but has no credibility.
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