Regulator II: Judgement Day

Few of us will shed tears for the Financial Services Authority, which George Osborne has pledged to exterminate. This bloated Brownian quango was supposed to regulate financial services, but its 4,000 staff were too busy making bankers tick boxes to see that the whole sector was about to explode. No point in assuring customers that the phone will be answered by the third ring if the bank at the other end of the line is already bust.

It didn’t even take any interest in the Libor rigging scandal, despite warnings from City journalists and the Bank of England going back at least seven years. It stirred only when American and Canadian regulators began to turn over the stones.

Not that the Bank of England was any better. The Governor didn’t even raise his eyebrow when the banks were taking wild risks, citing EU openness rules. Yes, he did warn the FSA, back in 2007, that the banks were looking shaky, not that the FSA took any notice. And through its inept monetary policy – expanding to help the banks through, then suddenly clamping down again – the Bank pretty much caused the collapse. Yes, again, it did tell the lethargic FSA of its Libor concerns, but it didn’t figure that was a waste of time and actually do something about it instead, again using the excuse that its powers were limited.

In fact we had three regulators, the FSA, the Treasury and the Bank, all stepping on one another’s feet and then, when everything blew up, all staring at their feet and saying ‘Not my fault, guv’.

But what is going to replace the FSA is even worse than this mess. Regulation is like the Hydra, it seems: cut off one head, and a greater number grow. The FSA has already spawned the Money Advice Service, whose £44m cost is borne by a levy on regulated firms. And in place of the FSA proper we are also going to have a consumer-protection body, the Financial Conduct Authority (FCA), a market watchdog, the Prudential Regulatory Authority (PRA), and the Bank of England, which gets back its old supervisory role. Even so, they will just be enforcing the rules – Osborne has already handed the rule-making role over to Brussels (which seems rather trusting, when London is the only real international financial centre in the EU, accounting for a major part of our trade).

No need for those 4,000 bureaucrats to do much to their CVs, then – there are going to be even more jobs in financial regulation from now on. At even greater cost to Britain’s financial services industry, of course. New York, Frankfurt and Shanghai must be rubbing their hands.

No industry needs more than one regulator any more than a football match needs more than one referee. Having more is a recipe for confusion and buck-passing. And the more regulation you load on a sector, the less competitive it becomes, because potential entrants cannot afford the cost of the burden. Only one new bank, Metro Bank, has entered the UK market. Given public attitudes to the big banks, they should be coining it, but instead they are paying millions in regulatory costs.

Competition, in fact, is the best regulator. Firms cannot offer bad service and charge high prices when other, cheaper and better companies are prepared to step in and snaffle their customers. But you wouldn’t know that from the early statements of the proto-FCA and PRA.

FCA boss-to-be Martin Wheatley, in his Vision for Enforcement paper, makes no mention of the importance of having a strong brand or of the power of competitive markets to benefit customers. He seems to think he can train new people in a matter of months to specify exactly how firms should compete in a hugely complex sector. I doubt that fledgling FCA bureaucrats can know that better than the market itself.

We already have consumer protection agencies in the shape of the Office of Fair Trading (OFT) and the Financial Ombudsman Service (FOS). Why do we need another? The FOS manages to deal with hundreds of thousands of cases with less than a 1,000 staff, and sends its systemic concerns up to the Bank and OFT. It could protect consumers perfectly well without this additional overlapping quango.

The proto-FCA too has issued its own puff prospectus, and again, it seems to think that it can guarantee financial stability single-handedly, with the management, auditors, shareholders, directors and creditors of firms themselves being relegated to bit-players. And it is going to be just like the FSA, demanding a constant stream of costly information from financial businesses. But instead of standing over firms’ shoulders and intervening before breakfast, lunch and dinner, our regulators should be setting clear rules and then punishing those that break them.

Maybe it’s not too late. Scrap the FSA, make the PRA just the sniffer dog for the Bank, commercialise the Money Advice Service, and tell Brussels and Whitehall that clear, simple regulation, clear personal accountability, and vibrant competition are the best tonic for Britain’s financial sector.