UK Conservatives would scrap financial watchdog

July 20, 2009

Britain's shadow chancellor George Osborne LONDON, July 20 (Reuters) – British regulator the Financial Services Authority (FSA) should be abolished and the Bank of England put in full charge of regulating financial institutions, opposition Conservatives said.
The Conservative Party, widely expected to win an election next year, said on its web site the country needed a “strong regulator” and its plans to create one would be set out later in its “plan for sound banking” document.
“Given everything that has happened, it would be bizarre to stick with a system of regulating the banks that failed so spectacularly,” the party’s finance spokesman George Osborne said on the site.
He will make a speech detailing his plans later in the day.
The well-heralded proposal would dissolve the “tripartite” system of regulation, split between the FSA, the Bank of England and the Treasury, introduced 12 years ago by Prime Minister Gordon Brown when he was finance minister.
The Conservatives blame the division of responsibilities for failures that led to the state rescue of mortgage Northern Rock in 2007 and the subsequent bail-out of other major British banks.
Osborne, who is set to become finance minister in a Conservative administration, will detail plans to abolish the FSA, Britain’s main banking watchdog, and transfer its responsibilities to the Bank of England, which would set up a new Financial Policy Committee to work alongside the interest rate-setting Monetary Policy Committee.
The Conservatives are maintaining consistently large opinion poll leads over the ruling Labour party with an election due by May next year.
Experts say the prospect of the FSA being stripped of key powers undermines its ability to regulate forcefully from now until the next election.
“The Tory (Conservative) proposals would abolish an independent, expert regulator, while diverting attention from banks that took excessive risks that led to this crisis,” Treasury minister Lord Myners said.
The proposals are also expected to include new powers for the Bank of England to regulate the pay, risk, and the size and structure of financial institutions.
According to Monday’s The Times newspaper, the Conservative proposals would also mean Lloyds Banking Group  and the Royal Bank of Scotland may have to sell part of their businesses.
The newspaper said the party planned to hold a competition inquiry into the part-nationalised Lloyds if it returns to power in a general election due by next June.
“The findings … will help to inform a Conservative government’s strategy for disposing of its banking shares,” the party’s finance spokesman George Osborne will say later on Monday, the paper added.
Britain holds large stakes in RBS and Lloyds, created by the merger of banking groups Lloyds TSB and HBOS, following last year’s banking crisis.
Depending on the outcome of the inquiry, the Conservatives may decide to legislate for a partial break-up of Lloyds and to a lesser extent of RBS, the paper said.
A Conservative government would also require banks that combine retail and investment arms to hold additional capital to limit their ability to indulge in high-risk trading, it added.

See also: Conservative bank plan sows doubt, seeks resolution

FACTBOX – Conservative banks proposals

Conservative Party statement, plan

One comment

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A conflict of interest rates…
The FSA’s responsibilities include prudential regulation. That is ensuring that banks and other financial firms behave in a prudent manner in relation to the risks they take. The Bank of England is responsible for monetary policy. That is using interest rates (and now quantitative easing) to control inflation.

It is important to note that there is no one prevailing regulatory structure anywhere in the world was successful in weathering the results of the credit crunch. Therefore, whether we regulate through the FSA or not is not the deciding factor. What did make a difference, and will make a difference going forward is the quality of the analysis and policies REGARDLESS OF REGULATORY STRUCTURE.

With the failure of the current tripartite system showed that it was not properly prepared to work under pressure. But this can be fixed with little disruption allowing us all to focus on the most important thing, that is changing financial firms’ behaviour so that banks and others will not be costing us trillions in future.

If Osborne’s suggestion of wrapping up the FSA with the Bank of England is actioned, there would clearly be an inherent conflict between implementing monetary policy and managing the financial sectors prudential regulation. If the Bank of England is to be seen as truly independent in its interest rate setting as well as managing banks prudentially, Osborne leaves the bank open to the charge that interest rates are set not necessarily for the good of the whole economy, but rather for the good of the financial sector for which it has responsibility – thus undermining the independence of the UK’s central bank.

Osborne is putting much of his energy into rebuking and attacking the FSA when the real problem is the behaviour of the financial markets (e.g. lending to those who couldn’t afford to pay!). This seems like a real case of ignoring the elephant in the room and instead deciding to attack the fly on its back! One of the most worrying features is that in the context of the credit crunch and ensuing financial crisis the Shadow Chancellor believes that addressing regulatory structure is the best contribution a potential government can offer. In doing so, he demonstrates his complete lack of understanding or appreciation of the way financial markets work, and the consequences of firm’s behaviour vs. the role and abilities of regulators to change them.

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