How long will it take to forget the lessons of the financial crisis? Conservative leadership candidate Liz Truss appears to have already done so.
Truss plans an immediate review of the roles of city regulators if she wins the job of British prime minister next month, according to campaign insiders. The most striking suggestion is that the two apexes of our national financial regulatory system could be combined into a single regulator.
It is, to put it bluntly, a terrible idea.
That’s not to say there isn’t a case for a catch-all regulator. Bringing all of financial regulation – conduct and prudential or financial stability – into a single institution could, in theory, eliminate siled thinking and communication failures between competing agencies.
But it’s been less than a decade since the UK abandoned that system in the form of the Financial Services Authority. It might look like another time. Yet it was Truss’ Tory predecessors George Osborne and David Cameron who argued for its scrapping, returning prudential regulatory powers to the Bank of England and reshaping the responsibilities of the Financial Conduct Authority as they currently stand. .
It was no doubt partly a political decision: to mark a New Labor experiment as a failure. But it was also clear by the time Osborne and Cameron proposed it in 2009 – even before the full report on the banking crisis was written – that the FSA had failed.
This is no longer true now.
The Financial Conduct Authority rightly draws criticism. Lots of reviews. There are specific regulatory loopholes: the London Capital and Finance and British Steel pensioners scandals are just two. A crisis in staff morale and recruitment, exacerbated by chief executive Nikhil Rathi’s sloppy handling of a bonus overhaul. Difficulties adapting to an extended mandate after Brexit. Complaints that the watchdog is dragging and not focusing enough on the big picture.
These should be arguments in favor of a concerted effort to improve FCA. They are no reason to tear up a regulatory model instituted only nine years ago.
FCA’s failures are not the kind that nearly brought our financial system to its knees, ushering in more than 10 years of public ownership of one of our largest banks. There is no equivalent justification for radical structural reform.
Meanwhile, the Prudential Regulation Authority actually appears to be functioning relatively well under the auspices of the Bank of England. The BoE’s financial policy work draws on the prudential knowledge of PRA staff. The PRA has been integrated.
To think that regrouping the FCA into the BoE could have an equally happy outcome is illusory. The FCA is a sprawling organization. He would be more likely to infect the Bank than to be cured by it. In any case, the Bank, criticized for its handling of the post-pandemic inflationary era, has its own problems to deal with without having to grapple with the FCA.
The FSA’s experience should be enough to caution against any misplaced optimism the twin mandates could be effectively balanced in an alternative combined organization. In the words of Martin Taylor, a recent member of the BoE’s Financial Policy Committee: “I see no possible benefit to doing this and considerable downside to the FCA and PRA.”
Why, then, would Truss consider doing it? If it’s because of a concern about the lack of attention to economic growth, that’s a mistake. We have already seen where prioritizing competitiveness over regulatory stringency leads us. Nobody wants the taxpayer to spend billions of pounds again bailing out banks (let alone bankers). It has been controversial enough to restore competitiveness as a secondary objective of the FCA. To make it the guiding principle of UK financial regulatory policy would be unfathomable.
Politics is the second option. Sam Woods, chief executive of the PRA, has not endeared himself to Westminster with his perceived stubbornness over insurance sector reforms, otherwise known as one of the few benefits of Brexit yet to be identified. The elimination of institutions could neutralize some clumsy personnel. Even a review would be an obvious threat.
In other circumstances, a review of the roles and responsibilities of City regulators may be a good idea. CAF’s mandate is perhaps too broad for it to master. But any reshuffling would be extremely confusing and time-consuming. There should be higher priorities for the new Conservative Prime Minister. The last thing the UK needs is the FSA redux.
For a morning roundup of the latest business stories, sign up for Cat’s City Bulletin