Whichever party wins the general election; how banks and other financial service providers treat their customers and do business will change.
The Tories want to split up the much criticised Financial Services Authority, giving oversight of bank balance sheets to the Bank of England; while setting up a new body to regulate how customers are treated. The Lib Dems say the Tory plans are "half-baked", but only promise a shake-up of the massive FSA. Labour is still wedded to the FSA – the brainchild of Gordon Brown – but acknowledges its failure and pledges a different approach.
Last month the FSA, in the guise of outgoing chief executive Hector Sants, set out its case for survival. Admitting serious errors in the run-up to the banking crisis of 2007, Mr Sants said a beefed-up FSA can get things right, and that in future it will adopt a more interventionist approach. The famous light-touch regulation, it seems, is dead, but what will really replace it, and will it avert both mis-selling scandals and future banking crises?
"Around the globe, not just in the UK, governments have been looking to change their regulatory regimes," said Michael Foot, the chairman of Promontory Financial and a former adviser to the Government – and now the Tories – on financial regulation. "Whatever they come up with, though, the bottom line has to be that banks and financial institutions need higher minimum capital requirements and the quality of capital held needs to be better."
The Tories say the best way to ensure that the "casino" operations and balance sheets of the banks are watched closely is to break up the tripartite regulation involving the Treasury, the Bank and the FSA, shunting the powers entirely to the Old Lady of Threadneedle Street. The Bank, rather than the relative upstart FSA, has the experience and expertise to manage the system.
But many in the industry are unconvinced: "The Bank has experience but it's made mistakes in the past. Think of the collapse of BCCI or the secondary banking crisis," said Matthew Bullock, the chief executive of the Norwich & Peterborough Building Society. "It's interesting that many of the investment banks are in favour of the Bank option. I suspect that they think that, long-term, the Bank will be more sympathetic, leave them alone to do what they do, whereas the FSA has signalled it would be more interventionist."
But what about the other track of the Tory's policy, namely creating a new body charged with the job of protecting the consumer? Those at the sharp end of Britain's personal-debt crisis seem to welcome the idea, provided the agency is robust enough.
"The FSA's track record on regulation is nowhere near as good as, say, the Office of Fair Trading. It's a large, cobbled-together organisation with all the associated problems. A leaner, fitter, nimbler body along the lines of the OFT is needed," said Malcolm Hurlston, chairman of the Consumer Credit Counselling Service (CCCS), one of Britain's leading debt charities. But, for Mr Hurlston, regulatory reform, although important, will be worth little without a culture change among financial-services companies and consumers : "Regulation isn't the real problem; that's greed of financial firms and ignorance among consumers. Take homeownership and its ridiculous overlending and overborrowing."
But the idea of an all-singing, all-dancing consumer body replacing the FSA has its downside. "Consumer protection needs to be about promoting competition, ensuring clear information for consumers and obtaining redress for them where needed. A separate consumer agency may stop a bit of mis-selling, but the danger is that, in the process, it will hit product innovation on the head. Think back to the mid 1980s when Direct Line started to do telephone insurance sales despite the risk it would destabilise the rest of the industry. The regulators need to have the courage to allow innovations like this to go ahead," Mr Foot said.
However, there are those who fear that the Tories are half-hearted about consumer protection. "Details of this new consumer body are scant and there is a feeling of second-class about the whole thing," said Mr Bullock. As for a stronger consumer body stifling innovation, he is unconvinced: "This is one of those clarion calls against regulation that you hear from time to time. Look, supposed product innovation in financial services often involves trying to reinvent the wheel, which can spell mis-selling. Money is a boring necessity and the basics – which everyone on above-average wage should be doing – are just that, basics."
And the investment trust industry, which had its own massive mis-selling scandal – split capital trusts – at the start of the century, wants no more of the light-touch regulation which characterised the FSA's first nine years of life. Annabel Brodie Smith from the Association of Investment Companies said: "We were under pressure internationally to compete, to make the City the centre of the financial world, hence light touch. We now live in a different time, whoever wins the election – even if the FSA were to be broken up – the keys are identification of risk to the financial system and improving consumer protection."
"There is a clear consensus among policymakers about control of investment bankers and casino banking," said Mr Bullock. "There's a real desire to keep it away from the public so that it doesn't drag the nation's finances down, and that applies to both the Governor of the Bank of England [Mervyn King] and the head of the FSA [Lord Turner]."Reuse content