Julian Knight: Our watchdog can’t see straight for looking two ways at once

So the iceman goeth – and what a lot of people are being wise with hindsight in the wake of the Icelandic financial disaster. Experts have been falling over themselves to say we told you so – how the country’s banking business model, which it turns out was more akin to a hedge fund than a bank, was a house of cards ready to topple.

For my own part, alarm bells began to ring a couple of weeks ago when Glitnir bank was nationalised, but did I honestly think that the coffers of Iceland’s institutions were so empty? Did I really envisage that it would potentially cost us as a country the equivalent of 2p on income tax to protect the deposits of British savers caught up in the collapse? No I didn’t, and neither I bet did the oh-so-wise experts.

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As for the local authority chiefs who are being chided as incompetents for maybe losing nearly a billion in the banks, there are mitigating circumstances. Councils are legally obliged to get the highest possible returns for their cash and the icemen were offering some of the best deals. The local authorities also did what all the experts advise by spreading their money around between providers; it just so happens a chunk of that went into the Icelandic banks. And don’t forget that the credit-rating agencies (whose own reputations must now be close to junk bond status) were giving these banks a clean bill of health right up until last week.

So who should have been wise to all this? Well I’m sorry to say it has to be the Financial Services Authority. Sorry, because there a lot of dedicated and talented people working at the FSA. However, I have to ask this question: if a regulator can’t protect your savings, what good is it?

Now I know the FSA’s staff were working furiously behind the scenes as the Icelandic banks started to go

under, but the mistakes in regulation were made long before – most fundamentally in the execution of the system of “passporting”. Basically, this allows foreign banks to sell their products to UK consumers provided they are regulated at home. Last week in TV interviews, FSA chairman Lord Turner near enough admitted that the City watchdog had no true handle on how well or poorly the Icelandic banks had been regulated back in Reykjavik. Sorry, not good enough – not by a long chalk – particularly as the FSA had already handled the Northern Rock affair disastrously.

It seems the FSA is institutionally not up to the job. Dame Sheila McKechnie, a friend of Gordon Brown and consumer campaigner who died in 2004, identified the paradox at the heart of the FSA as soon as it was formed in 2001. Pointing out that it had two main objectives – promoting financial services and protecting the consumer – she said you can’t serve two masters. She was spot-on.

Of course the middle of a desperate financial crisis is no time to ditch a regulator, but when eventually we get through all this perhaps the FSA should go the way of the Child Support Agency. Ultimately we need a regulator whose one objective, dawn to dusk, is protecting the consumer – even if that means stepping on the toes of the City or turning away unsound foreign banks from these shores, regardless of international agreements. Only that way can any shred of consumer confidence return.

Shame on you, Halifax

Anyone who thought that the bailout of the banks will somehow make them turn over a new leaf any time soon can forget it. Last week, the Halifax said it was “helping” indebted card borrowers by lowering the minimum amount that people have to repay each month to 1 per cent of the debt outstanding. This is as cynical as you can get because all the time people are paying just 1 per cent, they are cutting their debt by only a tiny amount. Put simply, the Halifax makes a ton of interest out of this and those who make minimum repayments could conceivably still be clearing their card debt in their dotage. Words fail me.

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