An end to the uncertainty, or perhaps not

"Mr Major's gamble has only half-succeeded.More than ever, he seems like a prisoner of the faction he sought to escape. He has taken a bound - but he is not free"

The initial reaction of financial markets to John Major's narrowly "convincing" victory in the leadership election was favourable and this seems likely to continue to be the case today. A big uncertainty has been removed. The City is spared two or more further rounds of balloting that would expose still further the internecine strife within the party. There are no longer months of skirmishes ahead of an autumn battle. To that extent at least, Mr Major can claim that he has cleared the air.

Thunderstorms also clear the air; they also leave wreckage in their wake. The new political landscape revealed after this contest is one in which the rift within the Tory party has been laid bare. While Mr Major scored just enough to scrape home in political as opposed to technical terms, Mr Redwood scored surprisingly high.

The election has done more than expose the divide within the Conservative Party; it has shown how far the balance of power has tilted away from the pro-Europeans towards the Euro-sceptics, from the status quo expenditure agenda of centrists like Kenneth Clarke to the tax and spending cuts agenda of the right. Mr Major secured his victory by chasing Mr Redwood down the path of his less than convincing manifesto.

All of this suggests that the lurch towards an easier fiscal and monetary policy anticipated in the City last week is now assured. One way or another, Mr Major has to satisfy demands within the Conservative Party for a return to the tax-cutting, election-winning ways of Mrs Thatcher.

He also has to satisfy his own manifesto pledge to lower taxes.

The problem is that there simply isn't the scope for big tax cuts; the public spending objective for the next fiscal year is extraordinarily tight for a pre-election year. The brooding scrutiny of the financial markets will act as a real constraint on the Government's ability to ease policy - as will the warnings of the Governor of the Bank of England, both in his meeting with the Chancellor and in evidence to the Treasury Committee. Even so it is going to be hard for Mr Clarke to stick to the line he has been preaching with such conviction to the City.

The Chancellor can probably expect to stay where he is in the Cabinet, but elsewhere the reshuffle seems certain to reflect the drift to the right. A more right-wing agenda may well be opened up at the DTI if Michael Heseltine now becomes party chairman, as expected. The President of the Board of Trade has used his time there to reassert the old-fashioned corporatist values of big is best, waving through mergers that might have fallen foul of previous incumbents. Scottish & Newcastle must be biting its fingers over the fate of its bid for Courage.

Whatever the precise shape of this week's reshuffle and the political complexion of the government that it creates, Mr Major's leadership gamble has only half-succeeded.More than ever, he seems like a prisoner of the faction he sought to escape. He has taken a bound - but he is not free. Mr Major's gamble has raised the stakes for all of us as the economy faces yet another period of electioneering mismanagement.

Sound opportunity or an act of faith?

Why should a dull but worthy high street bank like Abbey National want to buy a consumer credit company that has crashed not once, but twice? To the City there is a whiff here of Abbey's past joint venture into derivatives with Barings.

In the event the venture was succesfully unravelled from the subsequent Leeson debacle, but the City cannot shake its conviction that Abbey would be better off sticking to its knitting - the housing market.

Naturally enough, Abbey's chairman, Peter Birch, doesn't agree. He cites undue reliance on the housing market as the main reason for buying FNFC. The purchase will reduce Abbey's exposure to mortgage lending, which seems to suffer a further hammer-blow with every passing house price survey.

Unlike the building societies, FNFC is actually gaining from the million or so homeowners with negative or near-negative equity. They are turning to credit companies like FNFC to finance improvements to their existing homes. This enables Mr Birch to declare that the deal "makes Abbey a less risky institution, because it is less dependent on the housing market". Ummm.

Undoubtedly FNFC is a recovery situation that Abbey's financial strength ought to enhance. Abbey can provide far cheaper funding to FNFC and the deal will take the pressure off FNFC for distress sales of its remaining property portfolio.Even so, at 2.1 times book value and 80 times 1994/5 earnings, the price looks full. For FNFC's shareholders this deal makes sense. For Abbey's, it is an act of faith.

Signalling the need for reform

If it is true that City witnesses before the Commons Treasury and civil service select committee are being gagged - as apparently happened with Philip Thorpe, chief executive of Imro - then MPs are right to jump on their high horse about it all. In so doing, however, they are missing the point. City regulation is in a mess. Its lines of command and communication are confused and untrustworthy; its costs are far too high and many of its functions are inefficient and of questionable value ; it is bureaucratic and for all we know it is also ineffective.

It irritates and dissappoints practitioners and investors in equal measure. It cannot even deliver, judging by yesterday's High Court ruling, an adequate investors' compensation scheme.

The present infighting among regulators is as clear a signal of the need for reform as you could get. The Labour Party seems to recognise this better than the present Government. City regulation is nonetheless unlikely to be high on any incoming Labour government's list of priorities. A new system of regulation, requiring legislation, will have to await the next millennium. Even so, there is plenty that can be done. . The Treasury should start with the organisation most directly responsible to Government, the Securities and Investments Board.

Mr Thorpe may have been unwise in the way he expressed his criticism of the SIB, but much of what he says is true; it spends much of its time duplicating what the front-line regulators are doing.

As a consequence it wastes a great deal of money; it meddles to little effect; many of its junior employees are ill-qualified to the point of naivete. Imro is not the only front line regulator that thinks this. Both the Securities and Futures Association and the Personal Investment Authority share his concerns.

Without so much as an explanation, the PIA has this year had to accept a 12.5 per cent rise in the levy it pays to the SIB - which in turn is passed on to its own membership. In examining the effectiveness of City regulation, the select committee should as urgently be addressing the issue of whether the SIB is necessary at all. Its functions might be better divided between the front-line regulators and the Treasury itself.

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