City set for a shake-up – but will it work?

The financial services industry faces major changes in how it is policed. James Moore looks at what effect they are likely to have

Never again was the cry that rang through Westminster, Whitehall, the City and the rest of Britain in the wake of the financial crisis that devastated the country's economy. Since the Coalition Government took over it has proposed a far-reaching shake-up of the way the financial services industry is policed.

The aim is clear: make sure the taxpayer doesn't have to pump a penny more into financial services beyond the estimated £1trn or so that has been spent on direct aid to banks (bailing out Royal Bank of Scotland, Lloyds, Northern Rock, etc) and indirect aid to keep the financial system from falling into a black hole.

But what will it change and will it actually work?

Simon Morris, regulation partner at City law firm Cameron McKenna, sums it up this way: "What will change? A lot and a little. The shake-up is all to do with the way regulation is delivered. It is little to do with substance."

That is because, as Mr Morris points out, policy is made at the G20. The implementation of what is decided there is handled at the European level through directives. Delivery is about all that is left to national authorities.

Mr Morris says: "In terms of the G20, Britain does carry considerable clout. But in Europe its voice is a lot weaker. The new Mifid (Markets in Financial Instruments) directive, the market abuse directive, the hedge funds directive – the UK had very little input into these. All a state can do is design ways to deliver rules laid down in a directive that can't be altered."

The UK delivery system will, however, change quite radically. Previously the Financial Services Authority (FSA) handled day-to-day regulation, the Bank of England looked at stability and monetary policy. They came together in what was called the "tripartite" system with the Treasury at the top. But no one was quite sure who was in charge during the crisis.

Under the new system the Bank becomes all-powerful. The financial strength of banks and insurers will move from the FSA to a new Prudential Regulation Authority (PRA), a subsidiary of the Bank of England.

The Bank will also be charged with identifying long-term "systemic risks" such as house price bubbles, or the sort of cavalier lending to sub-prime borrowers that kicked off the last crisis, through a new and powerful Financial Policy Committee (FPC). It can force action where it sees problems.

Day-to-day supervision of financial sales and financial markets will be handled by the Financial Conduct Authority (FCA), accountable to the Treasury. It takes on much of what remains of the FSA, with the added requirement to ensure competitiveness of Britain's financial markets.

Says Mr Morris: "What they want is for regulation to be more judgemental, less about the rule book. But this is actually already in place. Firms are already being told to sell loss-making subsidiaries, to change chief executives, or to not launch certain new products. The changes are really like giving the watchdog a new collar and saying 'look what sharp new teeth it has'."

However, he adds: "What does differ is that the Bank of England dominates the landscape and the FPC holds a pivotal position. It is the glue between the economy and regulation.

"Overall I think it is a good thing. This is the whirlwind brewing in the City. None of it will be new, firms will have been feeling the wind.

"But for the economy as a whole, regulation should be smarter."

The Government will be pleased with the last comment. It has been caught on the horns of a nasty dilemma: despite all the talk of reducing Britain's over-reliance on financial services, it still accounts for 10-15 per cent of GDP; maybe more.

Ministers might decry bankers' bonuses and the conduct of financiers, but faced with a black hole in the public finances, they need the City and especially its tax revenues.

How then, to foster its success without exposing the taxpayer if it all goes wrong again?

Treasury sources say the shake-up is the answer to the dilemma. The Bill to create the new set up had its second reading on 6 February and the aim is for Royal Assent by the end of the year.

The Treasury minister Mark Hoban said in a recent speech: "Ineffective regulation and supervision of banking, and a banking system that pumped the economy full of cheap money, is the very reason we were confronted by a massive contraction in our economy. It is only through reform that we can ensure the stability of the financial sector as a foundation for the sustainable flow of lending to households and businesses across the economy.

"It's the kind of stability that we have brought to the financial sector by ensuring that our banks build their capital and liquidity reserves and lead efforts for greater transparency in the financial system, and through this Government's commitment to fundamental, regulatory reform."

As for the banks which have to deal with the changes, they will publicly voice support. No bank wants to get off to a bad start with its new regulator.

But behind the scenes they fear the Treasury's confidence is misplaced.

Says one senior banker: "We want to know where accountability sits. The problem with the PRA is that a regulator doesn't want things to fall over on their watch. The risk with the PRA is that it is staffed by people whose job is to ensure safety. And they want 100 per cent safety, which means we won't be able to lend anything.

"And yet, from other side you have politicians saying go out lend, don't worry about your client's history or whether people can pay back. Just lend. No one wants to go back to what we had before. It penalises prudence and rewards those who go wrong with a bailout. But getting the balance right is crucial. There is a sweet spot. The risk for the new structure is ... that they go too far in pushing safety first."

David Buik, the veteran City commentator, is slightly more upbeat.

He says: "Hindsight is the greatest trader on earth! However, I think we can take it as read that when Gordon Brown asked Sir Howard Davies to embrace nine regulatory authorities under one roof – which eventually became the FSA – Sir Howard probably bit off more than anyone could chew.

"This Government's decision to put the FSA under the umbrella of the Bank of England must be correct.

"The number of fines for improper behaviour has increased and the protection of the consumer has tightened up significantly, and the installment of Andrew Haldane as the man in charge of financial stability should ensure that there is no repetition of the disasters and machinations of 2007/9."

Arts and Entertainment
Robert De Niro, Martin Scorsese and DiCaprio, at an awards show in 2010
filmsDe Niro, DiCaprio and Pitt to star
In this photo illustration a school student eats a hamburger as part of his lunch which was brought from a fast food shop near his school, on October 5, 2005 in London, England. The British government has announced plans to remove junk food from school lunches. From September 2006, food that is high in fat, sugar or salt will be banned from meals and removed from vending machines in schools across England. The move comes in response to a campaign by celebrity TV chef Jamie Oliver to improve school meals.
England captain Wayne Rooney during training
FOOTBALLNew captain vows side will deliver against Norway for small crowd
Life and Style
Red or dead: An actor portrays Hungarian countess Elizabeth Báthory, rumoured to have bathed in blood to keep youthful
peopleJustin Bieber charged with assault and dangerous driving after crashing quad bike into a minivan
ebooksAn unforgettable anthology of contemporary reportage
peopleHis band Survivor was due to resume touring this month
people'It can last and it's terrifying'
Life and Style
fashionModel of the moment shoots for first time with catwalk veteran
Radamel Falcao poses with his United shirt
FOOTBALLRadamel Falcao's journey from teenage debutant in Colombia to Manchester United's star signing
Life and Style
fashionAngelina Jolie's wedding dressed revealed
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Front-Office Developer (C#, .NET, Java,Artificial Intelligence)

£30000 - £45000 per annum + benefits+bonus+package: Harrington Starr: Front-Of...

C++ Quant Developer

£700 per day: Harrington Starr: Quantitative Developer C++, Python, STL, R, PD...

Java/Calypso Developer

£700 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, J2EE, J...

SQL Developer

£500 per day: Harrington Starr: SQL Developer SQL, C#, Stored Procedures, MDX...

Day In a Page

Chief inspector of GPs: ‘Most doctors don’t really know what bad practice can be like for patients’

Steve Field: ‘Most doctors don’t really know what bad practice can be like for patients’

The man charged with inspecting doctors explains why he may not be welcome in every surgery
Stolen youth: Younger blood can reverse many of the effects of ageing

Stolen youth

Younger blood can reverse many of the effects of ageing
Bob Willoughby: Hollywood's first behind the scenes photographer

Bob Willoughby: The reel deal

He was the photographer who brought documentary photojournalism to Hollywood, changing the way film stars would be portrayed for ever
Hollywood heavyweights produce world's most expensive corporate video - for Macau casino

Hollywood heavyweights produce world's most expensive corporate video - for Macau casino

Scorsese in the director's chair with De Niro, DiCaprio and Pitt to star
Angelina Jolie's wedding dress: made by Versace, designed by her children

Made by Versace, designed by her children

Angelina Jolie's wedding dressed revealed
Anyone for pulled chicken?

Pulling chicks

Pulled pork has gone from being a US barbecue secret to a regular on supermarket shelves. Now KFC is trying to tempt us with a chicken version
9 best steam generator irons

9 best steam generator irons

To get through your ironing as swiftly as possible, invest in one of these efficient gadgets
England v Norway: Wayne Rooney admits England must ‘put on a show’ to regain faith

Rooney admits England must ‘put on a show’ to regain faith

New captain vows side will deliver for small Wembley crowd
‘We knew he was something special:’ Radamel Falcao's journey from teenage debutant to Manchester United's star signing

‘We knew he was something special’

Radamel Falcao's journey from teenage debutant to Manchester United's star signing
'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York