Bank escapes unscathed as political will fails

COMMENT: 'The country might as well be serious about City regulation by going the whole hog and engaging in root-and-branch reform'
Click to follow
The Independent Online
Few could disagree with any of the central findings of the Commons Treasury and Civil Service Committee on City regulation. Present arrangements are plainly deficient in many respects; most of the committee's recommendations represent an advance of some kind while remaining sufficiently uncontroversial to command widespread political support. Such is the drawback (or advantage if you believe in the consensus approach) of attempting to produce a cross-party report on these matters.

The most contentious issue - whether the Bank of England after the BCCI and Barings debacles should be stripped of its supervisory functions - is deliberately fudged. Instead, using that time-honoured Whitehall technique for playing difficult issues off into the long grass, the Treasury is invited to review the matter. The idea of a free-standing prudential supervisor of banks and building societies is described cutely as "a not inconceivable development". The unspoken view, however, is clearly that conception is some distance off.

The Treasury, these days, is no loyal friend of the Bank of England. Both at official and to some extent ministerial level, there is a desire to carve out for the department a new role in banking supervision and City regulation. The fact of the matter is, however, that the chances of this happening before the next election are virtually nil. Setting up a free-standing banking supervisor responsible directly to the Treasury would require a new Banking Act. Some of the committee's other suggestions would also require legislative reform. If parliamentary time is to be found for tackling City regulation at all, the country might as well be serious about it by going the whole hog and engaging in root-and-branch reform. This Government is certainly not going to do that. And the next, assuming it is Labour, will have rather bigger fish to fry in its early years.

So for the time being the Bank and other City regulators escape largely unscathed,despite concern about the fitness of the Bank of England in particular to meet the exacting task of supervision in today's rapidly evolving and sophisticated global financial markets. One view, reflected among a minority of committee members, is that the Bank of England's supervisory failings should be dealt with not by dismantling the present framework but by reinforcing it - by giving the Bank bigger resources and enhanced powers. It seems unlikely the Treasury will go for that one, however.

With no prospect of radical reform this side of the parliamentary election, what can it go for? To keep pace with the trend towards large, integrated financial conglomerates, providing a whole range of products across global markets, a more radical approach than that suggested by the select committee is required. It makes little sense to match integration and globalisation of practitioners with fragmention of supervision, split along industry lines. Far better to pool the resources and expertise in one powerful supervisory organisation. The long-term implications, both for the Bank of England and the other regulators, are clear. It is finding a government with the time and the political will to do it that is the problem. It will require a scandal or two more yet before the Government is finally shaken into action.

No open season in the water industry

Publicly, Lyonnaise des Eaux yesterday described the price cuts required as a condition of its takeover of Northumbrian as severe. Privately, the French must have found it hard to hide their delight, since the cuts are at the lower end of the 15 to 20 per cent range and back-end loaded, with little penalty for a new owner in the first couple of years.

Indeed, the full 15 per cent saving for consumers does not have to be put through until after the next industry-wide price review at the end of the decade, when the whole pricing regime will have been argued through again. The insistence that Lyonnaise secures a stock market quotation for its UK water business, designed to guarantee that the accounts remain transparent, is even less meaningful, since the company has 10 years to achieve the objective

Sensing rightly that the City would read this as signalling open season for the water companies in the stock market, Ian Byatt, the water regulator, inserted what might be called the Professor Stephen Littlechild memorial clause into his announcement.

Professor Littlechild has gone down in City lore, rightly or wrongly, as the man who sparked the electricity takeover frenzy with an unduly lenient price review. Mr Byatt is determined not to be remembered that way. "The approval by the President of the Board of Trade does not mean that the way is clear for the spate of takeovers currently under way in the electricity industry to spread to the water industry," he said.

As it happens, Mr Byatt has more firepower in his armoury than Professor Littlechild, whose advice that most of the electricity bids should be referred to the Monopolies and Mergers Commission has been studiously ignored by Ian Lang, President of the Board of Trade. In the water industry, merger references are mandatory, so bids cannot be nodded through by government, as Mr Lang has done with electricity. That gives Mr Byatt an immediate lever, since he has a big input into a monopolies inquiry and into subsequent negotiations over conditions.

There are other differences, too. The water companies' big investment programmes leave them with only a modest cash flow, unlike the juicy amounts the Recs produce. Nor are there the same commercial pressures to restructure that exist in the electricity industry or the rush of interest from US utilities. In the water industry, there is unlikely to be an open season - just a few potshots at stray birds.

A shared vision of the future

The "collegiate" approach to containing costs in the newspaper industry - the idea that several titles might share back-office and production facilities - has taken on a new lease of life in these days of rising newsprint costs and intense competition for readers. But the idea is an attractive one for other industries, too. The independent television sector has been doing a version of it for years, through shared sales houses. More recently, several ITV companies got together to handle their overseas sales efforts jointly too.

The idea is beginning to catch on among retailers: witness the appearance of fast-food outlets in food malls or the sharing of retail space by branded retailers on the shop floor of big department stores. More recently still, the utilities have seen how savings can be achieved by combining billing and some after-sales services. It doesn't take a takeover to make the "collegiate" approach work. Thames Water and London Electricity see no reason why they should merge to make it work. Cut the basic costs by pooling them with competitors, and compete on the factors that really differentiate products. Could this be the future across a wide range of industries?

Comments