Jeremy Warner's Outlook: Well done Vanni, but should taxpayers be liable for every regulatory blunder?

You begin to feel almost sorry for the beleaguered Financial Services Authority. Already reeling from the collapse of Northern Rock, for which it has admitted a degree of blame, and now running around like a headless chicken trying to put out the flames of one of the worst banking crises of the modern age, it has been found guilty of no fewer than half of the 10 determinations of maladministration made today by the Parliamentary Ombudsman in connection with the closure of Equitable Life.

The findings lay the Government open to possible compensation of £4bn, so, in all, Gordon Brown's regulatory brainchild, until a year ago routinely hailed as one of his key policy successes, is turning out to be quite a liability. Ann Abraham's report is a truly damning account of the clumsy and sometimes reckless way in which regulators dealt with a company which was plainly out of control.

Yet though Vanni Treves, chairman of Equitable Life, and his policy holders have won a splendid victory in persuading the Ombudsman to change her mind – in her first report on the issue in 2003, she cleared the FSA of maladministration – I'm not sure the whole thing is as cut and dried as she makes out.

To date, the FSA has largely excused itself of culpability in the debacle, pointing out, rightly in some respects, that the die had been cast long before it came into existence in the late 1990s. Yet the Ombudsman accuses the FSA of being a part of "a decade of regulatory failure". Its actions after taking over prudential oversight of Equitable are found to have been "largely ineffective and often inappropriate" and it is accused of having failed "properly to exercise its regulatory functions".

The main thrust of the allegation is that the FSA permitted Equitable to remain open on an unsound basis, with the result that premiums worth hundreds of millions of pounds were written under the FSA's watch on the basis of a false prospectus. Those who look to regulators to provide them with accurate and balanced information are said to have been "let down".

If all this sounds bad for the Government, just wait for what she accuses ministers of directly. Their behaviour in failing to establish a single inquiry into the closure not hampered by questions of jurisdiction or limited terms of reference is described as "iniquitous and unfair".

And still the Government is trying to wriggle off the hook, as it did with pensioners whose companies had become insolvent. In that case, the Government was eventually embarrassed by its own backbenchers and the courts into paying out.

To try to avoid a similar fandango this time around, Ms Abraham has leant over backwards to take on board the Government's arguments and rebuttals, repeatedly delaying completion of the report even as Equitable Life policyholders were dying off before they could find salvation.

Yet still the Government wavers on the issue of compensation, even though it knows it faces a constitutional crisis if it rejects the case put forward by Ms Abraham. Unless it apologises and pays up, as demanded, she will resign, reasonably arguing this is not how a parliamentary democracy is meant to work.

The Government showed no compunction whatsoever when it provoked Elizabeth Filkin into resigning as Parliamentary Commissioner for Standards for asking too many awkward questions. But it may not be able to behave quite so cynically with Ms Abraham, whose position is a more entrenched, constitutional and authoritative one. All the same, the Treasury shows every sign of doing its damnedest, for this is not so much a case of "won't pay" as "can't pay".

With the public finances already in such a mess, where's the money going to come from? You've guessed it. Ultimately it will be the taxpayer who picks up the bill for the regulatory failure now established. The £4bn required equates to about 2p on the basic rate of income tax.

As I say, full marks to Vanni Treves and the campaign for compensation, but let me just briefly put the other side of the case.

It is all very well for Ms Abraham with the benefit of hindsight to find the FSA and its predecessor regulators guilty of misjudgment, but is misjudgment really the stuff of maladministration? Ms Abraham alludes in the report to Northern Rock, but Equitable is not at all the same. With Northern Rock, the FSA was asleep at the wheel and has admitted so. With Equitable, the FSA knew there was a problem but took the wrong decisions on what to do about it. As far as I can see, there is no proven case of gross negligence.

A wider point needs to be made here. If the taxpayer is going to be held accountable for every case of regulatory failure that occurs, there's no knowing where it will end. The potential liability would be limitless. What should be done about the other, less high-profile, life fund closures that occurred around the same time, some of which have involved policyholders in even bigger losses? Should they be compensated too? The point of regulation is not to pay out when things go wrong, but to try to stop things going wrong in the first place.

Occasionally, there are bound to be failures. Regulators are only human, and, if the taxpayer is going to held liable for their mistakes, then perhaps governments shouldn't be regulating at all. Some might think that a rather good idea, but that's a debate for another day.

Bankers are under siege on all fronts

Dear old John Fingleton, chief executive of the Office of Fair Trading. It is perfectly reasonable of him to criticise the way banks profit from current accounts, even though the matter is now largely out of his hands – the courts will decide on unauthorised overdraft charges. But to do so in the middle of a banking crisis, with three major players still trying to raise distress capital and profits wiped out by bad debts, looks somewhat ill-timed.

Nor does his calculation of the average cost to the customer of a current account at just £156 a year look exactly iniquitous when you consider what you get for it – direct debits, cheques, ATM cash withdrawals, overdraft facilities, and so on. Obviously it is not "free banking", but nor does it look like profiteering. The problem lies rather with the distribution of those charges. The way it works at the moment is that the few subsidise the many. According to the OFT, 1.4 million current account holders are paying more than £500 a year and 4 million pay in excess of £200.

These higher charges are incurred either through penalty fees for unauthorised overdraft use, or through lost interest on cash balances or high interest on authorised overdrafts. There are also other charges which particularly get my goat, such as the extortionate rates levied for cash withdrawals while abroad.

All the same, if you regulate one set of charges down, bankers will always find a way of protecting the bottom line by putting them up somewhere else. This is particularly the case at the moment, for, having squandered so much of their capital on the credit and mortgage booms, the banks need every penny they can get.

The obvious solution to high bank charges is more competition. It has become much easier to switch banks, yet the numbers doing it are still limited. Banking regulation and capital requirements also impose extreme barriers to entry, even though the events of the last year has shown this oversight to have been pretty much useless.

Regulators on the whole prefer banks consolidated into a small number of well-capitalised players because generally they are seen to be safer and are more easily monitored. This assumption has been challenged by the present implosion, but it might have been even worse had the banking market been populated by a large number of smaller banks all viciously competing for custom.

Still, one possible consequence of the banking crisis is that retail banks may be forced to become more like utilities, highly restricted in what they are allowed to do and the sort of services that are expected of them. This would be the quid pro quo for the repeated taxpayer bailouts the banking sector is receiving. No wonder Mr Fingleton is champing at the bit. Perhaps there is a job for him at Ofbank once he quits the OFT.