Member of Bank's monetary panel criticises plans for super-SIB

The proposed creation of a financial mega-regulator came under fire yesterday as leading academics, including a member of the Bank of England's monetary policy committee, warned of the dangers of the Treasury's plans for a super-SIB.

Speaking to a City audience, Professor Charles Goodhart headed a high- level rejection of a single, all-embracing agency to oversee City supervision, although he admitted there was little prospect of the Government acting on the reservations.

His criticisms came only days after the first meeting of the monetary policy committee at which it was decided to raise interest rates by a quarter point to 6.5 per cent and will come as an embarrassment to Gordon Brown, the Chancellor, who appointed him to the Bank's panel.

Professor Goodhart said he doubted whether a single regulator would be able to effectively oversee the security of the financial system as a whole, the prudential supervision required to prevent individual institutions going bust and the conduct of businesses that would protect individual investors.

Michael Taylor, another speaker at yesterday's conference on financial regulation at the London School of Economics, added there was a danger of the regulatory process becoming a political football. He criticised the Government for announcing the proposed changes without necessary consultation.

He added that putting all regulation under one roof increased the danger of the reputation of the whole body, or the person heading it, being tarnished by even a small number of high-profile failures.

The hostility towards the Chancellor's proposals was in marked contrast to the almost unanimous welcome given to the planned shake-up when it was announced last month. It is the first considered response to suggest the new Government's whirlwind changes might have been made too hastily.

The criticisms of the Government's proposals formed part of a submission to last week's central bank governors meeting at the Bank of England. They were presented yesterday to a group of bankers, regulators and government officials.

Presenting the group's reservations, David Llewellyn, Professor of Money and Banking at Loughborough University, dismissed the recent claim in favour of a single regulator, that the blurring of distinctions between financial institutions should be mirrored by financial supervisors. "There remain, and will remain for the foreseeable future, major differences between banks, securities firms and insurance companies in the the nature of their business and the type of contracts they issue."

He also disagreed with claims that putting together the disparate self- regulatory organisations would necessarily create economies of scale. He quipped: "Speaking as a former Treasury official, I can say that most measures to cut costs actually increase them."

He believed a single regulator might also fail to have a clear focus on the objectives and rationale of regulation and would not make necessary distinctions between different types of institution. Other concerns included the excessive power invested in a single regulator and its tendency to become bureaucratic.

Finally, the group concluded there was a danger of creating an impression in the public mind that the dangers of financial scandals or disasters had disappeared.

Professor Goodhart and his colleagues said a better structure than the proposed single regulator would be four separate agencies. These would act as a systemic regulator, which would control all deposit-taking organisations such as banks and building societies, a prudential supervisor of all non- bank institutions where continued solvency was an issue, and two conduct of business watchdogs for the retail and wholesale sectors. Given that the Government appeared fixed on creating a single regulator, he said super-SIB should be created with these distinct divisions.

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