FSA attacks Blair as speech causes tensions to boil over

The Financial Services Authority has challenged the Prime Minister over a speech in which he declared that the City regulator was "seen as hugely inhibiting of efficient business".

Callum McCarthy, the chairman of the FSA, wrote to Tony Blair last week to protest, saying that the remark had undermined the authority of the regulator.

The letter said: "It is damaging to our influence and our abilities to support the principles of better regulation to be described in the way that has occurred, hence our anxiety to establish whether there is any evidence to support the claim, which appears to be unfounded."

Mr Blair's speech, delivered at London's Institute of Public Policy Research, was a broad-ranging attack on over-regulation of all aspects of life in this country. But within it, he singled out the FSA for criticism.

"Something is seriously awry when teachers feel unable to take children on school trips, for fear of being sued; when the Financial Services Authority that was established to provide clear guidelines and rules for the financial services sector and to protect the consumer against the fraudulent, is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone; when pensions protection inflates dramatically the cost of selling pensions to middle-income people ..." he said.

The Prime Minister said regulators must not try to eliminate risk altogether, as "a risk-averse business culture is no business culture at all. There is usually a seductive logic to any new regulation. There is almost always a case that can be made for each specific instrument. The problem is cumulative. All these good intentions can add up to a large expense, with suffocating effects", he said at the end of last month.

Downing Street confirmed it had received a letter from the FSA but a spokeswoman said Mr Blair stood by the speech. "The Prime Minister, of course, values the work of the FSA but he was talking about perceptions. If parents, members of the public and business perceive there is too much red tape and regulation in their day-to-day lives, it is right that the Government look at this," she said.

The FSA, in its letter, asked for a meeting with the officials who drafted Mr Blair's speech and offered a briefing with the Prime Minister to explain its work. It is thought that one of the authors of the speech was a leading Downing Street adviser, Matthew Taylor.

The regulator, which was established by Mr Blair's government early in its first term, does not accept that it is perceived as heavy-handed.

The FSA believes that a number of studies, including the Government's own Hampton review of regulation, published this year, have concluded that the City is well and appropriately regulated. The FSA is said to be "bewildered" by Mr Blair's attack, which it thinks is at odds with the Treasury view.

A spokesman for the watchdog declined to comment, saying only that "this was a private letter by Mr McCarthy to the Prime Minister".