In Whitehall and the City, the buzz is of the “new settlement”. It was a phrase the Chancellor used repeatedly in his annual Mansion House speech to senior bankers last month. What was seized upon by most commentators was the first time he used it, as in a “new settlement” for the way we manage our public finances.
But ears in the room, if not outside, pricked up when he said: “A new settlement in what we ask of your important industry, financial services.” George Osborne went on to say: “Our financial services industry in Britain has, in recent years, been seen as part of the problem – now it must become part of the solution.”
He added: “I want Britain to be the best place for European and global bank HQs. It’s in our national interest to be so.”
First came the words, and then came the deed. Among those in the audience was Martin Wheatley, chief executive of the Financial Conduct Authority. Last Friday, Wheatley was told by Osborne that his contract was not being renewed. He was out.
The two events mark a step change in the Government’s attitude towards banking. Ever since the financial crisis unfolded on the back of greedy bankers packaging together mortgages issued to people who should never have been allowed to borrow money in the first place, the Tories have stuck faithfully to a banker-bashing script.
They might be the party of the City, counting several former bankers among their ministerial ranks, and relying on those from financial services for donations, but they could sense the public mood. You would have to look very hard to find supportive words towards the banking industry from key Conservatives these past few years – and certainly not of the unqualified kind delivered by the Chancellor. Now they’ve gained an unexpected and total election victory, Osborne and his colleagues can relax the reins, and publicly restore old allegiances.
There’s more to the shift than that, however. What concerns this government more than anything economically, behind the scenes, is our lack of productivity. They can boast of recovery and tough debt management as much as they want but the fact is our country lags behind others when it comes to performance.
Our rivals do it better. What’s worse is we don’t know why. We think it may be that our school and university leavers are not up to scratch. It could be the price of neglecting our infrastructure. It might be a collective failure to help small-to-medium businesses.
Whatever the reason, we come up short. Except in a few areas. In defence, life sciences, creative industries and finance, we’re ahead of the rest. And the outstanding, shining jewel among that bunch is the latter. Ministers have realised they must embrace the City rather than attack it – and thanks to the election triumph and a weakened opposition, they can do so without fear of political fallout.
There is, though, another reason, alluded to by Osborne. The very idea that HSBC may decamp has sent shockwaves through the Government. Yes, they can buy that the bank is still at heart Asian and that Hong Kong is its spiritual as well as business home, but the symbolism of one of the world’s biggest banks quitting these shores is terrible.
They’re worried about whether it presages an avalanche, which could damage the City and with it, Britain, irrevocably. Other financial centres, they know, are queuing up for our business; they’re looking to hug our bankers, not hurl abuse at them.
While HSBC can point to the Far East accounting for the bulk of its revenues, and can also cite higher taxes here as a reason for moving, the fact is that the bank can justifiably blame an anti-big business, specifically anti-bank, mood among politicians, media and public as another factor in going. Cue Osborne’s volte-face.
The victim is Wheatley. Ever since he came here from Hong Kong, where he enjoyed a reputation as a hard supervisor (he loves to tell how he was holed up in his office with protesters outside, setting fire to effigies of him and waving banners showing his face with a set of devil horns), he has portrayed himself as the ruthless sheriff.
He even issued a statement saying he would “shoot first and ask questions later” in relation to new financial products. An outsider, from Essex originally, the son of a plumber who became a bookkeeper, Wheatley planted himself firmly on the side of the little man. He saw his role as protecting the consumer, saying he would guard customers against their own “irrationality”.
There’s no doubt he was effective, imposing bigger fines on banks, securing record compensation for customers, cracking down hard on the Libor and foreign exchange rigging scandals. No one, it seemed, was too big for the FCA and its boss. The FCA’s defeat of JP Morgan Cazenove’s Ian Hannam, the kingpin among City deal-makers, provoked shock and no little anger in some quarters.
In March last year, Wheatley’s “shoot first” comment returned to haunt him. The FCA’s role is to maintain an orderly market, to ensure the markets are transparent. But an FCA selective press briefing had the opposite effect, wiping billions of pounds from insurance company shares.
The subsequent report, published in December, castigated Wheatley. Significantly, Osborne had his opportunity then, and chose not to exercise it. Seven months later, he’s decided to pull the trigger. Now, the bankers’ eyes are on his choice as Wheatley’s successor. A popular selection would be Tracey McDermott, the head of enforcement at the FCA and now filling Wheatley’s shoes as interim chief.
Against McDermott is that she has been just as firm in bringing cases against the bankers (indeed, it was her prosecutions that Wheatley hailed). But she’s less showy and outspoken than Wheatley – and it was that side of him that so riled the banks.
The test will come with the first example of scandalous banking behaviour. For one thing is certain: ministers may have softened their views, but the banks have not changed. Will the Government rush to condemn or will they shrug it off? How Osborne deals with it will be a sight to behold.Reuse content