Editorial: The FSA was not the only villain

The Financial Services Authority’s 15-year reign over the City of London ends today – and few will regret its passing.

Not only did the FSA make little attempt to stop Britain’s banks steaming full-tilt towards the financial crisis from which we are still suffering the after-effects. To add insult to injury, the watchdog also failed to hold those responsible to account.

In fairness, however, the FSA was a victim as well as a villain. Many of the scandals that dogged the regulator in its early years were exacerbated by its difficult birth from the merger of nine different organisations.

The so-called “tri-partite” structure – splitting regulation between the Treasury, the Bank of England and the FSA – also hardly helped. Even during the worst phases of the financial crisis, it could be difficult to establish who was responsible for what.

As a result, it was all-too easy for the Government to use the FSA as a scapegoat, blaming the catastrophic over-reach of Britain’s financial sector on the regulator’s failure to consider “systemic risks” (even though such concerns were not within its remit). That the FSA was the brainchild of the former Labour government only added an extra, political dimension to the Coalition’s regulatory shake-up.

It should also be noted that the crisis reflected at least as badly on the Bank of England – which is about to take on a chunk of the FSA’s former role. Even the reticent Governor, Sir Mervyn King, has admitted that the threat to Britain’s financial stability from our overweening banking industry should have been “shouted from the rooftops”.

The FSA could never have survived the manifest failures of the system of which it was a part. But it alone was not responsible for the crisis, and its abolition is not enough to ensure that the problems are solved. It can only be hoped that the lessons learned by the FSA are not squandered, and that the Bank resists its natural tendency towards hubris now it has assumed so pre-eminent a role.