David Cameron yesterday risked putting the Conservative Party on an apparent collision course with the Financial Services Authority when he pledged to return power to the Bank of England, just as the FSA chairman, Lord Turner, argued for the existing financial regulator to retain the lead. The Tory leader was setting out his regulatory blueprint for Britain's financial services in the wake of the financial meltdown.
Mr Cameron argued that the Old Lady of Threadneedle Street should be restored to the regulatory driving seat in the financial sector. "The Bank of England will be back and we will restore its role in controlling the levels of debt in the economy," he said in a speech at the London Stock Exchange.
Under the current system, set up in 1997 shortly after Labour came to power with Gordon Brown as Chancellor, the supervision of banks was split between the Bank, the FSA and the Treasury under what has become known as the tripartite structure.
"The tripartite system monumentally failed its first big test," Mr Cameron said, specifically citing the collapse of the bank Northern Rock, which was nationalised last year.
But Lord Turner told a House of Lords Economic Affairs Committee that whatever reforms are implemented regarding the regulation of UK banks, the best solution would be to reorganise the FSA internally rather than return the regulatory lead to the Bank of England. "The regulator is the party in the best position to look at systemic risk," Lord Turner said, adding that returning such powers to the Bank of England would involve pointless people-shuffling with little substantive change. Indeed, it could involve the transfer to the Bank of as many as 700 to 800 employees from the FSA, many of whom had been moved over to the FSA from the BoE in the first place, he added.
Mr Cameron said that the Government is moving towards rules that "look good on paper" but would not work. "Without proper financial regulation, there will be no lasting financial confidence, and without lasting financial confidence, there will be no lasting recovery," he said. Rejecting the idea that the Tories are unabashed champions of markets and deregulation, he added: "For too long, our market has been governed by the destructive idea that you can take what you get, however you can get it. We need to change the culture in the City so people understand they don't just have a responsibility to themselves – but to society, too."
The apparent ideas clash between Mr Cameron and the FSA on the role of the BoE came against a backdrop of governments studying far-reaching regulatory change. Mr Brown hosted a meeting of some of the world's top bankers at Downing Street ahead of next week's G20 summit meeting, to discuss regulatory reform and the need to avoid protectionism.
The executives, from 13 banks, including Deutsche and JPMorgan, urged Mr Brown not to push for regulation that could damage economic recovery at next week's meeting. One topic was regulatory reform, including how regulators should develop their supervision of the entire financial system, as opposed to just the individual participants.
Mervyn King, the Governor of the Bank of England, argued that the Bank of England had been limited in its ability to address the economic meltdown by having no tools beyond interest rates, and the single goal of keeping inflation constant. The Bank had only obtained the access to information it needed on individual lenders once they became distressed and it moved into its role as their lender of last resort, he said yesterday.
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