Banking: UK Treasury calls future of FSA into question

There are two models for regulation - a single regulator covering the whole financial sector and multiple regulators each covering their own business area.

The UK used to have three primary regulators then, in 1997, as part of the Blair/Brown plan for a radical shake up of the way the UK was run, Gordon Brown's first significant action was to remove from the bank of England all regulatory function and to turn it to a pure engine of economic management. A small banking sector regulator became the vehicle for the vision of a single regulator and, even though there would not be law in place to make the changes formal, a series of contracts were made between the regulators in which one of them became what might be considered "lead regulator" and took over the supervision of banks and, through the contracts, securities and insurance. The FSA, although notionally independent, is subject to Treasury and - in its early years - was basically run by Brown's friends who implemented his vision - or whims.

The concept of a unified regulator is not flawed. As both supply and demand for financial services - and the abuse of those providing those services - converges, then the regulation of those business areas must also converge.

Many countries are creating convergence by stealth: the "Joint Forum" is an initiative of the Bank of International Settlements (the club for central bankers and therefore by default banking regulators), IOSCO (the group of Securities regulators) and the International Association of Insurance Supervisors produces common guidance for regulators in all three sectors: as that moves across the world, the FSA's model looks increasingly attractive.

The concept is that there are sufficient common areas in financial services regulation for a common approach, with industry specific areas receiving individual attention.

But areas such as enforcement, inspections, monitoring have substantial common ground, creating a rapidly escalating skill-set and specialisms which are patently lacking in almost all parts of the world where there remain regulatory silos.

The FSA is a good model; even if in its early days it was a bit of a mess and not particularly well thought through, it has reached the point where it is mature, confident and fair.

It is also effective.

Where the UK Government appears to be getting its knickers in a twist is over the question of executive pay. It is unfair to blame the FSA for not dealing with this issue - it is not within the FSA's remit.

The suggestion that supervision of banks should return to the Bank of England is tied up with the fact that, when banks ran into trouble, it was the Bank of England that bailed them out.

That's because, when Brown designed his grand scheme, he omitted to deal with the function of the Central Bank as Lender of Last Resort. As the economy fell apart, in the UK only a part of this was due to contagion of the global financial crisis. Much more was due to internal politics. Brown, by now Prime Minister, girded his loins, turned his back on the disaster he and Brown had created, and sallied forth to, as he put it "save the world."

The Bank of England, which - in 1997 - Brown had declared would be independent turned out to be a pawn of Brown's Treasury. Its committees were packed with his supporters and every time the economy went well, Brown crowed and every time it didn't he blamed the Bank. But the Bank was cramped by a narrow view of economic management - it was a totally Monetarist organ. In short, the only economic management tool at its disposal was interest rates.

It can be argued that the Bank also has control over the money supply but, other than in time of exceptional financial crisis, it has little or no control : that is in the hands of money lenders as spending moves from income and savings to credit. The Bank has no effective control over credit which is - at its simplest - the private sector printing money.

As the financial world descended into chaos, Brown's big solution was to form a "Triumvirate" made up of The Treasury, The Bank of England and the FSA. In reality, this was Treasury led - Brown effectively, from the Prime Minister's office, took control of the financial sector. History will decide how good a job he did. Right now, it's not looking on him too kindly.

The nett effect of the "Tripartite system" as Brown termed it was to remove the autonomy of the FSA in some areas. Those areas related to economic management and - critically for some banks - ownership. He had already transferred to the Treasury - and then effectively subcontracted to an industry group - the question of interpretation of counter-money laundering laws and their implementation.

It is difficult to see what can be gained by taking any or all of the FSA's powers to the Bank of England. It will weaken a system which actually works: cynics say that the Tripartite system was in part an excuse for Brown to try to regain control over the FSA which had become almost genuinely independent. The correct course of action would be to strengthen the FSA's authority in relation to balance sheets and the ability to require - when trouble is on the horizon - improved capital adequacy ratios.

The Bank of England is for dealing with economics. One of the errors in the early days of the FSA was to place too much reliance on economists. Economic forecasting is not the job of a regulator: that's what the Bank of England is for. The FSA is a regulator and it's very good at it. That is something that, almost a decade and a half ago, looked extremely unlikely.

Matters of how much people are paid in the financial sector might be a regulatory issue - but the safeguards are already there: shareholders are supposed to be able to vote down contracts that are not in the company's interests. With reports that one senior banker in London is in line for total compensation of more than GBP170 this year, that is causing ire in the media which is stirring up the public which are moaning to politicians. This is not the place to comment on matters of individual compensation.

Moving the regulation of banks to the Bank of England will have, in the current state of the law, no impact on the ability to limit that compensation.

The UK's coalition government are right to dismantle many of the expensive, disruptive, revolutionary, pointless and downright spiteful effigies to themselves that Blair and Brown built.

The FSA, as it has become in the past six or seven years, is not one of them.

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Nigel Morris-Cotterill is Head, The Anti Money Laundering Network, ultimate owner of BankingInsuranceSecurities.Com

www.antimoneylaundering.net