Regulation: has Obama wrong-footed Brown?

Gordon Brown said yesterday ""The idea that you return to a system where the monetary authority responsible for interest rates and controlling inflation... should be doing the day- to-day regulation of every individual financial institution is not only potentially a conflict of interest, it is actually the wrong thing to do.

"If you are going to regulate individual financial institutions, then you have got to have an agency that is responsible for doing so. It is sophisticated, it is difficult, it has to be staffed up. If anything, the powers of the Financial Services Authority have got to be greater in the years to come."

Not everyone agrees with him.

The Securities and Investment Institute, which gained its Royal Charter earlier this month creating what amounts to a new profession, yesterday released the results of a survey of its members: they don't think Brown has it right. The SII said "93% of industry players believe the current tripartite system of financial supervision in the UK should be overhauled. Just over half of those who took part in the poll – 55 per cent - on the SII website, were in favour of the Bank of England solely taking responsibility for keeping the sector in check, as advocated by the Conservative party." Only one third thought the current situation should continue.

But the real concern for Brown is that he and his Chancellor have created a false picture of who is in charge. The Bank of England was told it had control of the economy: but then Brown as Chancellor only gave them monetary policy to deal with. The Bank was left with just two tools: money supply and interest rates. Neither, historically, have proved useful ways of controlling economies. The Treasury told the FSA it was in charge of all forms of regulation: then it started to interfere and approve policies produced by industry bodies leaving the FSA in a wilderness. The Treasury then took de facto control by pulling strings through what it termed "a tripartite arrangement." Having emasculated both the FSA and the Bank of England, Brown has centralised control - within the Treasury.

Brown's policy, from before his party's election win in 1997 since when they have been in power without break, was simple: divide responsibilities in such a way that when things go right he could claim the credit but when they went wrong, he could always pass the blame.

The fact is that neither the Bank of England nor the FSA carry significant blame for the current financial crisis: the majority of the blame lies with government policy and global forces.

Across the pond, the regulatory system is different. US financial institutions do not have a composite regulator - in fact the USA's problem is that there are so many regulators that no one really knows where the borders are - and multiple regulators, both state and professional, often bite at the same target at the same time for the same conduct.

And so the Obama administration's idea is to centralise Federal supervision of large and complex financial institutions within the Federal Reserve Bank. But within Congress there is criticism of his plan. It is said to be weak and too narrow. Critics favour the creation of an FSA-style regulator. And they are right to criticise - for the plan calls for the creation of a so-called "Financial Services Oversight Council." Aside from the giggles that the use of the word "oversight" will cause, the Council is seemingly nothing more than another layer of administrators. It will be made up of existing bank and securities regulatory bodies which will collect information on systemic risk and analyse it.

Hang on, readers will be saying. Isn't that what the Fed was supposed to do all along?

But the plan is a non-too-subtle way of telling complex financial groups to break up - and to discourage the creation of new groups.

Assistant Secretary for Financial Institutions in the US Treasury, Michael Barr, said this week "Everything in our proposal is designed to ensure that large systemically complicated firms are subject to higher capital standards, additional firewalls, more exacting forms of prudential supervision and further restrictions on their activities. Firms will not want to be designated as systemic companies."

Is that the first major nail in the coffin of the Gramm Leach Bliley Act?