Regulation: UK unravels independence of central bank and regulator

It is no surprise that the UK Government does not admit its failings: any words implying failure or fault are, simply, not in the vocabulary of the man who claimed to have saved the world.

It is, the government implies, the fault of everyone else that the world is in economic crisis.

And at the front of that criticism are the very institutions that Brown and his cohorts have courted for the past decade and a half - banks, insurance companies and their associated businesses.

In 1997, one of Gordon Brown's first actions on appointment as Chancellor of the Exchequer (finance minister) was to declare that the Bank of England was free to set monetary policy and interest rates without Treasury interference. He set up the mechanisms by which this would - in theory - happen. But Brown is a control freak and he never did let go. The plan, it was soon revealed, was that Brown would be able to point at the Bank if things went wrong but claim credit when they went right. And throughout his term as Chancellor, that is what he did.

He also declared that the Self-Regulatory Organisations that had made up the regulatory regime since a major change in 1986 would be brought into a single regulator. With the Securities and Investment Board ("SIB") as the lead regulator, the new body would absorb the Investment Management Regulatory Organisation (IMRO), the Personal Investment Authority (PIA) and the Securities & Futures Authority (SFA) as well as the regulatory function of the Bank of England plus The Building Societies Commission (BSC), the Friendly Societies Commission (FSC) and the Registry of Friendly Societies (RFS).

SIB produced a report containing recommendations which included that it would become the lead regulator: its Chairman, Sir Andrew Large, stepped down on the day the report was "welcomed" by Brown - and Brown's friend Howard Davies was appointed to lead SIB - and the creation of "Super-SIB" as the nascent FSA became known.

Just weeks later, SIB changed its name to Financial Services Authority and - in the absence of any legislation to facilitate the absorbtion of the other regulators - entered into contracts to manage them. In effect, the FSA was now a combination of agent and manager of the other regulators.

But it soon became apparent that the FSA was in a cleft stick. Challenged by Committees as to why its penalties were so out of step with those charged in the USA for similar infractions, the FSA stumbled and mumbled, giving unconvincing reasons. The truth came out in recent weeks when senior FSA people began to imply that the FSA was not to blame for weak regulation and enforcement in the UK financial sector: a political decision had been made that UK competitiveness in financial services might be at risk if the FSA did not adopt a "light touch" regime - ironically that being the US Federal Reserve's approach under Greenspan.

In relation to money laundering, the Treasury drove the regulatory regime: deciding what non-FSA documents would be regarded as acceptable practice. The FSA all but abandoned its own regulatory regime as the Treasury awarded pole position to an industry-led body so emasculating the FSA in one of its primary objectives, the control of financial crime.

So, with the fallacy of the independence of both the Bank of England and the Financial Services Authority now clearly exposed, Alistair Darling is unravelling Brown's misdoings.

Darling was appointed as Brown's puppet Chancellor as Brown assumed the job of Prime Minister - but retained effective control over the Treasury turning himself into, in effect, the UK's first president.

But as the financial crisis deepened, Darling began to go off message. In press conferences he expressed his view leaving Brown to fume and glare. Brown formed a council made up of the Treasury, the Bank of England and the FSA - with the Treasury making the decisions. As the UK remembered Brown's crowing about his economic successes and watched hundreds of thousands of jobs disappear, their future taxes hocked to save banks whilst thousands of small businesses failed Brown's popularity declined. His stewardship of the government was called into question as minister after minister (not all of his party) was disclosed of having cheated on their expenses claims. Thousands lost their homes. Brown, with ministers being shed all around could not dispose of Darling who had, by the middle of 2009, become a thorn in his side.

One can almost imagine him screaming "will no one rid me of this turbulent Chancellor."

Emboldened by the fact that Brown could not replace him, Darling has published his planned reforms of the financial sector.

And at the heart of it is the creation of what Darling called in a statement "Council for Financial Stability - which will bring together the Bank of England, the FSA and the Treasury to monitor system-wide financial stability and respond to long-term risks as they emerge."

Yes, there are other proposed measures such as increasing capital requirements, yet another financial education scheme (this time funded by a levy on the financial sector - the previous government funded efforts having patently failed and, incredibly, financial education not featuring in schools.

But the primary core is this: Brown's financial sector reforms were ill conceived and improperly executed. Now the Treasury accepts this but it has no idea how to say "sorry."

But it does know that whatever it takes to fix it - the taxpayer will pay even if it's indirectly through lower profits at banks.