Tory plan to scrap FSA in banking shake-up

Author: By Joe Churcher and James Tapsfield, PA

The Tory leader said the tripartite system introduced by Gordon Brown was a
“policy failure of historic proportions” that was directly to blame for the
crisis facing the country.

He dismissed the Government’s proposed reforms as inadequate measures that
jeopardise recovery, promising instead to give sweeping new powers to the
Bank of England.

Under Conservative proposals, it will regulate City pay structures,
risk-taking and the size of financial institutions, with the FSA swallowed
up into a new consumer protection body.

The Government plans to keep the “tripartite” system – involving the Bank, the
FSA and the Treasury – but introduce an overseeing Council for Financial
Stability.

Launching the reform plans, Mr Cameron said: “The decisions that led to this
crisis represent a policy failure of historic proportions. We now need deep,
wide-ranging reform that matches both the magnitude of the crisis and the
scale of the hardship inflicted on the British people.

“That reform must be based on a clear understanding of what went wrong in the
first place and a clear determination to put it right.”

The debt crisis had been “at best ignored and at worst encouraged”, he said.

“For this, I believe the finger of blame points directly at the system of
financial regulation established by Gordon Brown in 1997.

“At its heart was the tripartite system; a system in which no-one was looking
at the big picture, no-one had responsibility and authority to act and
no-one was effectively in charge.

“So those bad debts, those risky loans, the soaring house prices, the systemic
risk, the asset price bubble – they all fell between the cracks of the
system.

“I’m afraid the Government’s proposals that all we need are a few more tweaks
and a little bureaucratic tinkering are totally inadequate and risk
preventing a recovery.

The Tory plan involves:

:: The scrapping of the tripartite system, with responsibility for maintaining
financial stability handed to the Bank of England. The Bank would have a
powerful new Financial Policy Committee, which would work alongside the
interest rate-setting Monetary Policy Committee and include the Governor and
Deputy Governor for Financial Stability, as well as independent external
members;

:: New powers for the Bank of England to regulate the pay structures, risk,
complexity and size of financial institutions, including requirements on
those which put financial stability at risk to hold large amounts of capital
to act as insurance to protect the taxpayer;

:: The abolition of the FSA and the combination of its consumer protection
functions with parts of the Office for Fair Trading to create a new Consumer
Protection Agency able to stand up for ordinary people on issues like bank
charges and excessive interest rates for credit;

:: A new senior post within the Treasury for a minister with responsibility
for European financial regulation, who would spend much of his or her time
in Brussels fighting Britain’s corner and defending the interests of the
City of London;

:: A new competition investigation by the OFT and Competition Commission into
the effect of mergers within the banking industry, particularly last year’s
creation of the giant Lloyds Group from Lloyds TSB and HBOS. Findings from
the probe would inform a Tory government’s strategy on returning banks in
which the state holds a stake to the private sector, signalling the
likelihood that they would not simply be sold as single entities.

The Tory proposals were unveiled as the Liberal Democrats called for the banks
now in part public ownership to be broken up before being returned to the
private sector.

The party’s Treasury spokesman, Vince Cable, said Britain’s banks had become
“the financial equivalent of Chernobyl” and radical safety measures were
required to make them less of a threat to the economy.

In a speech to the London Stock Exchange, Mr Cable said major reforms were
needed to the banking regulation system, including measures to make it
easier for large institutions to fail without the state being forced to step
in and save them.

He said there was a long-term role for state banking in the UK economy, even
after the current crisis has abated, and argued against a quick sell-off of
the Government-owned banks.

“The Government has yet to grapple with the challenge posed by the Governor of
the Bank of England: that if a bank is too big to fail, it is too big. One
approach is to make it easier for big institutions to fail.

“Some aspects of the financial services industry are simply too big for the
British economy to manage safely. The large, failed British banks are the
financial equivalent of Chernobyl. Like the former Soviet Union, the UK
became over-reliant on dangerous financial reactors.

“Britain has the highest share of banking assets in GDP of any major country,
four times as high as the US. To prevent Britain from becoming the next
Iceland, radical safety measures, like ones I have set out, are required.

“My approach to the City is not one of hostility, or of obsequiousness. I
recognise its importance. But it needs ‘tough love’, not the freedom to run
amok,” he said.

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