New plans mark a return to old ways

And yesterday it was at it again when Treasury minister Mark Hoban launched the Green Paper, which, though described as a consultation, sets out pretty firmly the Government's ideas on how the financial system should be regulated in future.

The Green Paper confirms the creation of a new consumer protection agency for the retail buyers of financial services and thus the wheel has come full circle.

Way back in 1986 when Thatcher's Government was pushing through the first financial markets regulation in the wake of the Boesky scandals in the United States and the Guinness affair here, Sir Mark Weinberg and others proposed a twin regulatory structure for the financial industry — a marketing and investments board to deal with the consumer and retail end of financial services and a securities and investments board to deal with the wholesale stuff.

The idea was dropped in favour of a unified system. A quarter of a century later it has become the new big idea.

However we are where we are — even if no one is really quite sure where that is — and it is obvious that banking regulation will see the biggest changes.

The consumer stuff on the other hand is more about changing the brass plate on the door in recognition of the fact that the Bank of England is determined never to get involved so someone else will have to do it.

It is debatable whether it will be more than cosmetic.

The easiest way to understand the dozens of proposed banking rules being drafted by a plethora of different bodies is to split the proposals into three layers of change.

If the banks were a motorcar, the first level of proposals would be concerned with making it safer to drive.

Increased capital requirements are like better brakes; living wills are like airbags designed to help you survive a crash.

Unfortunately, those who crave a safer world need to remember that better brakes do not stop car accidents. They encourage the driver to go even faster.

The next level centres on increasing safety by separating the traffic.

There are several ideas floating around.

Professor John Kay is an advocate of narrow banking with heavily regulated organisations providing the core services which are vital to the economy and the rest allowed to get on with it.

Others suggest a return to Glass-Steagall — the enforced separation of investment and commercial banking.

Others again suggest the reversal of Big Bang, which would prohibit the same firm acting as both agent and principal — performing both as a buyer on behalf of clients and the market maker from whom the securities are bought.

In the motoring analogy, racing cars are in one lane, passenger buses in another.

In future, no one would be allowed to put a Formula 1 engine into a passenger bus and drive it like Lewis Hamilton. One Fred Goodwin is enough.

It is, however, at the third level that it gets really interesting because this is where the authorities have suggested in speeches that they should get new powers for macro-prudential regulation — the right to impose a blanket 30mph speed limit on the M25 at times when it is particularly foggy, or simply because people are driving recklessly.

Thus, if mortgage lending looked to be getting out of hand, the directive would come down demanding bigger deposits from customers and lower loan-to-value ratios in order to dampen things down.

It is even more far reaching when it comes to regulating specific banks.

The Financial Services Authority's approach was to try to understand a business from the bottom up by immersing itself in a vast amount of shop floor detail.

In the event it had too much information and failed to see the wood for the trees.

The Bank of England hopes to adopt a fundamentally different approach.

Instead of an army of shop floor sergeants, the Bank will have relatively few but very senior banking supervisors who will engage as equals with the board and the bank's chief executive.

These "wise" men and women will look at the bank's strategy, not to assess whether it is good or bad as such, but to see whether the bank has the necessary skills and talents to be able to implement it without getting into difficulty.

If the supervisors think the bank does indeed have the required quality of chief executive, adequate risk control, and an appropriate level of challenge and knowledge in the boardroom then it will be allowed to proceed.

But if the supervisors are unconvinced then they can opine that the whole thing is too risky and demand that the bank puts up extra capital or changes its strategy.

Younger staff will see this as the end of banking as they know it. Their older colleagues will see it more as a return to banking as they used to know it.