Osborne’s plan to scrap FSA gets a mixed reaction in City

Hugo Duncan
20 Jul 2009

The City today gave a mixed reaction to Tory proposals to give the Bank of England greater regulatory powers to try to prevent future financial crises.

Shadow chancellor George Osborne proposed scrapping the Financial Services Authority and handing powers back to Threadneedle Street to oversee the health of the economy and to regulate the City.

He said the tripartite system of the Bank, the FSA and the Treasury set up by Gordon Brown had failed and needed to be overhauled.

But critics said the FSA was handed regulatory powers after very obvious failings by the Bank during the collapse of BCCI and Barings early in the 1990s. They also warned dismantling the system may prove more costly and risky than beefing it up.

Peter Hahn of Cass Business School said which people are in charge of financial stability is more important than where they are based.

“This has been a long-term process of consolidation but you end up with conflict,” he said. “In the end it is not as much where the chairs are but who are in the chairs. There were some structural problems but the issue is a lot more about having the right people.”

Others welcomed the proposals. Which? chief executive Peter Vicary-Smith said: “The current regulatory system has failed consumers so it's encouraging to see that all political parties recognise the need for reform. We share the Conservatives' concerns about the nature of competition in this market and the power that the big players wield on the high street, power that could be used to the detriment of the ordinary consumer. We need a stable, prosperous banking industry, where consumers are treated fairly, so it's vital that the regulator has the necessary tools to do its job and, more importantly, the will to use them.”

Paul Edmondson, of City law firm Cameron McKenna, said: “Scrapping the FSA sends all the right political messages. It sounds tough and points the finger at Labour and its creature the FSA, but it is still very unclear what moving the banking regulators from Canary Wharf back to Threadneedle Street will achieve.

“Like the official White Paper earlier this month, the Tory paper lacks substantive policies. It just repeats and recycles the general debate on what the new rules might be.”

Howard Wheeldon, of BGC Partners, said: “At last, it seems that the shadow cabinet has finally got the message that banking and insurance-sector regulation and control should be put back where it belongs, back in the safe hands of the Bank of England.

“They propose to turn Gordon Brown's leviathan FSA creation of all-consuming power into a meaningful consumer protection unit, taking away some previous duties and responsibilities of the Office of Fair Trading in the process.”