Osborne takes a chance with FSA regulatory shake-up

Putting the Bank of England in sole charge makes sense, in many ways. But is now the time to do it?

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Last Updated: 13 Jun 2012

So, George Osborne is to go ahead with his plan to effectively scrap the FSA, and make its supervisory function subordinate to the Bank of England - which will now be in sole charge of regulating the City and saving us from future financial meltdown. The plan - announced yesterday in the Chancellor's Mansion House speech, with more details to follow today - didn't exactly come as a surprise, since it's been widely trailed in the press (although we're not quite sure what his Lib Dem coalition partners, who never supported the idea, really think of it).

But the Chancellor's still taking a big risk. For a start, it’s not a model that has been proven elsewhere, so there's little evidence that this arrangement will be any more effective at preventing future crises than the outgoing ‘tripartite system’. And second, this kind of root-and-branch organisational overhaul is going to be pretty tricky to pull off - particularly at a time when our financial regulators have more than enough on their plates already…

It’s a widely held view that the FSA hasn’t exactly covered itself in glory recently - Osborne has repeatedly pointed the finger at the regulator for failing to prevent, spot or even warn about banking crisis, a fundamental failing by any standards.

And he made a forceful case last night for putting the Bank in charge. The tripartite system - introduced by Gordon Brown in 1997, also via a Mansion House speech - has simply not worked, he said: the Bank's remit was limited to consumer price inflation, the FSA was giving the banks too easy a ride, and nobody was looking at the bigger picture - particularly the huge build-up of corporate and personal debt in the UK.

What's more, when the crisis happened, it soon became painfully clear that nobody was sure who was in charge of what. His radical solution, then, is to basically scrap the FSA in its current form - its consumer protection arm will become a separate entity, and its supervisory arm will become a sub-division of the Bank of England. Meanwhile, its fraud-busting arm may become part of a proposed new Economic Crime Agency (ECA).

The plan has gained support from one unexpected direction; the Chancellor pulled a rabbit out of the hat last night by announcing that well-respected FSA boss Hector Sants - a long-time critic of Osborne's plan, who announced his resignation in February - has been persuaded to change his mind and stay on to oversee the transition from the FSA to the Bank, becoming a deputy Governor in the process.

The move should bring greater clarity in terms of where the buck stops in future, which is a good thing. But there’s also a lot of uncertainty about how things will pan out in practice. The evidence from other countries is equivocal: some countries where the central bank is in charge of regulation got through the crisis relatively unscathed, others got hammered. Equally, some of those with a tripartite-esque system did well, others did badly.

But our real concerns are over the timing and execution. Splitting the FSA into three bits, and then moving the supervisory arm lock stock and barrel to the Bank is a big undertaking, and a potentially huge distraction from the job in hand at a critical point in the recovery. The presence of Sants will undoubtedly help, but there will still be all the usual post-merger cultural issues to navigate.

What's more, Osborne is massively inflating the role and scope of the Bank of England. However clever its pointy-headed economists are, will they have the management skills to actually drive this complicated new machine?

The world economy might be better off now than it was in 2008, but we're still not out of the woods - concerns are rife about sovereign debt defaults or a second banking crisis, not to mention the ongoing troubles here in the UK with consumer debt, house prices, and inflation.

Launching such a big organisational overhaul when all this is happening is brave, to say the least. For all our sakes, let's hope that it works out.

In today's bulletin:

Osborne takes a chance with FSA regulatory shake-up
BP cancels divi and pledges $20bn ahead of Hayward's US grilling
Boardroom bonuses bounce back
Ethnic minorities still shut out of top professions?
Taking a hard line with latter-day Robin Hoods

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