Somebody needs to guard the City of London’s guardians

Allister Heath
I HAVEN’T been a fan of all of the Treasury select committee’s recent outings. There have been some excellent moments and some dire ones. But Andrew Tyrie, the body’s chairman, did a great job yesterday. He pointed out that the removal of Bob Diamond raises serious questions about whether regulators should be given such arbitrary powers over the boards of private firms.

Clearly, Barclays and others behaved appallingly during the Libor scandal. The point here is not whether it was right or wrong for Diamond to be forced out – but whether the way it was done was right, behind closed doors, with no due process, no right of appeal and in somewhat strange and opaque circumstances. Diamond wasn’t even pushed out until many days after the scandal broke.

So Tyrie was right to highlight the risk of arbitrary power being exercised. It now appears that the management – and in fact the very existence – of any “private” bank is now entirely dependent on being on the good side of the regulators. But the power to strike somebody off or to remove a banking licence is an extreme one. Like everything else, it requires checks and balances.

Many will disagree, favouring a return to the old ways when officials would restore order in the City by taking secret decisions in smoke-filled rooms. The governor was trusted to act wisely and fairly, and widely respected as someone of natural authority with an intimate knowledge of the City. The 1970s secondary banking crisis was dealt with in this way. Old City hands – in insurance as well as banking – readily recount how the Bank of England or other regulators used to act.

CEOs were summoned for a quiet chat or telephoned. One erstwhile bank chief told me how a senior Bank of England official asked him round to Threadneedle Street to inform him that he wasn’t comfortable with a proposed course of action. When my contact asked for an explanation, the official expressed surprise that he hadn’t been heard correctly the first time. The Bank of England also took drastic action when Midland Bank made a loss in the early 1990s, engineering a management change. John Redwood, the Tory MP, openly recalls how he acted behind the scenes when he was a minister in charge of regulating insurers.

Yet we can’t have it both ways. We can’t have an open and transparent regulatory body that is also still allowed to behave in the clubby ways of yore whenever it chooses. It must be one regulatory system or the other – and in today’s globalised world, we must choose openness and accountability. There are no Platonic philosopher kings – and certainly no economist kings. Somebody needs to guard the guardians.

Yesterday’s fall in inflation was the first piece of good news for the beleaguered George Osborne in many months. The consumer price index rose by only 2.4 per cent over the past year, a great relief and a lucky escape for the Bank of England, thanks in part to falling oil prices. The retail price index (RPI) measure increased by 2.8 per cent.

But before celebrating we must remember, as PwC’s Andrew Sentance points out, that inflation has been below target for just 12 months out of the past seven years. Chris Williamson of Markit reminds us that real average pay is still falling – but the present one per cent per annum drop (on the RPI measure) is the lowest rate of decline since November 2009 and compares to a peak of 3.9 per cent in September 2011. We should be thankful for small mercies.