You won’t get better banks if you split one bad regulator into three

Eamonn Butler
GOOD riddance to the Financial Services Authority (FSA). This inflated docklands quango was supposed to regulate the City, but its 4,000 staff were too busy ticking boxes to see the ticking time-bomb of the banking collapse.

Likewise, the FSA failed to take any interest in Libor rigging, despite warnings from City journalists and the Bank of England going back years. It only woke up when Canadian and US agencies began to delve. Even then, about three-quarters of June’s much-vaunted £300m fine was levied by American, not British, regulators.

George Osborne was right to scrap this overweight Brownian hulk. But, in a new report today, regulation expert Tim Ambler and I have concluded that Osborne’s new regulatory regime is even worse.

Cut off one head and, Hydra-like, three more grow. In the FSA’s place we have a consumer-protection body, the Financial Conduct Authority (FCA), and a market watchdog, the Prudential Regulatory Authority (PRA), while the Bank of England gets back its old supervision role.

Shades of the Tripartite system that fouled up so spectacularly in 2007/8, with regulators saying “not my business, guv,” while simultaneously stepping on each other’s feet? Absolutely. The City doesn’t need three different regulators, each trying to second-guess traders and each other, any more than a football match needs three referees.

Initial signs are that the new regulators will increase the cost and bureaucracy of doing business in the City. There will be plenty of jobs for 4,000 box-tickers. Instead of working like the Office of Fair Trading, simply setting the broad rules and punishing transgressors, the FCA and PRA seem determined to look constantly over the shoulder of firms, collecting massive amounts of data and intervening all the time and at all levels.

Nor, from their statements so far, do the embryonic new regulators seem to understand that the best regulator is competition – and that there is far too little of that among banks right now. Britain’s banks have grown bloated because the regulatory burden is so high that only huge banks can afford it. This, in turn, keeps out competition. With consumers so disenchanted with the big banks, you would expect new competitors to be springing up all over. In fact only one has, Metro Bank, and only then because it has deep pockets. The time and cost of regulation account for a large chunk of the £56.5m it lost in its first two years. It expects to break even only in year four.

Auditors, shareholders and directors also have a key role in governance, while the power of brands and competition between them is vital in promoting good governance and reputation, and in boosting value for money. But there is no sign that the new regulators want to strengthen such automatic controls. The PRA, instead, waxes eloquently (and extensively) on the importance of collecting “high quality data” – exactly the same bureaucratic tick-box stuff, it seems, that Osborne wanted to get rid of by scrapping the FSA. Yes, those 4,000 jobs are safe. But for each bureaucrat the PRA employs, traders have to employ at least one more. Ultimately we all pay the cost, as customers and as taxpayers.

So what should be done? A better model for consumer protection is the Financial Ombudsman Service, which manages to handle hundreds of thousands of complaints with just 1,000 staff, and raises any broad concerns with the Office of Fair Trading and the Bank of England. The newly-formed FCA contributes nothing extra, and its interventions are likely to be damaging as it struggles to second-guess both traders and other regulators.

Instead of micro-regulation, we need to encourage competition, and set broad standards of conduct – with transgressions punished. The best way to do that is to make auditors and executives personally accountable for breaking the rules. Even large fines have little effect on large firms, and bonuses barely suffer a dent.

So if we want to clean up City regulation, we need clear rules, clear punishments, stronger competition and clear regulation – not so many regulators that nobody knows who is responsible for what, and which all deny responsibility when things go wrong.

Eamonn Butler is director of the Adam Smith Institute. Simple Rules For Complex Systems: Streamlining the UK’s Financial Regulation Regime is out today. It can be found at