Truss’s idea for City regulation belongs in the past

How long will it take to forget the lessons of the financial crisis? Conservative leadership contender Liz Truss appears to have done so already.

Truss is planning an immediate review of the City regulators’ roles should she win the UK premiership next month, according to campaign insiders. The most eye-catching suggestion is that the twin peaks of our domestic financial regulation system could be combined in a single regulator.

This is, to put it bluntly, a terrible idea.

That is not to say there are no arguments in favour of a catch-all regulator. Uniting all of financial regulation — conduct and prudential or financial stability — in a single institution could, in theory, eliminate siloed thinking and failures of communication between competing bodies.

But it has been less than a decade since the UK abandoned that system in the form of the Financial Services Authority. That might feel like a different era. Yet it was Truss’s Conservative predecessors George Osborne and David Cameron who argued for it to be jettisoned, sending prudential regulation powers back to the Bank of England and refashioning the responsibilities of the Financial Conduct Authority as it now is.

That was undoubtedly in part a political move: marking out a New Labour experiment as a failure. But it was also clear by the time Osborne and Cameron proposed it in 2009 — even before the full report of the banking crisis had been written — that the FSA had failed.

The same is not true now.

The Financial Conduct Authority justifiably attracts criticism. A lot of criticism. There are specific regulatory shortcomings: the scandals over London Capital and Finance and the British Steel pensioners are but two. A crisis of staff morale and recruitment, exacerbated by chief executive Nikhil Rathi’s botched handling of a bonus overhaul. Difficulties adjusting to an expanded remit after Brexit. Complaints that the watchdog is lumbering and insufficiently focused on the big picture.

Those should be arguments for a concerted effort to improve the FCA. They are not cause for ripping up a regulatory model only instituted nine years ago.

The FCA’s failures are not of the type that brought our financial system nearly to its knees, ushering in more than 10 years of state ownership of one of our largest banks. There is not the equivalent justification for radical structural reform.

Meanwhile, the Prudential Regulation Authority actually appears to be functioning relatively well under the auspices of the Bank of England. The BoE’s financial policy work is informed by the supervisory knowledge of the PRA personnel. The PRA has been integrated.

Thoughts that folding the FCA into the BoE might have a similarly happy result are delusional. The FCA is a sprawling organisation. It would be more likely to infect the Bank than be cured by it. In any case the Bank, under criticism for its handling of the post-pandemic inflationary era, has its own problems to tend to without being saddled with the FCA.

The experience of the FSA should be enough to caution against any misplaced optimism the twin mandates could be balanced effectively in an alternative combined organisation. In the words of Martin Taylor, a recent member of the BoE’s financial policy committee: “I can see no possible benefit from doing this and considerable possible downside for both the FCA and PRA.”

Why, then, would Truss consider doing it? If it is because of a concern over a lack of focus on economic growth, that is wrong-headed. We have seen before where prioritising competitiveness over rigour of regulation gets us. No one wants the taxpayer to spend billions of pounds bailing out the banks again (least of all the bankers). It has been controversial enough restoring competitiveness as a secondary objective of the FCA. To make it the guiding principle behind the UK’s financial regulatory policy would be unfathomable.

Politics is the second option. Sam Woods, chief executive of the PRA, has not endeared himself in Westminster with his perceived obstinacy over insurance industry reforms, otherwise known as one of the few Brexit benefits yet to be identified. Eliminating the institutions might neutralise some awkward personnel. Even a review would be a clear threat.

In other circumstances, a review of the roles and responsibilities of the City’s regulators might be a fine idea. Perhaps the FCA’s mandate is too broad for it to master. But any shake-up would be hugely diverting and consuming. There should be bigger priorities for the new Conservative prime minister. The last thing the UK needs is the FSA redux.

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