Ashley Wassall: From deregulation to re-regulation

We now have a clearer picture of how the financial services sector is to be regulated in the future, following the publication of the final text of the Financial Services Bill last week.

As is usual with such documents, reading through the full text was like wading through treacle, while the so-called ‘explanatory notes’ were close to being impenetrably verbose.

In spite of the document’s gradgrindery composition, however, it did make for interesting reading. In particular, the Bill stands out because it represents a paradigm shift away from the laissez-faire approach to regulation under the previous Labour administration, and the revival of a more hands-on approach from government.

Deregulation was, for many, the key distinguishing factor that separated the ‘new’ Labour under Tony Blair from its previous incarnations, which were no longer deemed to be electable. In hindsight it is perhaps second only to the Middle East conflicts as a symbol of the three-term government, and just as negatively perceived.

Labour under Blair was business friendly and ostensibly wanted to hand regulation over to the professionals. Thus, control of monetary policy was handed over to the Bank of England - with the government requiring merely that a letter be sent if inflation missed its prescribed target - and the regulator was remodelled under the new moniker of the Financial Services Authority and imbued with fresh powers following the passing of the Financial Services and Markets Act 2000.

For a time all seemed to be well, but then the credit crunch hit and, while commentators began pontificating over whether freedom had gone too far, crunch became crisis and then depression. The rest we all know only too well.

Now, close to two years into the coalition administration’s reign, we have a new remodelling of regulatory roles.

At first there appears to be a superficial similarity between the Labour approach and that of the new government. Just as Gordon Brown had handed autonomy over monetary policy to the Bank of England, under the Financial Services Bill the Bank will get even more power, with a new macroeconomic regulatory committee being established and the primary responsibility for direct regulation coming under its auspices with the Prudential Regulation Authority.

I’ve written about this previously, highlighting my own discomfort at the amount of responsibility being concentrated into a single body, and will not labour the point further here.

What I’m more interested in is the revisions to the way this system will work that were outlined in the final Bill following the recommendations of both the Joint Committee and the Treasury Select Committee.