Regulation  

Stop meddling

Stop meddling

John Mann, Labour MP and member of the Treasury select committee is demanding that Treasury officials appear before the committee to explain the background to the cancellation of an inquiry into banking culture by the FCA which was announced on a ‘quiet news day’ (30 December 2015).

Mr Mann is rightly concerned that the Treasury appears to be interfering in the work and operations of the FCA as this could weaken the effectiveness of regulation.

In response, the FCA’s acting chief executive, Tracey McDermott, went to great lengths in interviews to emphasise that the FCA was not the puppet of the Treasury and that it had objectives set by statute (not by the Treasury) as well as a board of directors.

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All of this is true, but that does not mean the Treasury does not wield significant power. There is a history of Treasury interference in the regulator’s actions. Sir Hector Sants, the incumbent chief executive at the time of the financial crisis, defended his light-touch regulatory approach by saying it was what the Treasury wanted. Sir Hector, expecting to carry the can for the lacklustre role of the regulator, let it be known inside the FSA (the predecessor of the FCA) that he would not be seeking an extension to his contract. By passing the buck to the Treasury, instead of being fired, Sir Hector was knighted.

His successor, Martin Wheatley, was appointed by George Osborne as part of the new coalition government’s plan to restructure the old FSA by carving out the banking prudential regulatory activity and returning it to the Bank of England, and changing the name of what was left to FCA.

Mr Wheatley’s message was that he was going to “shoot first and ask questions later”, which sounds like he was on a mission to clean up the sector. It probably struck the right note at the time when there was clearly going to be plenty of banker bashing.

But the problem with bashing banks is that it simply discourages them from lending, and this was a post-crisis problem that Mr Osborne needed to address in order to stimulate economic recovery. During the post-crisis years, banks have been slow to make new loans and instead have had to contend with a rising tide of regulation and regulatory investigations and fines – not a climate that encourages lending. Indeed, one major British bank was contacted with an enquiry about funding an investment opportunity, but the response of the person who took the call was: “Why are you calling me?”

The reluctance of banks to return to the lending business is quite apparent in the growth of non-bank lending – senior debt funds have been a new and growing source of debt capital for borrowers and a mechanism for investors to capture reasonable returns, particularly compared to the very low rates on bank deposits.

But even during Mr Wheatley’s reign, it was not all banker bashing. It was well known inside the FSA that internal reports concerning banking behaviour and practices were required not to adopt a critical tone, but rather a more sympathetic approach.