Tory leader says the tripartite system for City regulation introduced by Gordon Brown was directly to blame for the crisis facing the country
David Cameron today accused the government of a “policy failure of historic proportions” as he unveiled plans to abolish the Financial Services Authority and divide its responsibilities between a beefed-up Bank of England and a new consumer protection body.
In a speech in London, the Conservative leader said the tripartite system for City regulation introduced by Gordon Brown was directly to blame for the crisis facing the country.
He dismissed the government’s proposed reforms as inadequate measures that jeopardise recovery, promising instead to give sweeping new powers to the Bank of England.
Under Conservative proposals, the Bank would regulate City pay structures, risk-taking and the size of financial institutions, while the rest of the FSA’s functions would be performed by a new Consumer Protection Agency (CPA).
The government plans to keep the “tripartite” system – involving the Bank, the FSA and the Treasury – but introduce an overseeing Council for Financial Stability.
Launching a Conservative white paper on banking alongside George Osborne, the shadow chancellor, Cameron said: “The decisions that led to this crisis represent a policy failure of historic proportions. We now need deep, wide-ranging reform that matches both the magnitude of the crisis and the scale of the hardship inflicted on the British people.
“That reform must be based on a clear understanding of what went wrong in the first place and a clear determination to put it right.”
The debt crisis had been “at best ignored and at worst encouraged”, he said.
“For this, I believe the finger of blame points directly at the system of financial regulation established by Gordon Brown in 1997.
“At its heart was the tripartite system; a system in which no-one was looking at the big picture, no-one had responsibility and authority to act and no-one was effectively in charge.
“So those bad debts, those risky loans, the soaring house prices, the systemic risk, the asset price bubble – they all fell between the cracks of the system.
“I’m afraid the government’s proposals that all we need are a few more tweaks and a little bureaucratic tinkering are totally inadequate and risk preventing a recovery.”
Under the Tory plans, bank and credit card customers would also have the right to receive a “data file” about the payments they make, allowing them to find out easily online whether rival companies offer cheaper services.
This proposal is based on an idea being pursued by Barack Obama’s administration. The Tories believe that current price comparison websites are flawed because customers cannot compare price information in a way that takes into account their personal spending behaviour.
The Tories are also proposing a review of the competition implications of the Lloyds/HBOS merger and insist that high street banks that engage in high-risk investment banking should pay a penalty in the form of “much higher capital requirements”.
They are in principle attracted by the idea of separating investment banking from retail banking – the so-called Glass-Steagall option, after the act once used to enforce this split in the US – but think this would only work if new regulation was agreed internationally.
Other proposals in the Tory white paper include:
• The creation of a financial regulation division at the Bank of England, overseen by a new financial policy committee that would work alongside the monetary policy committee. There would also be a new deputy governor for financial regulation.
• Higher salaries for City regulators, funded by an increase in the industry levy used to subsidise the FSA. City firms would have to second staff to the Bank of England to provide the regulators with better access to market experience.
• The Bank of England using capital requirements to impose a “tax” on risky bonus structures.
• The appointment of a Treasury minister, who would be based largely in Brussels, with specific responsibility for European financial regulation.
Lord Myners, the Treasury minister, condemned the Tory plans. “These proposals are window dressing that ignore the failures that led to the global financial crisis,” he said.
“While George Osborne talks about who’s in charge, we are focused on the lessons of the crisis, including greater scrutiny of the shadow banking sector and a crackdown on excessive city bonuses.
“The Tory proposals would abolish an independent, expert regulator, while diverting attention from banks that took excessive risks that led to this crisis.”
And Liam Byrne, the chief secretary to the Treasury, also criticised the Tories.
“David Cameron and George Osborne can talk all they like about banking reform, but when it mattered, they showed their inexperience and called it wrong,” Byrne said.
“They opposed the government’s action to protect Northern Rock irrespective of the risks to savers and the wider economy.
“Since that misjudgment, they haven’t learned their lesson. They’re the only politicians in the developed world who think that it’s a good idea to cut back spending in the middle of a recession, and deny the economy the boost it needs to get Britain out of the downturn.”
