After the scandal surrounding the fall of Barings Bank in 1995, the government took N2-style steps to clean up the banking sector. Ian Mullen explains how things changed....

The Government's creation of the Financial Services Authority (FSA) and the powerful new Act of Parliament needed to underpin its work, was designed to give the necessary regulatory strength to company nine regulatory regimes across the breadth of the financial services industry.

Providers of financial services are subject to heavy regulation. This is needed to reduce the risk of institutional or systemic failure. Additionally, prudential regulation plays an important role in maintaining fair and open markets by addressing asymmetries in information.

Regulation to provide protection for retail depositors and investors through compensation schemes and rules on the selling of products is clearly beneficial, if presented on a proportionate basis to the risks involved. Importantly, self-regulation in banking products is an important part of the regulatory framework, something recently endorsed by the recent De Anne Julius Committee Report on Banking Industry Codes.

Regulation, then, is routine, covering nearly all aspects of banks and their businesses. Having said this, implementation on such an enormous scale has tested both government and the Industry.

FSA chairman Sir Howard Davies, together with his lieutenants and staff, has been engaged in a vast programme of policy definition, rule drafting and subsequent pre-consultation - this all-important stage of testing the principle and the detail with industry practitioners and consumers alike to ensure the effectiveness of the proposals.

This pre-consultation is essential in obtaining the support and confidence both for the proposed changes and the quality of our regulator colleagues, who will ultimately oversee implementation.

Looking up
Clearly, this process, which has stretched over the past two years, is far more detailed and time-consuming than the "early win" the government achieved with monetary stability.

Nevertheless, with final implementation due to take legal effect on 1 December,

I share the wide belief in the industry that the government, through the creation of the FSA as it is now constituted, stands poised to win a further vital edge in the drive for global competitive advantage. I say this in the knowledge that the cost of the FSA is, and will be, paid for by a direct annual charge on the financial services industry: for 2000/ 2001, the charge will be about £170m.

Given the substantial statutory powers of the FSA and its considerable resources, the government will, it is hoped, look to use the flexibility and wide-ranging scope it has legislated for the FSA and, therefrom, enable initiatives to be channelled through its processes so the areas of damage can be minimised, and the compatibility with existing and proposed financial regulation maximised.

For example, regulation on consumer information or pension selling needs changing, then this should be done through the FSA, so that policy can be thought through and co-ordinated in terms of content and timing.

While the industry has been engaged with the creation of the FSA, government has launched an array of other initiatives directed at banks, notably the Cruickshank, Myners and Sandler reports. Initiatives that have been remarkable in their lack of consultation with us. Initiatives that have, indeed, been accompanied by public assertions damaging the banks that in subsequent reasoned debate have become diluted, if not withdrawn.

Ominously, the creation of the Financial Ombudsman Service looks set to further play down the role of practical dispute resolution in favour of formal conduct of business rules, even though that was not the intention of recent financial services legislation. It is, in practice, another initiative set to add a further body of regulation to the banking industry.

Constructive involvement
Notwithstanding, we have salvaged benefit from the aftermath of the independent banking review published on 20 March 2000, led by Don Cruickshank. The involvement of the Office of Fair Trading in the regulation of the banks' payment clearing services arrangements will, hopefully, be constructive, but laced with a certain frisson of concern for the unknown. We await the seemingly academic approach that will produce the Competition Commission report on clearing bank services for small business, termed the small and medium-sized enterprise sector (SME).

In many ways, this Competition Commission inquiry, which reported to Patricia Hewitt in October 2001, is a specific example of a previous point made - markets evolve quickly and regulatory initiatives can be overtaken by events. With little evidence, the Competition Commission has hypothesised a series of remedies that would not work well in a market context. It has, for example, proposed obliging banks to supply money transmission services for free, or forcing them to sell profitable businesses against their, and their customers', wishes.

Market trends
In practice, the market has in any case moved, with HBOS announcing it will seriously increase its presence in this market across England and Wales.

This development, along with statements from Abbey National and others, all suggest significant entry to this market is not only possible, but also now evident. These are market-led solutions in play.

To where does all this lead? If this trend of government by-passing its regulator becomes a permanent device in forming policy, all the well tested consultation processes that are part of the proven regulatory check and balance will be compromised. If defacto regulation is created by pre-emptive dictat, rather than through consultation, none of the parties will gain.

Questions would arise of the government treating the provision of banking facilities and associated money transmissions as a utility. This is an attitude and understanding that invites crippling regulation, which would adversely impact on all our industry - global and domestic.

  • Ian Mullen is the chief executive of the British Bankers' Association.

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