No one expects government bureaucracies to be missed. When the Milk Marketing Board, which gave the world Lymeswold cheese, was shut down, nobody really noticed.
When the Department of Trade and Industry closed to make way for the Department for Business, Enterprise and Regulatory Reform, it is a fair guess that no one, possibly even the staff, was bothered. Yet even with the bar that low, the Financial Services Authority (FSA) is likely to be especially unlamented.
The main regulator of Britain’s financial markets for the last 16 years, the FSA presided over a series of scandals and the near collapse of the banking system. It is hard to think of a single thing it got right – certainly nothing that would make up for the things it got wrong. Britain would probably have been better off with no regulation at all than the financial Inspector Clouseaus from Canary Wharf.
The thinking behind the creation of the FSA – that regulation could be split out from the central bank – was always flawed. We learned that during the 2008 crash. And they are learning it all over again in Cyprus and elsewhere in the eurozone. When the nasty stuff hits the fan, the central bank is the one that has to step in and prop up the system.
The fact is, the Bank of England (BoE) is always going to be ultimately responsible for British banks, so it makes sense that it should regulate them. But the Prudential Regulatory Authority – its cumbersomely named new division that will replace the FSA – needs to be more than just a new set of faces at a new address. It needs to come up with a whole new approach.
The FSA was rightly criticised for its leaden-footed, box-ticking approach. But, in fairness, British banks have become a nightmare to regulate. It is only a slight exaggeration to describe banking as a rogue industry, hardly more honest than the Sicilian olive oil business. Britain’s banks have become addicted to mis-selling.
From payment protection insurance, to the Libor scandal, to interest-rate swaps for small business, to interest-only mortgages and packaged accounts, they have created a business model that depends on ripping people off.
Any industry can suffer the odd scandal. Horsemeat gets into the food chain. Apple messes up the maps function on its latest phone. These things happen. But the finance industry appears to be unique in having an endless series of them. It is clear that something more serious is happening.
The trouble is, banking’s business model is obsolete. Every high street has three or four bank branches, far more than it has butchers or newsagents or clothes shops. This is too many. For most of us, banking is now a simple internet service: you get some money paid in, pay some out, and get a card that dispenses cash if you have enough money in your account. It is a very basic product, and one that isn’t worth much.
The banks are mis-selling because they have to find some way of supporting this bloated cost base. If they didn’t, they wouldn’t be able to pay their bills, let alone make a profit. The FSA simply waited for each scandal to unfold, then imposed fines. That wasn’t good enough. The new regulator has to start restructuring the finance industry so that it works for consumers.
What would that mean? Three things. First, the banks need to be broken up. RBS isn’t likely to return to the private sector soon. So while it is owned by the state, it might as well be used to create more competition. At the very least the merger with NatWest could be reversed. And you might as well break that up into the old National Provincial and Westminster chains. Likewise, Lloyds TSB could be split into two separate banks again.
Today, there are four big banks playing the same game. Customers find it a hassle to switch, and won’t find anything very different if they do. But with six or seven big competitors, the market would look a lot more diverse.
Next, encourage more low-cost web-only rivals. The rules for new banks have already been relaxed, which is a step in the right direction. But the regulator should make it far easier to start web-only banks. Very few of us need to visit a branch anymore – but those thousands of premises are incredibly costly.
The gap in the market is for an internet bank that can make good money from free current accounts, without the incentive for mis-selling. It is not as if the world is short of web entrepreneurs – the problem is that regulators still make it too hard for new players to break into the market. That must change.
Finally, the regulator needs to find ways to bring companies with a tradition of innovation and customer service into the market. Retailers such as Tesco have tiptoed into finance – but how about Google or Apple? A smartphone with a banking function built in could blow the market wide open. Toyota or Volkswagen know far more about delivering reliable products at low cost than any high-street bank.
Give them licenses and let them experiment. There may be mistakes along the way and new entrants may need to be monitored closely, but if the BoE is to do a better job of regulating the sector than the FSA, it must try something different – not just employ a new set of suits to tick the same old boxes.