The Treasury Select Committee has produced one of its most insightful reports this week on the accountability of the Bank of England. It puts the issue of accountability so firmly on the agenda that it actually goes much further and raises the question of whether a central bank should be independent of political control.

This has been the conventional wisdom among the major political parties for the last 15 years and when Gordon Brown moved quickly to cut the Bank free of political control in 1997 he was loudly applauded by the Liberal Democrats and quietly encouraged by the Tories. I have never supported the independence of the Bank of England and the Treasury Select Committee report's insightful analysis thoroughly vindicates that stance.

Of course the headlines this week have focused on the proposal that future governors should serve only a single eight year term - they are currently appointed for five years which can be renewed - and that the appointment should be subject to scrutiny and potential veto by the Treasury Select Committee. This has been sold by the committee's chairman Andrew Tyrie as a way of ensuring that, once appointed, the governor would be free from political interference: the rest of the report, however, sets out an aggressive agenda for future political engagement with the Bank.

Mr Tyrie summed it up well when the report was published on Monday: "Scrutiny of the Bank should reflect the needs of 21st century democracy. That means clear lines of accountability and more information made available to Parliament. It should be crystal clear who is in charge at a time of financial crisis. On all of these issues the government's draft legislation would benefit from improvement". It is in time of crisis that the select committee sets out a case for the Bank submitting to direct political control and it is these recommendations that I expect to meet the fiercest opposition from the Bank after the proposed veto on the appointment of the governor.

The recommendations on page 54 of the report do not leave much doubt as to who the select committee thinks should be in charge when there is a crisis:

"We strongly recommend that the definition of what constitutes a "material risk" for the purposes of Clause 42 of the draft Bill be contained in the forthcoming legislation. This definition should also take account of the fact that major liquidity operations by the Bank require Treasury approval--the material risk of these too must require notification to the Treasury....

"We further recommend that the Draft Bill be amended so that this early warning triggers a discretionary power for the Chancellor to be able to direct the Bank if he or she so chooses. The Bank should be required to provide such an early warning to the Chancellor as soon as the FPC becomes aware of a possibility of a material risk to public funds...

"To ensure proper accountability to Parliament, the responsibility of the Chancellor for all decisions involving public funds or liabilities in a time of crisis should be stated in the draft Bill".

These recommendations should start the debate about independence and political control of the Bank of England, one that should have been had a long time ago but which, with people pitching tents in the City to protest about their lack of influence over the financial world, is very much a debate for our time.
 

Anyone trying to keep track of the various proposed reforms of financial services regulation over the next few years will have to have eyes in the back of their head.

It seems that almost wherever you look in the UK, Europe and beyond someone is cooking up some changes. The major reform in the UK, of course, will be the replacement of Labour's tripartite regulatory system - the Bank of England, the Financial Services Authority and the Treasury - with a range of new regulatory units with new powers. A key element of the Coalition government's proposals is a substantial strengthening of the powers of the Bank of England coupled with the creation of a new Financial Conduct Authority. The FCA is the current front-runner as the name of the organisation that was originally penciled in to be called the Consumer Protection and Markets Authority.

Europe gets in on the act
The list of directives and regulations making their way through the labyrinthine procedures of the European Union is intimidatingly long. So long that a cynic might be tempted to wonder whether there isn't a deliberate policy of swamping the sector with consultations and drafts that it wearies of responding to them. There is hardly a sector of the retail or wholesale financial service market that isn't affected by this: hedge funds, derivatives, banking, insurance, pensions, securities, retail investments, venture capital and audit are all on the list.

If practitioners think that negotiating a way through this deluge is bad enough imagine the challenge facing those on the regulatory side of the fence. Financial Services Authority chief executive Hector Sants summed up the problem when he published the FSA's business plan back in March: "The 2011/12 business year for the FSA will be a difficult one. We have to ensure that we are operating effectively as a supervisor as well as taking forward the key policy initiative. The principal ones are progressing the domestic consumer protection strategy, implementing a number of key EU directives and influencing the continuing international regulatory reform agenda, all this has to be done at the same time as taking forward the preparations for a new regulatory structure. The regulatory reform agenda remains on track to ensure the new structure will be ready in 2012", said Mr Sants.

Parliamentary passage fraught with challenges
The FSA may find itself marking time if it is indeed ready before the end of 2012 because the pace of the Treasury's consultation and the increasing likelihood of a tough Parliamentary passage for the new structure suggests that we will be well into 2013 before the new regime is properly in place and operational. We are currently only at the stage where consultation has recently closed on a draft Financial Services Bill to enact the government's reform proposals. The huge number of responses (which can be found on the Treasury's website) will now be considered by a joint committee of both Houses of parliament which has been asked to report by 16 December. Faced with that deadline it is very hard to a Bill proper emerging before the end of the first quarter of 2012.

This would not leave sufficient time to debate it properly even allowing for the spill-over session in September, especially given the huge interest there will be in its progress and the vast scope there is for potential mischief making with it. As one example, you can already see Parliamentary forces being marshaled by the independent financial adviser community to use the debate to delay the implementation of the Retail Distribution Review. The influential Treasury Select Committee has positioned itself aggressively on this issue following a report it produced on RDR during the summer.

The committee asked for a delay in the timetable for implementing RDR beyond the current plan of 2013 and when this was rebuffed by Mr Sants and the FSA, the committee's chairman Andrew Tyrie went on the attack: "We need good conduct of business regulation but we have to make sure that the successor bodies are accountable and explain their decisions, not only to the industry but even more importantly to the millions of consumers who pay for their services". He said that the Treasury Select Committee planned to open a formal inquiry into the accountability of the Financial Conduct Authority - and that is before the Bill has even been presented to Parliament.

This all suggests the progress of the Bill will straddle two Parliamentary sessions and that it is likely to take about a year from start to finish, meaning implementation could drift deep into 2013.

While all this is going on the EU will be producing directives on Packaged Retail Investment products, Market Abuse, Financial Sector Sanctions, Audit Policy, Insurance Mediation, Money Laundering, Insurance Guarantee Schemes, not to mention a continuing debate about the implementation of Solvency II.

Keeping abreast of that lot will tax the best-resourced public affairs departments in the City.

Based on an article originally published in The Actuary, November 2011

The latest newsletter covering the activities of the All Party Parliamentary Group on Insurance & Financial Services is now available.

This up-dates people on changes in the group's officers and its administrative arrangements as well as previewing the issues likely to dominate the autumn session of Parliament.
APPG News30.pdf

You have to applaud Angela Knight's preemptive Bank Holiday strike against the impending Banking Commission report. There is always something to be said for getting your retaliation in first when the game is getting abit dirty. By doing just that she has cleverly managed to shift the debate onto the banks' currently favoured ground which is to argue that they have a key role in promoting economic recovery. That isn't the framework within which the debate on banking regulation should be conducted.

Clinton started the rot
We should wind the clock back to the 1990s and the Clinton administration's decision to repeal the Glass-Steagall Act which was the first, flawed, step in handing the banks too much power and control over the world economy. It allowed them to consolidate and grow to an extent that  appeared to put them beyond the reach of national regulators. Then came the fashionable policy of granting central banks independence from government control which was one of Labour's key policies when it was elected in 1997. Gordon Brown, as Chancellor, took only weeks to cut the Bank of England free from Treasury control, enthusiastically supported by the Liberal Democrats and never opposed by the Tories. This was another signal to bankers that governments trusted them to run the economy.

Were we in safe hands?
Where has that got us? It has led us into the most severe global economic crisis since the 1930s. The banks ran the global economy to suit their interests. Fine for a while as those interests looked to coincide with those of governments hooked on growth (unsustainable as it may have been) but once those interests parted ways the collapse was catastrophic and the banks were exposed for their role in creating a financial system that served their interests above everything else. Almost everything they have done since has reinforced that analysis.

Central banks should be democratically accountable
I can't say I have often agreed with the former Tory minister and leadership contender John Redwood but when he said on Radio 4 at the weekend that independence of central banks was not compatible with modern democracy I found myself cheering. I have always thought this was a misguided policy and so it has proved. He was talking in the context of the Eurozone crisis and the growing tensions between national governments (especially the Germans) and the European Central Bank but it equally applies to the UK. Perhaps we will at last challenge the absurd notion that the Bank of England can be left to its own devices so long as it keeps an eye on inflation and writes a nice little note to the Chancellor every now and then to explain why it can't even do that one thing effectively. I think there is a challenging debate to be had around how central banks should be democratically accountable in a modern democracy and complex economy, with the emphasis firmly on how and not whether they should be accountable.

This is about who runs the economy
This is part of the context for the debate on the Banking Commission's report. It should be about who runs the economy and who controls the banks, not what the banks perceive is in their best interests. I'm afraid for all the PR and political skills Angela Knight deployed over the weekend I think it unlikely that the public and politicians will buy the argument that the banks need to be left alone to promote economic recovery. I just don't think people trust them any more and who can blame us.
 

It has taken far too long and the scheme is still too tightly drawn but at last Equitable Life policyholders know when the compensation they have argued for a decade will start to flow.

Well, their shares went up this morning on publication of the Banking Commission report so the markets obviously think it could have been alot worse. To me the proposals look messy, indecisive and overly complex and lack the courage to drive through to the obvious conclusions.

One group certainly took the advice I offered last month about doing more to connect with MPs and Parliament and it has paid off already.

Independent Financial Advisers up and down the country have been lobbying hard to bring MPs' attention their many concerns about the progress and implementation of the Retail Distribution Review. A few months ago you would have said they were wasting their time as all the arguments had been heard before and had failed to shift the Financial Services Authority from its chosen course. A combination of IFA perseverance and alot of new MPs still keen to engage with businesses in their constituencies has produced a result that few, including the FSA, expected: RDR back on the political agenda with the resultant pressure on the regulator to re-think some of its proposals.

The big break though came a couple of weeks ago when the Conservative MP for Wyre Forest, Mark Garnier, secured a two hour debate on the floor of the House of Commons. Over 40 MPs from the three main parties spoke in this debate and about twice that number attended it, both unusually high figures for such a narrow, specialist topic. There was very little disagreement among the MPs about the need to re-visit RDR. There was alot of focus on grandfathering rights, concern about the amount of time required to compete the new qualifications, the costs  - put at £1.7bn, the rigid requirements on fees and the fear that many experienced IFAs would leave the market. This was estimated by Mr Garnier at as many as 10,000, a figure not disputed during the debate. It was a scenario that alarmed many MPs from rural constituencies who feared that IFAs could become as scarce as Post Offices.

These concerns did not get alot of house room from the government as Mark Hoban, the Financial Secretary to the Treasury, largely defended the FSA and the RDR, although he did try to offer some reassurances on where the costs would fall. He did, however, acknowledge that this issue is now firmly on the political agenda. The Treasury Select Committee has said that it will take evidence on the subject very soon which will ensure it remains very much a live political issue.

In the meantime, the All Party Parliamentary Group on Insurance & Financial Services will also be examining the issues raised by IFAs at its last meeting of the year next Wednesday when it will hear from the Association of Independent Financial Advisers, the Chartered Insurance Institute and the Financial Services Authority. The meeting takes place in Committee Room 18, House of Commons at 4.30pm on Wednesday 15 December and it is open to the public.

Two months ago I would have said there was no chance of re-opening this debate and even less of changing the FSA's mind on any of the issues. Now I am not so sure. I think if IFAs keep a tight focus on two or three key issues they could win some concessions. The trap I see looming is that some IFAs are in danger of getting abit gun-ho and seem to think that they now have a chance to force the whole RDR back to the drawing board. They don't. What they do have is an opportunity to limit the more draconian aspects of RDR and, crucially, reduce the financial and administrative burden on them and their business. They just need to keep focused on objectives that are achievable. 

The £1.5bn that the government has put on the table to settle the long-running Equitable Life saga is a good deal. I know the policyholders' groups don't see it that way but in the current economic climate the prospects of getting the £6bn plus they now say they were hoping for are remote.

The compensation demanded by the policyholders has steadily crept up in the many years I have been following this scandal. When the action groups first held meetings with MPs to lobbying for a settlement they were talking about £2bn. Then, as the campaign gained momentum this jumped to £4bn, a figure which although high, seemed to find some acceptance among those campaigning alongside the policyholders and which was broadly endorsed by the Parliamentary Ombudsman in her report in 2008. Now, the demands have jumped again and £6bn is being bandied around as a 'fair' settlement.

The trouble is no-one really knows as it depends on alot of assumptions and quite a few subjective judgements, key among which is how far the old maxim of caveat emptor (buyer beware) should have applied to a group of policyholders generally better off and better informed than the average investor when buying products that had some of that "too good to be true" lustre that is frequently found on so-called top-performing financial products. Beyond that difficult question, there is the almost insoluble problem of separating how far Equitable's demise was down to bad management (not compensatable by government) and how much was down to regulatory failure, for which the government should be expected to pick up the tab.

After years of debate and delay by the last government, we do at last have a substantial offer on the table, one that is three times the size of that recommended by Sir John Chadwick just three months ago in his report commissioned by the outgoing government. It is a decent offer and one that allows both the Conservatives and Liberal Democrats to say they have delivered their election manifesto pledges to compensate the policyholders and to do so quickly. This will mean largely ignoring last week's report from the House of Commons' Public Administration Select Committee which urged the government to re-engage Sir John Chadwick with revised terms of reference based on the earlier report by the Parliamentary Ombudsman. I really can't see where this would get anyone. If asked a new set of questions, Sir John would probably come up with a higher figure than the £400m to £500m in his July report but how long would that take and, if his recommendation was significantly above the £1.5bn now on the table, how likely would the government be to throw more money into the pot? Let me hazard some answers to those two questions: it would take too long and the government will not increase its offer when it is massively reducing public expenditure.

It is time to accept that this is the closing chapter of another sad story of failure in the UK financial services market.