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Credit crunch confidence crisis

There is no shock value in the current crisis-ridden climate when a consumer group says the financial services sector has a mountain to climb to restore consumer confidence. Which? - once the Consumers Association - set out this case with admirably clarity when it spoke to the All Party Parliamentary Group on Insurance & Financial Services recently. More of a shock was its critique of a regulatory system that we all know has failed but which few have yet pointed so clearly at where they believe the fundamental fault lines lie. More of that later.

Which? used a recent survey to illustrate how far consumer confidence had been rocked over the last few months. Here are a few figures from that survey:
• 84% think the banking system needs to be reformed to avoid another crisis.
• 21% do not trust banks to keep their money safe.
• 72% of pension holders are worried about the value of their pension.
• 35% of current mortgage holders are worried about having their home repossessed.
There are plenty more in the full presentationWhich APPG presentation.ppt
Consumers need to be confident that their money is safe, said Which?, as the current situation is bad for consumers and bad for the financial services industry. The whole system cannot function without trust and the focus has to be on restoring that lost trust starting with getting the banks - especially those relying on taxpayer support - to treat customers fairly. Which? was particularly critical of the failure of banks to manage the contraction of credit which it attacked as going "from feast to famine".
It also called for a stronger voice for consumers in the running of the nationalised and part-nationalised banks, starting with representation on UK Financial Investments which has been set-up by the Chancellor of the Exchequer to oversee these unwanted - at least unsought-after - state holdings.

All predictable stuff, as was the assertion that regulation needs to be stronger, more probing and much more consumer-focussed. Which?, went further than this, however, spelling out where it thought the fundamental faults with the current regime lay.

Firstly, it called for a separation of retail and investment banking, a call for a return to the days of the US Glass-Steagall Act which kept the riskier end of wholesale and investment banking away from what we used to call the clearing banks: cross-ownership was prohibited in the US which effectively put a block on it elsewhere in the world. When this Act, passed in the wake of the Great Crash of 1929, was swept away in 1999 the seeds of the current crisis were sown, argued Which?. The high risk addiction of the investment banks replaced the innate caution of the very traditional retail banking sector.

The second fault line Which? drew to the attention of MPs contains the irreconcilable conflict between prudential supervision and consumer protection. The thrust of Which's argument as it emerged in discussion with the Parliamentarians at the meeting was that if the number one priority is solvency then decisions will be made that will not be in the interest of consumers, essentially where we are today with the brutal shut-down of credit destroying the mortgage market and other lines of consumer and business credit. This would require a total reform of the regulatory regime put in place after Labour came to power in 1997 and which has the broadly based Financial Services Authority at it heart. Which? would like to see prudential regulation handed to a freshly empowered Bank of England with the FSA left to concentrate on a more consumer orientated role.

This is an interesting analysis and one that will, I am sure, emerge from elsewhere as the debate about what happened, why it happened and how the current system of regulation allowed it to happen gathers momentum. Whether it is entirely right I have some doubts. As unpalatable as it is to most in the UK financial services sector I still think that we will find ourselves looking at some form of product regulation more along mainstream European lines as the most direct and effective way of convincing consumers that regulators have really taken control of the problem. The irony of this is that we in the UK have fought hard over the last 20 years - ever since the run-up to the creation of the Single Market in 1992 - to convince the rest of Europe that prudential regulation was the way forward and that product regulation was not in the interests of consumers. It is an argument that now looks threadbare.

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