Regulation of banks, building societies and insurers now looks to be a significant political battleground

The initial reaction to the Chancellor's announcement of a relatively tame and limited package of reforms of financial regulation has to be that the most significant aspect is actually the Tories' response. The Shadow Chancellor, George Osborne, told the House of Commons that an incoming Conservative government would scrap the tripartite regulatory system - FSA, Bank of England, Treasury - and replace it with a system where all prudential supervision of major financial institutions goes to the Bank of England, including banks, building societies and insurers. This would leave the Financial Services Authority as a "powerful regulator to protect consumers". Mr Osborne specifically said that it would have a brief "to stamp out unfair practices like mis-sold payment protection insurance and excessive bank charges".
This opens up a huge gulf between Labour and Conservatives on financial regulation as the centrepiece of Mr Darling's proposal is a further development (I hesitate to call it strengthening, although he did) of the tripartite system. This would see the Financial Services Authority retaining the principal role as the prudential regulator as well as taking on new powers to regulate hedge funds and other derivative products - at that level it would be a stronger system. Financial stability would rest with a new Council for Financial Stability, the tripartite arrangement re-invented. It is hard to see how that would work any better than the previous incarnation which failed to prevent last autumn's crisis.
The only common ground between the two major parties is over their hostility to the European Union propsoals embodied in the Larosiere Report. Both see this as potentially damaging to the UK and the City of London in particular and favour a much less prescriptive model of global co-operation. There is an element of heads in the sand over this as the EU is making  a massive land grab on the regulatory front and may have its new institutions up an running before the dust has settled on the next General Election in the UK.
The big danger in this is that the political uncertainty will actually cripple the current system, with the FSA unable to restructure and recruit, the Bank not able to develop its role and the Treasury sitting on the sidelines with civil servants not keen to do too much work that will be wasted should there be a change of government.

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