A kick in the teeth for the financial services regulator

IN 2012, from the rubble of the discredited Financial Services Authority, a new regulatory system for the financial services industry emerged. We were told it was going to be tougher and more proactive. We were also told it would stand up to the powerful bosses in the interests of their customers.

Three years on, those promises look pretty thin with the news the Financial Conduct Authority (FCA) is dropping its review into Britain’s banking culture, staff pay and complaints procedures. We are told the FCA will instead, in its own words, engage individually with firms to encourage their delivery of cultural change.

For anyone concerned the lessons of the banking crash have not been learned, those will sound like weasel words. The crash happened because individuals within the banking industry took reckless, irrational and self-serving risks with their customers’ investments and there have been precious signs since that the behaviour of the banking sector has fundamentally changed.

After the crash, a consensus appeared to be building that what was needed were much stronger regulations but also a stronger regulator with the self-confidence and the powers to intervene when needed.

However, the defenestration of the FCA’s review leaves our regulatory system, once again, looking weak in the face of the banks’ threats to move out of the UK – threats which never sounded convincing in the first place.

The danger of replacing the review with a watered-down system designed to encourage rather than force change is obvious. The banks say they are making changes to the way they operate, but at a time when there is a real risk of the banks returning permanently to their old ways, ditching the review sends precisely the wrong message: carry on regardless.

What the banking sector needs is a regulator with bite – the dropping of the review is a sign it has just had most of its teeth kicked out.