George Osborne, banks and the turning tide of regulation in the UK

03 March 2016

Adam Barber - PhD student at SPERI

The mood music being played to the City by the majority Conservative government has been quietly but deliberately changed since May 2015

In the immediate wake of the financial crisis in 2008-9 it appeared as if there was an endless line of politicians in the UK from across all political spectrums queuing up to lambast and publicly deride the banks (and bankers) which had come so perilously close to destroying the entire system of financialised global markets and wreaking havoc on the domestic economy. Seven years on from this moment, the key questions that now has to be asked is the following: has the pre-crisis, and previously very close, political relationship between the City of London and Westminster’s elite really changed much at all even after everything that subsequently happened?

I will focus in this post upon Chancellor George Osborne’s so-called ‘settlement’ with the City following the election of a Conservative government in May 2015. I won’t go as far as to suggest that we are on the eve of returning to those former days of seeing politicians referring bankers for knighthoods, posing for photographs with the banking elite or publicly praising the work of Chief Executive Officers (CEOs) in delivering outstanding and seemingly never-ending growth through the use of highly complex and utterly misunderstood debt instruments.  But I do argue that the tide has shifted again in Westminster, with Osborne renewing the former metaphorical friendly hand to banks and bankers in an attempt to bring them ‘in from the cold’ (if they were indeed ever truly outside).

The first sign that things were changing in regard to the City came in July 2015 when it was announced that Martin Wheatley, the CEO of the key City regulator, the Financial Conduct Authority (FCA), would relinquish his position in September that year courtesy of Osborne not renewing his contract. Wheatley had established for himself and the FCA a reputation as tough enforcer which refused to cosy up to bankers, but sought instead to become the kind of regulatory body which struck with impunity when banks stepped out of line, including imposing record fines over the mis-selling of Payment Protection Insurance (PPI) and the rigging of the Libor and FoRex rates. While Osborne naturally praised the work of Wheatley, who had headed up the organisation since its conception in the wake of the numerous banking scandals, the Chancellor also spoke about the ‘next stage’ of banking regulation and emphasised the need to rebalance the relationship between the City and its regulators.

Caroline Binham of The Financial Times described Wheatley’s dismissal as ‘overt political interference’ in what is meant to be an independent regulator and saw it as emblematic of the turning tide of regulation towards the City following the 2015 election win of the Conservatives. And, certainly, following his dismissal there has been a raft of policies and initiatives which typify a reimagining of the relationship between the banks and government in the UK.

For example, in October 2015 came the news that, after months of lobbying by some of the most high-profile bankers, including very public speeches by former Barclays chairman Sir David Walker, rules on ring-fencing would be relaxed. Under the new changes, due to be in place by 2019, UK banks, while still being forced to separate their retail and investment divisions, will be given greater freedoms to transfer capital from one area of the business to another in the form of dividends. The changes, announced by the Bank of England’s Prudential Regulation Authority, came after senior bankers argued that the new rules previously proposed would put them at a competitive disadvantage. However, critics have argued that such concessions strip back the recommendations contained within the Vickers report to their very minimum and will ultimately make life easier for investment banks by handing them a cheap and readily available credit supply.

Likewise, October of last year also saw the Treasury announce that it would be abandoning its ‘reversal of burden of proof’ rule contained within the Bank of England’s Financial Services Bill. In the event of serious failures, under the original proposals, senior managers would be responsible for proving that they had taken ‘all reasonable’ steps to prevent such occurrences from happening. In effect, the burden of responsibility would have fallen on bankers to prove their innocence as opposed to the regulators proving their guilt. Now critics argue that the new rules, which overturn legislation passed less than two years previously, will make it increasingly difficult to hold senior bankers to account in the event of a failure, with the consequent likelihood of prosecution of guilty parties being severely diminished and the effective abolition of accountability for those at the very top.

Finally, October 2015 also saw the FCA announce a deadline for consumers wishing to claim compensation over the mis-selling of PPI. Although banks have already rightly paid out more than £20bn in compensation, the FCA announced that it wished to bring an end to the PPI saga by setting a 2018 deadline to end claims in order, it said, to begin to rebuild public trust in the banks. Despite the claims management industry predicting that such news would lead to a surge in compensation claims, banks and investors clearly saw the new deadline as positive, with share prices in UK banks rallying following the announcement. Many insiders now fear that thousands of customers could miss out altogether, potentially absolving the banks of having to make millions of pounds of further, merited pay-outs.

In other words, the change of political climate that took place in the UK in May 2015 appears clearly to have begun to signal a thawing of the frosty relationship of the past seven years between the political class in Westminster and the City. Concerns exist that these various new initiatives approved by the Chancellor as part of his ‘settlement’ with City (which do not of course get much media attention outside of the financial pages of the supposedly serious press) may be the outcome of political pandering following high profile and public threats by HSBC and Standard Chartered to relocate their headquarters away from the UK in relation to their criticism over the previously tougher regulatory requirements. Yet, while both HSBC and Standard Chartered have now ultimately decided to remain headquartered in the UK, for the time being at least, the mood-music looks as if it has been successfully changed on this front, with once popular ‘banker bashing’ being replaced by the reappearance again of a much friendlier Chancellor and government.

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