The resignation of Hector Sants, chief executive of the Financial Services Authority, is a catastrophic consequence of George Osborne’s opportunistic decision to scrap the City regulator.

Right in the middle of the process of overhauling financial regulation – a complex process that has to be negotiated internationally – Britain is left with an emasculated watchdog.

Here are five reasons on why the Osborne policy is a disaster:
1. It was conceived as a way of attacking Gordon Brown who created the FSA. Osborne is the Tory version of Brown: he makes policy tactically to embarrass his opponents, not strategically for the good of Britain.
2. There are few supporters for the scrapping of the FSA in the City, where it is seen as insane by respected former regulators – especially at this time.
3. It has destabilised the FSA, as the departure of Sants shows, but it will take years to get the new arrangements in place. Even if it was the right policy, this is the wrong time to introduce it.
4. The Bank of England has more than enough to do already, and what it does, it has often done badly throughout this crisis. It took ages to do what central banks do in liquidity crises because Mervyn King was obsessed with moral hazard – an academic concern of little relevance when the building is burning down.
5. The Tories have now admitted that they will have to create new quangos to do the regulatory stuff that the Bank can’t do, such as consumer protection and insurance regulation.

There are big changes needed at the FSA, as Lord Adair Turner, its Chairman has acknowledged. They are being introduced, and would hugely improve financial regulation. But after 6th May the regulation of financial services will be in limbo for more than a year while desks are moved and new jobs are advertised. This policy alone makes Osborne unfit to be Chancellor.

John Willman Open Posts