Outlook: Getting the banking balance right

THE FINANCIAL Services Authority generally gets a rough press, though not from this newspaper, which has adopted a quite sympathetic approach to the new City regulator. If all this flak were down to some heinous act of regulatory failure, then this might seem reasonable enough, but actually it is mostly because the FSA is judged to have been endowed with too much power, not too little.

Don Cruickshank, the former telecommunications regulator charged by the Government with investigating the banks, places himself firmly in the "too much regulation" camp in his long awaited interim report on whether the banking system is failing the wider UK economy. He reckons that quite apart from the propensity of regulation to clog up the system with red tape, it further inhibits competition, new entrants and innovation when applied to financial services by imposing possibly excessive safeguards on behalf of depositors and investors.

This was probably not the finding that Gordon Brown, the Chancellor, had in mind when he asked Mr Cruickshank to conduct the review, and there is no doubt that Mr Cruickshank touches a raw nerve when he recommends the FSA be given "a primary competition objective".

Such a purpose could radically alter the nature of financial regulation by giving the FSA a cartel-busting mission as well as a statutory duty to be as light on controls as is consistent with adequate prudential supervision. Howard Davies, chairman of the FSA, would argue that he is already achieving the correct balance between investor protection and unbridled free market activity. Getting that balance right is, afterall, a key purpose of nearly all regulation. The Financial Services and Markets Bill, moreover, already includes a statutory duty not to impede competition.

But Mr Cruickshank seems to want to go further. The implication of his report is that regulatory barriers to entry in banking and perhaps other areas of financial services too, should be significantly reduced. Is he right about this? The only intellectually honest answer is that until Mr Cruickshank produces some solid evidence to support the contention that banks are not meeting customer needs, it is hard to tell.

Certainly the report itself produces no evidence whatsoever, other than the entirely fatuous observation that there are more banks for the average customer to chose from in the US than there are here. To be fair on Mr Cruickshank, however, UK bankers have not exactly lent over backwards to help him in his researches, and it may be he's on to something.

Banking regulators are by their nature a cautious and conservative lot, and they would argue that it would be highly dangerous to lower barriers to entry any further than they are already. The upshot, they claim, would either be a big and costly increase in subsequent supervision, which might itself cancel out the benefits of enhanced competition, or a near certain series of banking failures a few years down the line. Those now demanding less regulation would then be on their high horses accusing the FSA of regulatory failure.

It is for this reason that the Government has so far already twice rejected the sort of proactive competition objective Mr Cruickshank wants to see built into the legislation. Nonetheless, Mr Cruickshank has plainly opened up an important area of debate. The present burden of regulatory requirements may be unnecessarily onerous and support cartel like behaviour. Regulators may indeed be getting the balance wrong.