Forget tighter rules, make banks lend more, says Turner
Policymakers should switch their focus from setting strict rules for banks to making them lend more, a City audience hears
Jill Treanor, City editor
guardian.co.uk, Thursday 20 October 2011 21.00 BST
Policymakers must consider how to stimulate lending to revive the economy, the City’s chief watchdog said, as he also conceded that regulators may never be able to prevent customers being “ripped off”.
Lord Turner, chairman of the Financial Services Authority, told an audience at the Mansion House in the heart of the City on Thursday that current economic conditions meant the authorities should switch from imposing strict rules on banks to focusing on ways to make them lend more.
“Political independence to take unpopular action, to ‘take away the punchbowl’, is not the challenge today – the party is not so much out of hand as cancelled,” he said. The speech was in contrast to the overriding concern of the Treasury since the 2008 banking crisis to implement new rules to prevent “bubbles” being created that later burst with dire consequences.
He noted that the new financial policy committee – set up within the Bank of England to tackle systemic risk – had been deciding whether “macro-prudential policy” could be used to stimulate supply. But, he said, this type of policy was “on the horns of dilemma” as banks needed more capital to mitigate concerns about their financial strength but also might be expected to hold less capital to stimulate the economy.
The FSA is being broken up by the coalition into the prudential regulation authority, inside the Bank of England to look after big banks, and the financial conduct authority (FCA), which Turner warned would not be able to prevent consumer losses from the financial services industry. He noted £15bn in compensation had been paid out to consumers in the last 20 years. The latest incident is the payouts for payment protection insurance (PPI).
“In financial services the potential for the customer to be ripped off is simply far greater than in other sectors of the economy – and the consequences potentially more significant,” Turner said.
He said that while the FCA intended to take a new approach to regulating products, such as intervening where customers might be facing losses, there would still be mistakes. Even so, he stepped back from calling for the FCA to be able to regulate products while they were being created.
“This new approach, underpinned by some new powers can, I am confident, make a difference.
“But we also need a realistic understanding that no system of regulation can or should try to create a nil-risk market environment.”
He said: “If there is another mis-selling wave as large as PPI, it will be fair to say that the new approach has delivered no better than the past. But even if the FCA is successful, somewhere in the system, though hopefully on a smaller scale, customer detriment will arise which cannot be prevented in advance, with customers instead protected by their right to complain and, if appropriate, to receive compensation.”