The financial crisis of 2008 ensured that politicians had to approach financial services in a totally different way. There were three reasons for this change in approach.
Consumers were angry that rich city bankers seemed to have made everyone poorer. Governments were terrified at the prospect not only of systemic failure, which could bring the economy to its knees, but also that banks in future might behave as if a government bailout was always a possibility, which is unacceptable to the custodians of taxpayers’ money. And businesses that relied on bank support in hard times were frustrated when banks cut back on lending.
Consumers are still restless for change. Anger remains across the country about the perceived unfairness of normal households losing out due to the errors of the greedy rich. This is compounded by falling real wages: while the costs of living are rising, energy bills were up by 37% between 2010 and 2013.
It’s little wonder that the public remain angry at the people who they blame for their empty purses and wallets. A 2012 YouGov poll found that 80% of those polled either agreed or strongly agreed that there is a widespread problem of ethics in the British banking industry. A range of organisations have sprung up to champion the case of consumers. The Church of England, Which?, Citizens Advice and Consumer Focus have all lobbied to bolster consumer powers.
The Independent Commission on Banking, launched in the early days of the Government, concluded that retail banking was insufficiently competitive, while the Parliamentary Commission on Banking Standards sought to address failures of governance.
The most controversial element of reform – the separation of retail and investment banking – will be implemented over the course of this decade. But in the run up to that, a new institutional framework has been created in an attempt to move on from the perceived failures of the previous regime. Yet the new regulators are being asked to deliver several, sometimes contradictory, things at once.
The FCA under the stewardship of Martin Wheatley will be the first to come under the glare of the spotlight. The body will take over consumer credit powers from the OFT in April this year. The FCA are consulting businesses, banks and credit reference agencies on this and a wide range of other financial services topics to cement how they intend to improve consumer credit in 2014 and beyond.
But politics is never far away: the FCA is already reeling from the Chancellor’s decision to intervene on the payday lending debate in response to campaign groups, forcing the new regulator to rapidly insert a section on interest rate caps into their current consultation document.
The FCA’s difficulty is that consumers want a more responsible banking sector along with cheaper, bigger loans. So while the regulator may be forgiven for focussing for now on taking some early scalps and to crack down on flagrant abuses, its longer term challenge will be to navigate between the desire for dynamism and the need for sobriety.
The political mood as we approach the election only points in one direction. Labour, initially compromised by a perceived failure to prevent or mitigate the crash, is pursuing a populist agenda taking on big business across several sectors. Within the Government, Lib Dem Vince Cable has wrestled with the Treasury, largely unsuccessfully, for a say on banking policy, and will put the case for further action in 2015. This will leave the Conservatives, traditional friends of the City, who urged Labour to deregulate more in the run-up to the crisis, in the unusual position of pointing to how hardline they have been.