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Taking the Reins

June 18, 2010

Taking the Reins

George Osborne’s month of frenetic activity at the Treasury has provided welcome reassurance to many in the City of London.

The creation of the Office of Budget Responsibility is the sort of thing that gets promised in Opposition and conveniently forgotten once an election is behind us! So full credit to the Chancellor for seeing it through. However, such has been the sorry state of economic forecasting over the past couple of years – from independent as well as Treasury sources – there can be no guarantee that the OBR will fare much better. The true test of the OBR’s much vaunted independence will come when it is no longer possible to blame a previous administration for current economic woes.

Wednesday’s Mansion House speech signalled the recasting of the UK model of financial services regulation. In truth, not all the blame for the international financial crisis should sensibly be laid at the door of the tripartite system. Global imbalances and the unsustainable level of public and private debt (helped on its way by the former government’s misguided inflation targeting and the Bank of England’s keeping to excessively low interest rates) were primary causes here. The main danger associated with the effective abolition of the FSA now is that this much maligned organisation has over recent times developed momentum and stability in its consumer protection and market activities. As sovereign default in the Eurozone reaches crisis point over the next year the inevitable lack of focus as reorganisation of the UK regulatory regime gathers pace may prove costly.

Clearly the big winner of this reorganisation is the Bank of England. The Chancellor rightly identified that in the run-up to the September 2008 crisis no one appeared to be in charge. The buck now assuredly stops firmly at the door of the Old Lady of Threadneedle Street.

I reckon there is one small missed opportunity. While I can see the attraction of an over-arching Economic Crime Agency, working closely with the City of London Police’s Economic Crime Directorate, I should have preferred that this was now overseen by BIS rather than the Treasury. As I have written before, robust competition policy should lie at the heart of future economic strategy for both the financial and general corporate sector. The activities of the erstwhile Serious Fraud Office should ideally be more integrated into the OFT and Competition Commission in implementing a radically improved system of investigation and prosecution of economic crime.