RIP FSA?

22 07 2009

FSA LogoGeorge Osborne, the shadow chancellor, said that the Conservatives planned to get rid of the Financial Services Authority if they were to win the next general election. Under their plan, the FSA would be renamed to the Consumer Protection Agency and would be responsible for consumer issues while the Bank of England would have overall power and would also be responsible for monitoring and regulating the banking sector. This move would abolish the tripartitie system consisting of the FSA, the Bank of England and the Treasury which was set up in 1997 by the then chancellor and now Prime Minister, Gordon Brown.

Leaving the pros and cons of such a policy on one side, I don’t think it’s right to announce definite plans of what would happen to the FSA if the Tories were to win power. That is because it diminishes FSA’s authority now when it is trying to regulate the banking sector as nobody will then take them seriously because everybody knows that the FSA’s days are numbered.

Think of a CEO that announces that he is to step down after a year and names his successor. Who do you think will hold the real power now, the CEO or the person who will succeed him? A leader with a sword over his head doesn’t have any significant power as everybody in the organisation will listen to the new guy who will eventually be in power.

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Rather than really bring about a change in the banking regulation, it seems that by announcing their plans, the Tories are trying to earn some political brownie points by taking advantage of Gordon Brown’s unpopularity.

Even though it may be obvious from the numerous polls and the general sentiment amongst the public that the Conservatives are going to win the next election, it does not mean that they have won the election and are in power. The mainstream media are increasingly interpreting the phrase “if the Tories win the next general election” as “when the Tories win the election”.

The thing is, whether we like it or not, Gordon Brown is still the Prime Minister and the problems plaguing the financial sector have to be dealt with now, by those who are in power now. By announcing that the FSA is doomed and the media hanging on to George Osborne’s every word, it affects the authority that the people in power have when they try to be though with those running the financial institutions.

So when you read the headline “FSA warns banks over long-term bonuses” in the Financial Times, you don’t picture a strict headteacher warning a student, but instead picture a lion without any claws or teeth in a zoo letting out an inaudible whimper rather than a ferocious roar. If the regulators and policy makers have no authority, how is the change to be brought about. It’s no wonder then that some of the financial institutions, which not less than a year back, were on the brink of collapse and some even went to the government cap-in-hand asking for financial help are now announcing record profits and are still trying to pay bonuses even when the so called “bonus culture” has been criticized by the regulators, the prime minister and the chancellor for hastening the speed of the financial mess.

Sure, its necessary for the public to know the policies of each party to enable them to make an informed decision about whom they will cast their vote. But for a political party that is desperately trying to distance itself from the negative publicity from the MPs expenses scandal and hoping to win the next general election, it doesn’t seem right when it tries to capitalise from its opponent’s unpopularity and kicking him while he is down.

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Unemployment nears 2 million

13 02 2009

natwest-moneysense

According to the figures released by the BBA (British Bankers Association), deposits in the high street banks fell by £2.3 billion in January alone.

One of the reasons for this is that people who have lost their jobs are having to use their savings to supplement the loss of their income. Even those who are still employed, but have been forced to reduce their working hours or accept a pay cut, have to withdraw from their savings to meet the shortfall. Those who bought houses when the prices were at their peak are having to use their savings to bridge the gap when their mortgage nears renewal. Many are also dipping into their savings to pay off their credit card bills from Christmas and other unsecured loans.

Also, with the base rate at 1% most high street banks are offering almost no significant rewards to savers for their money. There is almost no incentive for people to save. So, those with savings are looking for alternative forms of investment, something that will at least give them a rate of return above or at least matching the inflation rate. 

A typical banking model is banks borrowing money from savers in the form of deposits and lending that money out to borrowers in the form of mortgages, loans, credit cards, overdraft, etc. The bank charges the borrower a fee, in the form of interest, for the sum of money that is lent out. The bank gives the depositor a reward, in the form of interest, for allowing it to use its money. The fee that the bank charges the borrower is slightly higher than the rate which it pays out to its depositor, and the difference is pocketed by the bank.

Banks are still finding it difficult to borrow from the money markets. And even if they can, its going to be really expensive, which means that the extra cost would have to be passed on to the borrower. So, if deposits are decreasing and savers are withdrawing more money, banks have very little to fall back on. Also, savers have, to a great extent, lost faith with the banks. They will no doubt feel that their hard earned cash is being used to pay bonuses and reward failure.

It seems like banks will have to go a long way in winning the trust of the consumer and offer more than the paltry rewards to attract their savings. Without the deposits, they’ll find it really hard to fund the lending. Unless, of course, the name of the bank is Northern Rock which has access to the pockets of the taxpayers. Northern Rock was nationalised and was lent some £28bn by the Government last year. It payed back most of it, around £18bn, by forcing its existing customers to move to other providers. This week it pledged that it would offer new mortgages which will be worth around £14bn over the next two years. It most certainly wont be anywhere near the 100% it used to offer.     

The overall sentiment seems to be that if bankers want their customers’ money, they will have to work really hard to get it, because the customers would rather spend it on themselves than paying the bankers to spend it for them.
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