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The City’s masters need to stay above the fray

By Alistair Darling

Published: November 28 2010 20:34 | Last updated: November 28 2010 20:34

As the world’s centre of economic gravity shifts remorselessly to the south and to the east, we in Britain need to ask ourselves where we are best placed to compete. Financial services will clearly be part of the answer. London is one of the major financial centres and, frankly, it has to remain so. Yet its pre-eminence is not guaranteed. The need for strong, independent regulation has seldom been greater.

First, we must make it clear that we want to keep this industry. There are plenty of other countries that would like the business and foreign banks will be making decisions in the next few years that will have far-reaching consequences for London. We need to be clear that we want them to do business here and that we are determined to create the right environment to enable them to do so.

That does not mean craven submission to whatever the banks want. Regulation needs to be far tougher and more intrusive. Contingency plans need to be drawn up now in case of a bank’s failure. The real problem today remains sorting out the toxic assets still held by too many banks in Europe.

Second, we need to look at London’s reputation. Here the position of the Bank of England is becoming increasingly important, not just as a traditional central bank responsible for monetary policy, but also as a regulator.

Reputations matter. It is imperative that the independence of the Bank remain absolute. It cannot afford to enter the political fray. Of course the governor is entitled to his views on the government’s fiscal policy. I never had any problem with Mervyn King expressing a view. But when members of the monetary policy committee and, it seems, the Conservative chairman of the Treasury Select Committee believe that a political line has been crossed, then the Bank must think long and hard about what it says. To become identified with one political party would be fatal to its reputation.

At a time when the Bank is about to take on the highly sensitive business of regulating banks and other financial institutions, this might be an opportunity to look again at its governance.

I started this reform but it needs to go much further. The MPC has been a success precisely because it is a committee where each member is listened to and where he or she has a vote. The regulatory side requires a different approach. But there must be a more open and transparent means of reaching decisions.

The concept of a governor rather than a chairman is perhaps an anachronism. The Bank is operating in a very different world to that of 1946 when it was founded in its present form. There needs to be more participation in decision-making from people both inside and outside, perhaps mirroring the MPC.

Getting this right is vital for London’s future. But so too is the world’s perception of our attitude to the financial industry.

Recently I met a very senior executive of a foreign bank. He confided to me that he was at heart a conservative. No surprise there, you might think. But he went on to say that in some ways today’s Con-Lib government was, as he indelicately put it, “worse than you lot”. He felt the abolition of the Financial Services Authority was a political gesture and in that he is right. He also believed that government rhetoric – particularly the increasingly empty rhetoric of Vince Cable, the business secretary – was achieving nothing concrete and even damaging our reputation in the eyes of the outside world.

We face two years of uncertainty until the regulatory system is overhauled – this at a time when the regulators should be spending every hour of the day asking themselves whether banks across the world are secure. The woes of the Irish banks are not an isolated problem. The stress tests applied in the summer do not pay nearly enough attention to the inter-relationships in the banking system. This is no time to engage in a regulatory restructuring driven largely by politics.

Whether we like it or not, we need banks. London’s position is critical for the whole of the UK now. Getting the reforms right and positioning ourselves correctly in the future could have a profound consequence for our fortunes for generations to come.

The writer is MP for Edinburgh South West and a former chancellor of the exchequer

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