The Seven Investment Management founder’s financial mutterings
I have always been somewhat cynical over the ‘independence’ of the Bank of England’s Monetary Policy Committee. When this innovation was sprung upon us with the advent of New Labour coming to power in 1997, it seemed all the more radical as it was coming from an individual already known as a control freak in the form of Gordon Brown. Of course, it was independent – after all its mandate and targets were set and approved by the Treasury, its membership was at least approved if not always selected by the Treasury, and I have no doubt that the intentions of the Treasury were made abundantly clear to all involved. Apart from that I am sure it was completely independent.
That however, wasn’t the really damaging issue about the changes to the regime of the Old Lady. It was the introduction of the FSA (not to be confused with the Food Standards Agency or its related body the Free Syrian Army). This super regulator was the diplodocus of the regulatory world, established to resolve the pantheon of regulatory issues through its creation. However, in doing so, Mr Brown managed to achieve the destruction of much of the expertise and knowledge of the UK banking and financial industry much of which had been fostered and developed under the Bank of England. Many will recall that banking disasters are nothing new in the UK. We can go back easily to Johnson Matthey, Barings, (let’s not mention BCCI) and issues with Midland and Nat West, most of which were sorted in private with a consenting adult within the Bank of England, with the result announced once the problem had been, if not resolved then at least managed, – or more to the point not on the 9 o’clock news.
You may recall mention of the ‘Old Lady of Threadneedle Street’ raising an eyebrow to warn wayward bankers that they were erring into dangerous waters. The Bank’s ability to collect data was significant and it enabled her to look forward to identify risks in advance, not necessarily with great precision and 20:20 vision but at least to alert those concerned, including the politicians.
From the inception of the FSA, the now castrated Bank could do little other than whimper through the mechanism of the MPC.
Now though, we are seeing a change. Our new Governor, Mr Carney, has made it very clear that he and the Bank will be taking a far clearer role in identifying potential risks. His adjustment the other week on the Funding for Lending Scheme, was part of this but his other comments about looking forward to warn of levels of over lending and gearing were more important. What this really means is that Mr Carney has brought back through its Financial Policy Committee (FPC) the previously tried and tested method of the Bank of England acting as the warning guard on the watchtowers of the City of London.
As an example, the FPC could order lenders to test borrowers’ ability to pay and make clear ‘recommendations’ (i.e. do it or else) regarding mortgage to value ratios, and loan to income as well as debt to income ratios etc. This is more than a raised eyebrow from the old girl – she is standing there with a whipping cane in her hand (sorry that might be too much excitement for some there I think).
Justin Urquhart Stewart is the founder of Seven Investment Management and a regular media commentator. Originally trained as a lawyer, he has observed the retail market industry for 30 years whilst in corporate banking and stockbroking.