A cautionary tale from the United States

The Financial Services Bill, which will abolish the Financial Services Authority and enact a new regulatory regime for financial services, is currently being considered at public bill committee stage in the House of Commons. But, as is the way with Bills in committee stage, it has all but disappeared from view.

However, sometimes public bill committee debates can shed some light on the finer points of legislation that escape debate in the more general second reading debates. The United Food and Commercial Workers (UFCW) union of North America has done us all a service by highlighting a loophole in the legislation that gives lighter touch regulation of some new banks (such as those run by supermarkets) compared to the established high street banking operators.

Under the legislation, the remit of the new regulators will automatically extend to bank holding companies but not to non-financial holding companies, eg retailers, that own banking subsidiaries. The Bill does give the Chancellor the power to extend by Order the regulation to new entrants like Tesco. But this begs the question put by shadow Treasury minister, Cathy Jamieson MP, “if a company is or wants to become a bank holding company, why should it not be regulated as such”?

This is a question that exercised US regulators and legislators in 2005 when ASDA owners, Wal-Mart, applied for a banking licence. The UFCW joined a coalition of bankers, the Federal Reserve and regulators in opposition. Even the then Federal Reserve Chairman, Alan Greenspan, called for the closing of the loophole in US law that allowed some commercial firms to open banks, on the grounds that the Federal Reserve would not have the power to oversee the parent company and banking subsidiary on a so-called “consolidated basis”. In the absence of such a power, he argued, commercial firms should not be allowed to enter banking. The Federal Deposit Insurance Corporation – a US supervisory body – imposed an unprecedented moratorium on applications for the type of licence that Wal-Mart sought, and bills were introduced in Congress to outlaw commercial firms from owning banks. Wal-Mart subsequently withdrew its application.

As Jamieson put it to the Financial Secretary to the Treasury, Mark Hoban MP: “Does this not represent a cautionary tale for us here in the UK?”

It begged a number of other questions that she put to Hoban:

  • Why has this exemption to regulation been made?
  • Is light touch regulation being offered in order to attract new entrants?
  • If it is necessary to regulate financial holding companies, why is it not necessary for non-financial ones? Are the risks different?
  • Under what circumstances and what criteria would an Order be made to extend regulation to non-financial groups?
  • If the regulation is not extended until after a problem has arisen, won’t that be too late?
  • What guarantees are there that new entrants with customers’ non-banking data won’t misuse that data or infringe people’s privacy?

In proposing amendments that would have automatically extend the new regulators’ remits to new entrants, Jamieson made it clear that no one is talking about telling supermarkets how to stock their shelves or airlines how to plan their routes. The regulators would only exercise their powers if they considered that a parent company’s actions or omissions could have a material or adverse effect on the regulated subsidiary. Regulators could require the parent to take or refrain from specific actions or compel it to provide information. This didn’t prevent Mark Hoban from joking that we wanted to avoid regulators intervening on the price of bread in Tesco or Sainsbury’s. Beyond that rather obvious joke, the minister didn’t have much by way of response or than to say that the proposed regulation represents a “proportionate power of intervention”.

The amendments were not pressed to a vote as Jamieson was probing Hoban to see if he accepted that there was a problem. His response to the debate (Hansard Financial Services Bill committee 8/3/12 columns 463-467) suggested that he didn’t and she promised to return to it in the future. This is a relatively small part of the Bill, but in terms of clarity, consumer confidence and protecting the taxpayer, every little helps. Now where have we heard that before?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s