Time to scrap the FSA


So ex-HBOS banker Sir James Crosby has quit his job at the UK's bank regulator, the Financial Services Authority. It happened just 30 minutes before Gordon Brown faced questions in Parliament, so I guess he was pushed. But the surprising thing is that Brown appointed him to the FSA in the first place. The Authority is now saying that it had been concerned about HBOS's risky investments since 2002. And then Brown makes it's head poacher into one of the gamekeepers! Absolutely bizarre.

The Financial Services Authority is no good and should be closed down. A Brown invention, it was always clunky and lumbering. With over two thousand staff, it had to make up lots of things for itself to do, so it came up with hundreds of checklists for financial firms, regardless of size and whether the tickboxes were all appropriate. The cost of its enormous bureaucracy meant that banks had to get large to carry the army of compliance officers they needed to deal with it. So the banks consolidated, and competition disappeared.

The Bank of England was a much better regulator. It knew what was happening in the markets, because they could see which banks were coming through their doors to ask for emergency cash. The FSA hadn't a clue, and when the Bank tipped them off about the flighty Northern Rock, they did (next to) nothing about it.

People blame the banks for the financial crisis, and there's no doubt that the banks have taken some shameful risks. But that's because the FSA has squeezed the competition out of the sector. And it encouraged the banks to take enormous risks with their customers' money, because everyone knew that if their bets didn't work, the government would bail out their account holders. This isn't a crisis of banking, it's a crisis of regulation. Every single part of banks' operations, from how they trade derivatives to whether they smile at their customers, is subject to regulation. That regulation hasn't worked. Sir James Crosby should be just the first of thousands to face the sack. And Gordon Brown the second.

Eamonn Butler's new book, The Rotten State of Britain is published in March.