The chairman of the City watchdog yesterday drew a line under the era of anything-goes banking, promising a clampdown on risky trading, fat-cat pay and loose regulation.
In his long-awaited review of financial regulation, Lord Turner condemned Britain's over-reliance on profits from financial services that produced little real benefit for the wider economy. Society was now paying the price for reckless trading and "financial innovation" and banks would be forced to rein in a reliance on "casino banking", he said.
"The UK was vulnerable to global problems because we were home to several of the world's leading banks, actively involved in risky trading activities," Lord Turner said. Britain also saw rapid growth in mortgage lending financed from abroad as banks sold bonds backed by mortgages and relied heavily on money markets, rather than retail deposits, to lend. Reliance on these markets and on risky trading activities led to the near collapse of Northern Rock, HBOS and Royal Bank of Scotland. In future, British banks will have to hold more capital against their loans and build up reserves during boom times to cushion them against future losses, the Financial Services Authority (FSA) chairman said.
The crisis has shown that markets are not self-correcting and that bank managements need reining in to stop them getting swept away by the dash for profits, Lord Turner said. The FSA will replace its "light-touch" regulatory approach with more aggressive action to question banks' actions and business models, he said.
The FSA will also clamp down on banks' pay to stop them doling out big short-term cash bonuses that reward risky business practices before the consequences are known. Bonuses will have to be paid out over a longer period with more of them in shares rather than cash. Even the cash element should be subject to "clawback", the FSA said.
Lord Turner said that his proposals would have stopped HBOS and Royal Bank of Scotland from reaching the point of collapse in October.
He criticised the past approach of the FSA for letting banks have too much leeway. The FSA had concentrated on supervising financial firms while the Bank of England worried about the economy with neither giving enough attention to how the two were linked, he added.
The Conservatives leapt on the report to attack the Prime Minister, who as Chancellor moved supervision away from the Bank of England to the FSA and oversaw the debt-fuelled economic boom. George Osborne, the shadow Chancellor, said: "Gordon Brown's regulator has published a carefully-worded yet devastating critique of the last 10 years of economic policy and financial regulation. What is strikingly clear from this report is that the British regulatory system and model of economic growth is broken and needs fixing."
Lord Turner stopped short of clamping down on mortgage products but did not rule out doing so in future. He said such action would discriminate against borrowers who could not raise deposits from their families.
In a radical shift for the FSA, he called for a single European banking regulator to oversee national watchdogs.
Vince Cable, the Liberal Democrats' Treasury spokesman, attacked Lord Turner's report. "If the proposals on pay and bonuses had been followed five years ago, Britain would not be facing such a huge financial crisis now," he said. "This report completely fails to call for the separation of low-risk high street banking from high-risk banking. Banks should be safe places for people's savings, not huge roulette wheels."