Even after a turbulent decade at the Treasury, Lord Sassoon’s last few weeks could be the most tense.
The Financial Services Bill, which will mark the end of the Financial Services Authority (FSA) and turn the Bank of England into the most powerful central bank in the world, is in its final stages in Parliament. But Sassoon, the architect of the original plan when it was drawn up in 2010, warns it could still go wrong.
“There’s pressure to dilute things from people who want the new world to look like bits of the old world,” said the Commercial Secretary to the Treasury who leaves the Government in January. “In particular not to give the Bank and the Prudential Regulatory Authority the space to exercise the judgement which is critical to getting this right.”
He adds: “I’m continuing resisting the pressure, even during this report stage, from people who would like the Financial Conduct Authority and Prudential Regulatory Authority to look alike going forward. We say they are very distinctive things, that’s the whole point; we’re creating two very distinctive authorities.”
Preserving the distinction could make the difference to the whether the regulators spot the next financial crisis or not, he argues.
Sassoon says it would be “misty eyed to think the Bank of England would get it right all the time” but he insists it will have the best chance if broad judgement about risk in the system is kept separate from policing the actual financial firms themselves.
“We need a Bank of England that can be freed up of the conduct issues to be able to make judgements and really understand how management and risks work within the systemic financial institutions,” he says.
The need for judgement rather than just rules was Sassoon’s starting point when he drew up the original plan for the Tories while they were still in Opposition. The second principle was to create “someone who didn’t exist in the tripartite system” an overall person in charge. And so, the new Governor will have both the power and the responsibility on their shoulders.
“I’m pleased that this basic concept is very much at the heart of the bill, of course as time goes on, there’s so much else going on in the industry, things will change. We’ve put in clauses relating to lessons learned from the Libor scandal , for example.”
Beyond the key principles, Sassoon, whose father was first cousin of the war poet, Siegfried Sassoon, has expected changes to the original White Paper.
The biggest addition will be the Vickers reforms , which will require retail operations to be ring-fenced from investment banking divisions. The changes will follow in a separate bill in the new year. He says the Vickers plans “fit with the philosophy”. He’s also welcomed the addition of powers for the Bank of England to wind up failed institutions which in fact were passed in the dying days of Gordon Brown’s government and rules to combat other recent abuses, notably Libor rate-rigging.
Some argue it’s too much change to make in a fragile economic environment. “Of course it would be better to do a lot of these things in calmer waters but there’s never a good time, we need to get on and deal with the structure of banking,” Lord Sassoon said.
He says it’s up to the first stewards of the new banking models to ensure they fill out the legislative architecture with practical plans. Watching the system work in shadow form for almost a year, he’s confident. But he’s realistic that the structure isn’t foolproof “there isn’t a no-fault regime”, he says and will also have awkward consequences. He agrees that the big challenge of “creating a safer system built on higher capital and liquidity levels plays against the need to get more credit flowing, to SMEs in particular”. “I don’t pretend that all these won’t cause tensions and complications,” he says.
The key test of success won’t be the prevention of another crisis, he says, but how the system works. In particular, the test will be whether competition in the banking sector improves. “One of the mysteries or tragedies of the banking system is how few new entrants there have been over many decades,” Sassoon says. “Now we’re giving the Bank of England a judgemental ability and the tools to resolve banks that get into trouble, I would like to see a world much more like the US where thresholds for new entrants are lower, not higher, because they are less systemically risky.”
Few politicians, let alone junior ministers, could hope to have a bigger impact on Britain, but Sassoon insists it’s not his only legacy. Working with the Debt Management Office, Sassoon has also been responsible for persuading international investors to buy billions of pounds of British debt. He admits the eurozone debt crisis has helped. “The fact that we have our debt and our currency under our control is the starting point, but I think we’re a safe haven from the eurozone because we are genuinely safe, not because there’s nowhere else to put the money.”
But it’s perhaps fitting that Sassoon the architect is handing over to the ultimate builder: Paul Deighton , fresh from his success of delivering the London Olympics .
As for Sassoon, he’s heading back to the private sector, a prospect he’s already looking forward to.