On the face of it, the system of financial regulation in the UK has now radically changed, following George Osborne’s first Mansion House speech as chancellor. Osborne, who will certainly have enjoyed dusting down his old-Etonian uniform of white-tie and tails to address the City’s elites, is to abolish the tripartite system of regulation set-up in 1997 by Gordon Brown, and with it, the Financial Services Authority (FSA). He has done this even though the Liberal Democrats were opposed to the FSA’s abolition.

But aside, from the headlines, what has Osborne actually done, what will change, and will it make any difference to the quality of financial regulation?

Firstly, the big winner in title and prestige is Mervyn King, governor of the bank of England. The bank has been given the role previously held by the FSA, known as macro-prudential supervision, to go along with its existing control over interest rates. This means that governor King will be responsible for monitoring whether the actions of the City, or any individual financial institution, posed a systemic risk to the UK economy.

King has now become the most powerful governor in living memory. Guardian economic pundit Nils Pratley has cleverly described King as now being “too big to fail”. But this is precisely the charge that has led to Vince Cable’s new Vickers commission being established to examine whether to break up the big banks.

Osborne also announced that the government will create a “powerful new consumer protection and markets authority” to regulate every financial services firm. It sounds good, but just because something is set up doesn’t mean it will do succeed, especially if it is created by a chancellor ideologically wedded to light-touch regulation. Moreover, it would also duplicate new financial infrastructures that are close to being established at EU level such as the European systemic risk board and the new European authorities on banking, pensions and securities and markets. What is the point of creating something that will already exist?

Moreover, while the FSA will disappear, the personnel won’t. While King will chair the new financial policy committee at the Bank, the day-to-day running of it will be done by Hector Sants, the current chief executive of – you’ve guessed it – the FSA! Meanwhile, the chairman of the FSA, Adair Turner, is considered a possible successor to King when his term as governor ends in 2013. You’ve only got to listen to Turner’s response to Osborne’s speech to know that he doesn’t think much has changed: “the FSA now has the clarity of direction and timescale as well as the leadership we need to meet the challenges ahead”. Doesn’t sound like the words of a man who’s just lost his job does it?

Osborne is right to say that Britain’s system of financial regulation “failed spectacularly” during the economic crisis. But the Bank has its critics too – that it did not cut interest rates quickly enough when the crisis was brewing, and that its monetary policy committee did nothing to prick the property asset bubble when it was booming in the years leading up to the crisis.

Osborne’s Mansion House speech also said that banks should pay a levy as a consequence of the huge bail-outs many have received during the crisis. The figures expected to be raised by the levy range from £1 billion to £5 billion – we won’t have a real idea until next week’s ’emergency budget’, but expect the figure to be at the low end of the scale. Again, this raises several questions. Will it be a one-off levy, and what safeguards will there be to ensure that banks don’t just cover the extra cost by charging their customers on the high-street more? Meanwhile, since the coalition clearly does not support it, Labour should continue to campaign for an international financial transaction tax that would rake in multi-billion revenues every year – far more than a bank levy.

In other words, Osborne’s proposals might sound radical, but amount to little more than re-arranging the chairs and re-naming the offices. Institutional adjustment is all well and good, but the mind-set of financial governance and markets has to change if anything to be different in the future. The tripartite system – the bank, treasury and the FSA – all bought the idea that light-touch regulation worked best. It didn’t and it doesn’t. If this mindset doesn’t change, don’t expect the new framework to change anything.

Photo: wallyg 2006