FactCheck: did Brown have 'foresight' to regulate British financial system?
Updated on 23 September 2008
Did Brown have the "foresight" to equip the UK's financial system with "better measures" than those across the pond?
The claim
"What Gordon Brown has shown is the foresight to put in place better measures for our financial system - and therefore for the British public - than the Americans..."
Jack Straw, Justice Secretary, BBC Today Programme, 23 September 2008
The Background
There is no longer any hiding the fact the economy is on the skids, and the prime minister's supporters now try to use it to their advantage.
They want to paint Gordon Brown as the experienced hand - or fist - to lead Britain out of financial turmoil. It should not be left to a "novice", as Brown himself jibed today.
But is Jack Straw correct to say the PM had the "foresight" to equip the UK's financial system with "better measures" than those across the pond?
The Analysis
Sceptics of whether Britain's financial system is better regulated than its counterpart in the United States would immediately mention two words: Northern Rock.
The institution's crisis last year - which led to the first run on a British bank in more than 150 years - goes to the centre of Straw's claim.
In this context, it is important to note perhaps the biggest step in Brown's approach to the regulation of the UK's financial system, the creation of the Financial Services Authority (FSA).
The FSA, set up just months after New Labour came to power 11 years ago, was designed to put an end to the self-regulation of the financial services industry and to consolidate regulation responsibilities under one roof.
It was to have a "light touch" in terms of rules, so as not to stifle the financial sector, but to also offer protection for consumers.
It proved popular with banks and financial institutions, especially in comparison with the more prescriptive rules-based regulation employed by the US Securities and Exchange Commission.
The FSA also drew praise from consumer groups, particularly in relation to its scrutiny of mortgage selling.
Sceptics of whether Britain's financial system is better regulated than its counterpart in the United States would immediately mention two words: Northern Rock.
But it is the events of last summer - the crash of Northern Rock - which have casted doubts over the UK's financial structure, even in relation to its beleaguered US counterpart.
The doubts boil down to two aspects: bank resolution and deposit insurance. Both seem to expose weaknesses in Straw's assertion about Brown's supposedly superior management of the financial sector.
Bank resolution relates to the system which is in place to help a bank when it is struggling, and to identify such struggles as soon as possible.
In the US they have the system of "corrective action" which occurs when the Federal Reserve provides liquidity to a bank if it's in trouble. This often happens quickly, before concerns over the relevant bank even reach the public domain.
The FSA and its fiscal colleague the Bank of England have no such prompt procedure.
One leading London School of Economics academic, who did not wish to be named, told FactCheck: "There is no way Northern Rock would have happened in the US. The Federal Reserve would have stepped in much sooner - before it even hit the headlines.
"The trouble is that with the splitting of the FSA and the Bank of England, neither side really has the information or resources to act quickly - like they can in the US."
On September 20 Mervyn King, the Bank of England governor, even admitted he would have liked to have helped Northern Rock sooner; but UK regulations had stopped him.
'The process of deposit insurance is far, far quicker in the US- whereas in the UK the legal position is far more unclear.'Dr Dalvinder Singh
As a footnote, it is worth remembering that about 2,500 people work in the UK's financial regulatory sector, a figure dwarfed by the more than 10,000 staff who work in the equivalent sector in the US.
But while the bank's survival might not have been best-served by the UK's 'slow' financial regulation system, how about the thing that really matters: ordinary people's savings?
Clearly the savers that queued outside bank branches last year did not feel assured by Brown's "better measures".
While bank deposits and savings in the US are automatically guaranteed by the government up to the first $100,000 (£56,000), it was not until 1 October 2007, weeks after the Northern Rock crisis came to light, that the British chancellor finally stated that the first £35,000 of all savings in UK banks was guaranteed.
Prior to that announcement, the maximum payout was £31,500 in the event of a bank collapse, although not many people seemed to know that.
Dr Dalvinder Singh, author of Banking Regulation of UK and US Financial Markets, told FactCheck: "At the time of Northern Rock we had people waiting outside banks - and rightly so.
"The process of deposit insurance is far, far quicker in the US- whereas in the UK the legal position is far more unclear. It can take people up to six months to get their money back in the UK, as opposed to just days in the US.
"In the UK we found a lack of information about deposit insurance, to the extent of which even the Banking Code, which the customer is given when opening an account, had very little information about what protection there was, if any."
The verdict
In light of recent events economists on both sides of the Atlantic have called for an overhaul of the US and UK financial systems. It is clear that the US, with its multiple regulatory bodies and original sub-prime crisis, is far from a perfect system.
But against the backdrop of the collapse of Northern Rock - and the sight of people queuing outside banks to withdraw their savings - Straw's assertion that the British people have been left better protected by Brown's "foresight" seems rather tenuous. After all, there have been no queues outside US bank branches.
FactCheck rating: 4
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The lower end of the scale indicates that the claim in question largerly checks out, while the upper end of the scale suggests misrepresentation, exaggeration, a massaging of statistics and/or language.
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The sources
Jack Straw on the Today Programme 23 September
Northern Rock bank run
Timeline on the Northern Rock crisis
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