Time for a new Social Contract to underpin British Banking?

The implicit Social Contract between the big British banks and the Treasury broke down as a result of the financial sector liberalisation following the ‘Big Bang’ reforms in 1986, culminating in the 2007/8 financial crisis. To restore trust in British banking and to help banks achieve their public duties and social responsibilities, is a new social contract needed to complement the post crisis regulatory reforms and are there lessons to be learnt from the water industry?

A ‘social contract’ for British banking involved the Committee of London Clearing Banks (CLCB) being granted oligopolistic powers over the payments systems and money creation and, in return, the big banks were expected by HM Treasury to assure financial and monetary stability (Mark Tucker, 2009; Howard Davis, 2015).

This long lasting implicit social contract between the government and the big banks was undermined following the ‘Big Bang’ liberalisations of the banking and wider financial systems in 1986 and shredded by the 2007-9 financial crisis.

Post 1986, the traditional City of London club-like self-regulatory arrangements were formalised under the Securities and Investments Board (SIB) and formal regulation was introduced and overseen by the Financial Services Authority form 2001. The FSA took over banking regulation from the Bank of England; which was to focus on monetary policy and (systemic) financial stability.

The resulting principles based regulation ‘with a light- touch’ culminated in the 2007-9 financial crisis.

In response to the crisis, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) were established to oversee a substantial rules-based regulatory tightening and pre-crisis voluntary banking codes of practice were largely abandoned.