Terry Murden: Banker basher in chief Vince Cable should look even wider for his solutions

Published on Monday 26 July 2010 15:30

YOU have to hand it to Vince Cable. At least the Business Secretary is doing what he said he'd tackle if he was given a job in government and he is certainly wasting no time in setting out a programme of reform.

He just needs to make sure that he doesn't get over-zealous and that he takes heed of objections to some of his plans.

Opposition to his proposal to break up the banks will build over the next year as the commission led by Sir John Vickers gets stuck into its remit and the flaws in the argument become evident. Yesterday's green paper on bank lending and the planned revision of the takeover code will have more suggestions piling up in the Business Secretary's in-tray in the coming months.

Undoubtedly the banks are in need of further reform and the new regulatory regime which also began to take shape yesterday will contribute to the changing landscape of the financial services sector.

But replacing one set of acronyms for another is not the answer. I am yet to be convinced that scrapping the Financial Services Authority is an appropriate response to the banking crisis. The argument for reform is self-evident, but some staff will simply transfer from the FSA to the new Financial Policy Committee, requiring a pointless (and costly) process of re-educating the public. There was a case for simply correcting the failings of the FSA which in recent months has won a few victories, not least against insider dealing, which has always been a tough nut to crack.

As for bank lending, the problem remains the same, but the solution is as elusive as ever. Businesses, especially small firms, insist they are being denied access to finance, or else being charged exorbitant rates to get it.

The banks say low demand is the problem. More to the point, they are being asked to cut their balance sheets while increasing their lending levels. One banker told me recently that to achieve the targets being set by the government would require the banks to lend at levels last seen in the property boom. There is no sign of that situation returning and, in any case, it was over-leveraging the property market that got us into this mess in the first place.

Cable cannot be faulted for trying to improve the flow of capital into business, but he should step back from his role as chief banker-basher and look even more widely than his list of options which includes the reintroduction of regional stock exchanges.

There is some regret that they were shut down, but in a world of globalised trading platforms their time appeared to have past. Some will remember plans to create ScotX, a Glasgow-based exchange that collapsed when it failed to muster enough support. Of course, at that time debt finance was in plentiful supply whereas companies are now being encouraged to seek equity finance. So could it work today?

Cable has recently spoken in support of using the tax system to encourage equity finance. He should go further by incentivising venture capital trusts to re-invest and by creating more tax-free zones for start-up firms to flourish.

Forget protectionism but some rule tightening could be needed

THE Business Secretary is also attempting to shake-up the takeover rules, thereby making sure employees are not disadvantaged by mercenary shareholders, particularly short sellers, and that there is something left of UK plc which is under constant siege from foreign predators. Vince Cable's predecessor, Lord Mandelson, set the ball rolling with his plan to introduce a Cadbury Law that would make it more difficult to push takeovers through and hopefully stem the flow of ownership overseas.

Cable has picked up the baton and is promising to take action. With engineering firm Tomkins becoming the latest likely to fall into foreign hands, it looks as if change is afoot.

But not everyone is happy. Ahead of today's deadline for comments, there have been objections to change from those who believe the code works well and that political meddling is the last thing required. Well, to a point. The threat of a takeover can be good for stirring lazy managements into making improvements, and the reality of a takeover can get rid of them.

But it is no surprise that the City generally wants no change to the rules as its firms stand to lose multi-million pound fees if takeover activity is curbed.

There have also been warnings against protectionism, notably from the Institute of Chartered Accountants of Scotland. But Cable has said he would not countenance protectionism. He just wants to tighten the rules. He also wants the UK to remain a free market economy. That's as it should be.