Report calls UK financial watchdogs cowed and secretive

Two British watchdogs set up to apply lessons from the financial crisis will sleepwalk into the next banking meltdown if they don't make big changes, a report said on Tuesday.

Annual spending on financial regulation has tripled to 1.2 billion pounds since taxpayers had to bail out a string of UK lenders in the 2008 banking crisis. These bailouts led to the Financial Services Authority (FSA) being scrapped in 2013, to be replaced with the Financial Conduct Authority (FCA) and the Bank of England's Prudential Regulation Authority (PRA). The 150-page report from the New City Agenda think tank and Cass Business School said problems identified at the FSA such as "group think", or lack of internal challenge, "box ticking", and watering down rules, had resurfaced at the new watchdogs. "Unless we change the culture of regulators we will be sleep walking into the next financial crisis," the report concludes.

The PRA should improve openness and accountability by extending its links with the public beyond the "closed circle" of finance, it said. "The odd talking shop is not enough."

The FCA must demonstrate independence from politicians and industry and use its new powers to "name and shame" misleading adverts, and take action against senior industry executives.

The FCA's first CEO, Martin Wheatley, was ousted by Britain's finance ministry for being too hardline, at the risk of turning the FCA into a "timid and cowed" watchdog that scrapped a review of banking culture, the report said.

A new senior managers' regime for making top banking officials directly responsible for their decisions was diluted, it added.

Andrew Bailey, the FCA's new chief executive and the PRA's first boss, will on Wednesday unveil proposals to revamp the watchdog's mission statement. The report said he would need to demonstrate independence from politicians and the industry.

In response, the FCA said that as part of its new mission statement it would seek engagement with all stakeholders to set out a clear path ahead for financial conduct regulation in Britain.

The Bank of England was not available for immediate comment.

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The criticisms echo issues raised by the Treasury Select Committee (TSC) in parliament, where the report will be launched later on Wednesday.

The report also noted the vote to leave the European Union will put Britain in full control of regulation, putting heavier demands on resources.

Members of the New City Agenda include the Archbishop of Canterbury and former oil executive Justin Welby, London Stock Exchange Group CEO Xavier Rolet, Newton Asset Management Chairman Helena Morrissey and former TSC chairman John McFall.