Introduction

This chapter identifies and explains the policies adopted by the UK government towards the banking sector. The chapter begins by providing a brief historical account of the development of banking regulation from the creation of the Court of Alderman in the seventeenth century to the Financial Services Bill (2011). The chapter identifies the contrasting policies adopted by the Labour government (1997–2010) and those proposed by the Coalition government.

History of banking regulation: early policy initiatives

The first attempt to regulate financial activity in the United Kingdom occurred in 1697 when legislation was enacted that required those who worked within the ‘City of London’ to be licensed annually by the Court of Alderman. The regulatory regime required licensees to take an oath that they would undertake transactions honestly and without fraud. Gilligan took the view that the 1697 Act ‘was a crucial legislative initiative because it was the first attempt by any government to impose certain standards of probity and competence upon those dealing in the embryonic securities market’. The next piece of legislation enacted was the Bubble Act 1720, which was followed by an Act to Prevent the Infamous Practice of Stock-Jobbing in 1734. However, this legislation only lasted until the early part of the eighteenth century and was replaced by the Joint Stock Companies Act 1844 and the Limited Liability Act 1855. It was not until 1939 that any direct legislation applied to the financial services industry. The Prevention of Fraud (Investments) Act 1939 was the first piece of legislation that aimed to protect investors. The 1939 Act was amended by the Prevention of Fraud (Investments) Amendment Act 1958, which gave the Board of Trade the authority to appoint inspectors to investigate the administration of unit trusts. Gilligan noted that these two pieces of legislation ‘were notable for the improvements they brought in licensing standards’. Conversely, Fisher and Bewsey argued that they ‘were of very limited scope in practice, regulating only a fraction of investment business’. The impact of this legislation was negligible and it resulted in the City of London becoming self-regulating. This is a stance supported by other commentators, who noted that financial markets in the United Kingdom have a ‘long-held traditions of self-regulation’, as influenced by the ‘essentially private character of the Bank of England and the Stock Exchange’.