Mixed news from the world of financial regulation today. My morning toast was made that bit more enjoyable by encountering the news that Vince Cable is having no nonsense from the FSA about its report into the collapse of the Royal Bank of Scotland (reported here). The FSA was thinking that maybe it wouldn’t share the outcome of its investigation into the events leading up to the £45bn bailout, ostensibly because it might influence George Osborne’s deliberations on the merits of reforming the Financial Services and Markets Act.

After all, if you are considering whether the system needs to change in order to avoid a global financial crisis, the last thing you’d want to know was where the failings of the existing system are.

In contrast, Vince is arguing that he needs to know what’s in the report because ‘lessons must be learned’. All you can say to that is, nice one Vince. That’s absolutely what we need by way of meaningful Lib Dem input into government – transparency and a willingness to stand up to entrenched interests.

Later in the day we had a rather pallid Gordon Brown popping up in the television studios to plug his book, and in the process do a mea culpa for the weaknesses of the system of global financial regulation. And that follows comments made earlier this year by George Osborne, who identified the banks’ failure as imposing massive costs on everyone. So perhaps we’re heading for political consensus that if significant reform is necessary we need to see it happen.

But then the excellent vegetable dansak I was eating this evening was rather spoilt by coming across a post on Left Foot Forward, picking up on an article in the FT earlier this week. Ruth Potts reports that Young Master Osborne is perhaps soft-pedalling on the idea that significent reform or firmer external regulation in a bid to:

… normalize relations between Government and the city.

The thrust of the post is that the Chancellor is prepared to strike a deal with the Bankers. The suggestion is that if they show a bit of self-restraint and agree to moderate bonuses, restart lending to small business, and put money into Cameron’s Big Society bank then perhaps further external regulation would not be necessary.

Having looked back at the FT article this interpretation of the article is perhaps the strongest reading it would withstand. The thrust of the article is more that the Vickers’ review of the future of banking is creating enough uncertainty without considering further taxation, such as enhancing the bank levy. On the other hand, possibly the most alarming line in the article does not originate with Osborne, but with his boss, who is reported as having told colleagues:

It’s time for us to stop beating up on the banks.

It seems to me that it is absolutely not the time to reduce the focus on the banks. The changes in the architecture of the global financial system as a consequence of the financial crisis have so far been minimal. Even Mervyn King has gone public with the view that proposed reforms are an inadequate defence against the type of global meltdown we experienced in 2008.

These are matters of truly monumental significant, although they were only front page news for a short period. The idea that some form of gentleman’s agreement to show self-restraint is a sound basis for financial regulation is implausible – and that would be the case even if we hadn’t been in the middle of a global recession triggered by inadequate regulation. In the current context it would be laughable, if it weren’t such a serious issue.

There is a relatively small window of opportunity to effect substantial changes to the regulatory architecture before the forces of the status quo reassert themselves. It sounds as if that window of opportunity is starting to close. Seeking to challenge entrenched concentrations of power and ensuring that markets are as competitive as possible is a particular and perennial concern for liberals. But we should all be worried if it doesn’t happen.