Economic News

LONDON (ShareCast) - Chancellor Alistair Darling has fired a warning shot at the City, accusing some who work in the UK's financial hub of complacency over the causes of the credit crisis and how to avoid similar mistakes in future.

"If they go back to the way they were without asking themselves over and over again whether they understand what they are doing, that would be disastrous for them and the rest of the world," he said in an interview in the Independent.

"There are people who are too complacent in my view. They need to be brought back to earth," he added.

The government is expected to instruct the FSA to take a more proactive approach to prevent a return to pay hikes and bonuses based short-term profits that it regards as key reason for the recent problems. That could involve banks involved in riskier areas having to hold more reserves.

However, he rejected the idea of a salary cap on City workers to stop previous excesses. "You can't have a pay policy in legislation," he said.

"Every single director of a bank should ask themselves, 'Do I understand what the bank is doing and the risks it is being exposed to?' As the economy begins to recover, people must not drop their guard but strengthen their guard to make sure they don't repeat the mistakes of the past. Similarly, the regulators must keep a very close eye on what is happening and be vigilant about the risks. It is very important people don't get the idea the crisis is all over; that they don't need to bother."

Darling also dismissed talk of a battle between the FSA and Bank of England over which agency regulates the UK's financial sector going forward.

"It is not a turf war," Darling said in the interview. "It is a question of ensuring they both do the job they are set up to do and both do it effectively.

"They are not competing with each other. They are complementary".

Darling did indicate however, that controls generally will be tightened in forthcoming White Paper on financial regulation with the FSA and the Bank of England to get more powers, while hedge funds also set to come under scrutiny by the FSA.