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Having served as minister for everything from Social Security to Transport to Trade and Industry since 1998, Alistair Darling has developed a reputation as a dependable workhorse for the Labour government. Since succeeding Gordon Brown as Chancellor of the Exchequer in June 2007, Darling has had to put all of his political skills and energy into salvaging Britain’s crisis-hit financial sector and combatting a devastating recession. In an interview last month with London Bureau Chief Loch Adamson in his spacious Treasury chambers, Darling explained why a tough new regulatory approach is needed to restore the fortunes of the City of London.

Institutional Investor: The International Monetary Fund has expressed concerns about the U.K.’s indebtedness and the prospect of a slow, jobless recovery. How is the country going to dig its way out of the morass?

Darling: It is essential that we and other countries support our economies just now, because if you don’t do that, you run the severe risk of a crash, plunging the economy into a much deeper — and far more painful — recession. But as a recovery becomes established, then all countries will have to make sure that they take steps to reduce their borrowing and their debt levels. You have to do that in a way that is fair to people and doesn’t damage businesses — and doesn’t put at risk the recovery itself. What the IMF made very clear [last month] is that the job isn’t done yet. What markets and investors want to see is that just as we have a credible plan for supporting our economy through the immediate problems, we also have a credible plan for reducing borrowing. In the budget [in April], we announced a plan to halve the deficit over a four-year period.

Much of the regulatory focus to date has been on remuneration. Is that sufficient to get at the underlying problems in the financial services industry? Is regulation going far enough?

Whilst some in the financial services industry see regulation as an unwelcome intrusion, people should recognize that if you don’t have a sufficiently regulated system, the risks will always be there that we will have another crash. It is important that banks recognize that they simply can’t go back to the days when some of the brightest and best got into a situation where they started to develop ever-more-exotic products that they didn’t fully understand, and what is worse, it was quite clear that their board members failed to comprehend what on earth they had got themselves into. Therefore that means that you have to create a more intrusive regulatory regime. I also think it means that you have to have board members who are prepared to put their hands up and say, "Excuse me, what does this mean? Could this bring down the bank?"

To those people who are saying, "You shouldn’t don’t do anything that might damage our competitiveness," part of being competitive means that you can be a good place to do business and people can have confidence that if you’re regulated here that actually stands for something.

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