THE applause from business leaders packed into the Business Design Centre in Islington, north London, was rapturous. It was November 2005 and Gordon Brown, then chancellor, had just delivered the defining speech of his tenure at the Treasury.

It centred on economic stability and encouraging Britain’s entrepreneurs. The economy was booming - and the enemies were regulation and red tape. “[This] approach followed for more than a century of regulation by governments of all parties is outdated. The better and, in my opinion, the correct modern model of regulation - the risk-based approach - is based on trust in the responsible company, the engaged employee and the educated consumer, leading government to focus its attention where it should: no inspection without justification, no form-filling without justification, and no information requirements without justification, not just a light touch but a limited touch,” Brown said.

Amid the meltdown in the global economy and the near-implosion of Britain’s banking system, no-one is talking about light-touch regulation today.

Lord Turner, chairman of the Financial Services Authority, the City watchdog, pledged last week to create a new army of highly paid and highly trained enforcers to take a tough line with City traders and bankers.

“There will be more people asking more questions and getting more information than we were getting before. There is no doubt that the touch will be heavier,” Turner said.

The FSA has already written to City bosses urging restraint on pay and bonuses and calling for them to outlaw “bad” pay deals such as pure cash bonuses that encourage short-termism.

Brown has also abandoned his rhetoric of light-touch regulation and called for a summit of world leaders to rewrite the rules of international capitalism that have stood since they were laid at Bretton Woods in New Hampshire in 1944.

Building on the kudos earned from the £37 billion recapitalisation of Britain’s banks, Brown is calling for a new system of financial regulation led by a reformed and enlarged International Monetary Fund (IMF).

The first step will be to place 30 of the world’s biggest banks under what is in effect global regulation, overseen by a college of supervision, made up of regulatory officials from each of the countries in which they operate.

A meeting of world leaders is likely to take place in November or December to agree international rules for financial regulation, cross-border supervision of multinational firms and a global “early warning system” to watch for future crises.

In an interview with The Sunday Times this weekend, Turner said this would involve the creation of a so-called college of supervisors to police the big multinationals.

In practice, this would mean the FSA working with American regulators to police a large US bank with operations in London. The college of supervisors would meet at a senior level several times each year to share insights and issues.

Turner said international leaders and regulators must also work together to create agreed principles on pay and bonus cultures; how much capital banks must hold as security; accounting methods and the role of the rating agencies.

Can global regulation really prevent a repeat of the current crisis, though? After all, the politicians were warned - and warned often – in the years running up to the credit crunch.

A report in June 2007 from the Bank for International Settlements - the central bankers’ central bank - gave warning that years of loose monetary policy had fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump.

It pointed to a confluence of worrying signs: mass issuance of credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors and entrenched imbalances in the world currency system.

As early warnings of a financial crisis go - surely it was about as good as it gets.

However, those were the good times. In midsummer 2007 HSBC had just published a research note on the UK equities market entitled The Froth Is Yet to Come. And the mergers and acquisitions boom was still in full swing. Nobody in the City was in the mood to listen to the doom-mongers.

“The IMF and the Bank of International Settlements had an early-warning system, but nobody pays any attention when the party is in full swing. Do the politicians want someone with global police powers who can come in and remove the punch bowl?” said Andrew Hilton, director of the influential Centre for the Study of Financial Innovation.

“For the politicians to say ‘we should have been stopped years ago’ is disingenuous. They were warned but they didn’t listen.”

Joachim Fels, global economist at Morgan Stanley, is more optimistic. He insists the world has been changed fundamentally by the economic crisis and is hopeful that in future governments will sit up and take notice of early warnings.

“This whole crisis was very useful for that. When times are good there is a tendency not to listen to the warnings. But this is such a big crisis that it will force governments and central banks to listen in future.” Fels said that a global response to financial issues would be crucial in the future.

“This cataclysmic event has shown that global problems need a global response. We need a global regulatory structure. I hesitate to say regulator because we need local regulators, but a global structure which needs to look at the whole financial system. We need common rules, which incorporate private equity and hedge funds as well as banks - it needs to be fairly encompassing and broad.”

Nobel laureate Joseph Stiglitz, a former World Bank chief economist, told The Sunday Times this weekend that global financial regulation was crucial to the world economy.

“It is desirable, I would say even imperative. America’s inadequate regulation led to an export of toxic mortgages all around the world that had global ramifications, so the importance of doing it is very clear. But the difficulties are enormous, partly because there are such different regulatory philosophies around the world.

“But we have learnt that without good regulation we will all suffer. For the next 10 years the scars will be there,” he said.

Stiglitz insists that every nation should have a seat at the table. “This is a new Bretton Woods moment and we will need to start again from scratch. We need to ringfence the core financial system from the gamblers.

“Consenting adults can gamble between themselves with rich people’s money but not with depositors’ money. Hedge funds are as large as they are because they get money from the banks. If you are getting money from the banks you must be regulated,” he said.

Stiglitz believes part of the problem is that the banks have in effect been regulating themselves under a voluntary code. He wants the regulatory system to be redrawn to give ordinary people a say in how the banks behave.

“We can bring to the table workers, savers, investors . . . all the people who will be hurt by the system collapsing rather than all the people who will gain by bad behaviour. Part of the problem was the incentive structure – stock options encouraged bad accounting, bonuses encouraged shortsighted behaviour and excessive risk-taking.”

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