The FSA admits – We regulate banks by ticking boxes

Well, alright, maybe that wasn’t exactly what FSA Boss, Adair Turner said on the Andrew Marr Show this morning, but he might just as well have done.

What he did say was that in their regulatory methodology that perhaps they had been ‘…too focused on process and procedures, and not on the totality of the systemic risk…’

In that one telling phrase, Turner finally admitted what some of us have been telling the FSA and the financial regulatory community for so long!

I was watching Chancellor of the Exchequer, Alistair Darling on the news this week, and no matter how often he was asked if he would be nationalizing HBOS, he squirmed and wriggled his way out of giving a straight answer by saying that banks did better in the private sector as long as they were well regulated. It wasn’t the answer to the question he was being asked, but it was clearly the mantra his political advisers had given him, and he stuck to it.

I suppose I wouldn’t mind so much if I had half an ounce of confidence that the two-tone Caledonian had half an ounce of knowledge of what this shibboleth, ‘regulated’, meant, but the problem is, I don’t!

When it comes to regulating the financial sector, Darling and his boss, Gordon Brown, seem to have bought the ‘good chaps’ syndrome in an even more wholesale way than Tony Blair used to adopt. They turn, without fail to the City institutions, the big consultancies, the business lobbyists, the ‘great and the good’, all of whom have a vested interest in being nice to the financial sector, and in doing so, they reflect, again and again, their wholesale lack of real understanding of what is needed to regulate the City (which I am using as a general catch-all phrase for the financial sector).

Let us start from the first premise which is known to anyone who has seen the financial sector from the inside, or from underneath. The City is a jungle, in which the law of the jungle prevails, and the strong survive and the weak go to the wall. It is a place where the only rules are ‘don’t get caught’ and if you do get caught, ‘you’re on your own’. Nobody goes to work in the City for the sake of altruism, you go there to make a shed load of money, and as much of it as you can before you retire with your grotesque pension, your summer house in Tuscany, your non-executive seats on various plush boards secured, and possibly a knighthood or even, under this mob, a peerage.

There used to be a time when certain Chancellors used to say that international businessmen came to London to do business because it was known as a clean and well-regulated place in which to do business.

What utter bollocks!

These men come to London because they know that it is flabbily regulated, that not too many searching questions are asked and that it has been traditionally easy for a wealthy foreigner to set up business in London, secure in the knowledge that he will be offered great tax incentives as a non-dom to stay here, and that is why foreigners poured into London, because it was a tax-haven for them, it had nothing to do with London’s well-regulated markets.
People can’t make money in markets that are too well regulated, so you roll the dice, you play for high stakes, you keep your winnings and you try to fob your potential losses off into other people’s investment plans and pension policies. Like the man from Citibank said, ‘when the music plays, you have to get up and dance!’

Oh, and when it comes to the regulator, you first of all make sure that when their staff show any sign at all of becoming remotely good at what they do, and they have begun to ask questions which might mean that they might just have an inkling of what you are up to, you make sure that you hire them with more money than they will ever earn in the agency, and you put them to run your own internal compliance organization. Once you have them signed up, they have a choice, follow the party line and enjoy life, or rock the boat, and find themselves in deep water!

The problem, for too long, has been that the FSA has repeatedly failed to regulate the financial sector. Oh, they have given a good impression of going through the motions, they have had review procedures, think-tanks, consultative documents, and discussion forums. They have produced reams of paper containing millions of words of policy, all the time making sure that each document contains the words ‘this is not FSA advice’. They have ticked the boxes, focusing as Adair Turner has admitted on ‘…process and procedures and not on the totality of systemic risk…’

I have some advice for Lord Turner, presumptious though he may think it.

Ticking boxes of processes and procedures doesn’t cut it, mate! You also need some grey hairs, a good memory for what happened before, some real personal moral courage to step in and say ‘enough is enough and this has got to stop’, and the skill and knowledge to be able to know when the great white sharks are not just rolling in the surf, but are in the middle of a feeding frenzy. You can usually tell by the presence of the blood in the water, never theirs, always someone else’s.

So, start hiring some people who really know about financial wrong-doing and give them some space in which to manoeuvre. If you don’t know any, give me a call and I can recommend some.