The FSA: Rottweiler or Poodle?

Some years ago, I was a senior official in FIMBRA, the Financial Intermediaries and Managers Regulatory Association, the unlamented early Self Regulating Organisation which was eventually subsumed into the Financial Services Authority, when the alphabet soup of competing original SRO’s was eventually ended.

My early concern, as head of investigations and member vetting, and the concern I took away with me when I left, was that FIMBRA and its corresponding agencies did not see themselves as performing a policing function when it came to dealing with their member firms. They were far more concerned to ensure that their member firms were protected from the impact of the financial services levy, which was how the lead regulator was funded, by ensuring that a minimal number of member firms were expelled from membership, and encouraging more and more firms to join, thus diluting the costs of membership to the others.

I lost count of the number of times I heard the Director of the compliance division say ‘our job is to keep our members in compliance’, as an excuse for not taking a member in serious breach of the rules to the disciplinary committee and face the likelihood of the errant member being expelled!

Frankly, the early days of the post Big-Bang era, as far as City regulation was concerned, were a farce, and it eventually got so bad that FIMBRA’s name became re-interpreted as ‘F**k It, My Broker’s Run Away! as more and more members disappeared with their client’s monies.

Imagine my bemusement therefore to read in The Sunday Times an article entitled ‘…Exposed: the banks’ cosy ties to the watch dog…’

It appears that as a result of a whistleblower’s information to the Commons Treasury Committee, the FSA required the very firms it regulated to report on their relationship with the FSA inspector sent to oversee their activities, and how these observations were then used to help influence the level of bonus and the career prospects of the individual concerned.

Quite why the FSA feels the need to pay bonuses I have never managed to work out, but this appears to have become part of their anomic culture.

As a result of the whistleblower’s claims it appears that FSA staff were anxious not to antagonize the banks they oversaw because of the potential impact on their pay; Regulators were warned ‘not to frighten the horses’ during visits to firms because it might impact upon their willingness to provide cooperation; The FSA believed its role was to ‘serve’ the industry which ultimately funded it; and that staff turnover and a limited level of resources resulted in limited expertise among staff to really question the big banks too closely.

This is precisely the same level of spasticity in regulatory intervention that so marked out the ineffective days of FIMBRA, with regulatory staff ill-equipped to take on the member firms for lack of industry expertise, coupled with an almost child-like belief that member firms would want to co-operate with their regulatory visits.

This ridiculous point of view stems from the fact that most banks and financial institutions will go out of their way to avoid bringing themselves to notice as far as the FSA is concerned. They have taken a very careful ‘risk-based approach’ towards the nature of their relationship with their regulator and they have established that as long as the regulator is able to find and see what it wants to find and see during a visit, then not too many awkward questions will be asked.

This is why FSA officials get such a respectful hearing from member firms when ever they give key-note speeches at industry conferences or workshops. The FSA officials trot out the same tired and hackneyed policy statements that have been approved and reviewed by so many different people inside the agency that they are now entirely devoid of any humour, light, interest or value, while the audience sits in silent receipt of these words. There are never any questions, the FSA official is never, repeat never challenged as to the policy statement, and they then return to the office, content that they have maintained the high-level of FSA delivery.

The audience at the same time, quietly lets out a collective sigh of boredom, grateful to have got that part of the programme out of the way without antagonizing the FSA. The regulator on the other hand returns believing that yet another incomprehensible policy statement has been delivered which everyone present appeared to understand, adopt and no doubt, would soon implement.

Financial regulation is about asking awkward questions of the biggest institutions and having the courage to say ‘Well, I’m sorry Mr Fat Cat Banker, but your explanation for these figures does not make any sense to me and I am going to go on asking awkward questions until I do see some sense in them…’

When I was at the Fraud Squad, I used to love it when some irate spiv would accuse me in the interview room of not having the skills or the training to understand his business model. My answer was invariably the same. ‘…Until such time as you can explain these figures to me in a way which makes sense, you will continue to sit in that chair…’ and I will continue to ask these questions. It is a matter for you..!’

It is quite scandalous that things should have got to a state where the lead Regulator is inviting its constituency to report on the conduct of its supervisory staff. Human nature dictates that if a person thinks that their income, or their bonus is going to be impacted by an adverse report, they will pull their punches.

This latest revelation is really the final nail in the coffin for the FSA and frankly, it really is about time that it was wound up and allowed to go the same way as its predecessors, SIB et al.. We should give banking supervision back to the Bank of England, who at least used to understand these issues, and we should let a re-invigorated Metropolitan Police Fraud Squad deal with the rest.