Deborah Arnott: How the FSA got financial regulation wrong

[Legal Beagles]

Deborah Arnott: We should have taught bankers the same lesson we taught consumers: if it looks too good to be true, it almost certainly is

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[EXC]

Re: Deborah Arnott: How the FSA got financial regulation wrong

Good article.

[Paule]

Re: Deborah Arnott: How the FSA got financial regulation wrong

Gordon Brown was quoted last weekend in the Observer saying that he had wanted tougher global regulation of the financial system in the 1990s, but had failed to get it as other governments refused to agree. With hindsight, it's easy to see that this was a major missed opportunity, but even at the time it should have been clear to all that we were living on borrowed time.
People forget, but when Labour came into power financial regulation was already in a mess, which they tried to sort out. Deregulation and Mrs Thatcher were synonymous – once in power she deregulated everything from fireworks to the financial system. Deregulation of our financial system in 1986 led to similar changes around the world as other countries fought to compete with the growing dominance of the London markets. The impact of allowing dodgy fireworks to be sold was limited and easy to spot, as the number of reported injuries immediately rocketed. The impact of deregulation of the financial system was more of a slow burn, which finally exploded on a global scale.
Some 10 years ago, I was employed by the Financial Services Authority (FSA) to set up a consumer education department to enable the new watchdog to meet its obligation to increase public understanding of the financial system. The logic was that you could only protect consumers effectively if they understood what they were buying. Now I can only look sadly back at my naivety. How could I have thought we had a chance of succeeding in this Herculean task when all around us the industry was up to its old tricks? More to the point would have been education for the bankers, regulators and governments. A key message would have been the same one we gave consumers: that if something looks too good to be true, it almost certainly is. A financial bubble that would not turn to bust was always too good to be true, and the forlorn hopes of a soft landing were clearly untenable as any serious examination of previous such financial bubbles would have shown.
The warning signs were there before Labour came to power, with the Barings Bank collapse and pensions mis-selling. That is why the new government set up the FSA. It was given four statutory objectives: market confidence, public awareness, consumer protection and reduction of financial crime. Unfortunately, although two of its four objectives related to consumer protection, the balance of the work of the FSA was heavily dominated by just one – that of maintaining confidence in the financial system.

When I started work at the FSA, it was immersed in the task of ensuring that the three million people who had been mis-sold personal pensions received the compensation that was their due – more than £10bn in total. A commission-driven system had led to a massive scandal where people with good, solid final salary pensions where urged to swap them for risky personal pensions with no guarantees. But within a year of my starting work, it became clear this was not a one-off. The very same industry had also been busy mis-selling endowment mortgages and was forced to set up yet another major compensation scheme. There was also an early warning of the risks of derivatives and complex financial instruments with the collapse of the hedge fund Long-Term Capital Management in the late 1990s. And the scandals kept coming – next up was Equitable Life, another disgrace still playing itself out today.
People working for the FSA mostly had, and I'm sure still have, the best of intentions. They work hard and worry greatly about the effectiveness of what they do. Many of them could make a lot more money working in the industry they regulate but choose not to. But it's clear that the FSA became the victim of regulatory capture. From the start, market confidence was the overriding objective and consumer protection was not given sufficient weight. "Light touch regulation" was the watchword, with the threat from the industry that otherwise London would lose its predominance in world financial markets. So, despite the continuing scandals, the lessons weren't learned by the regulator, or by government, and when the FSA set up a system for regulating mortgages in 2004, yet again it was too light touch to be effective.
I left the FSA more than five years ago and went to run Action on Smoking and Health – a much simpler job with the simple objective of working to protect people from the harm caused by tobacco. But I learned a salutary lesson while at the FSA, which is that consumer education can never substitute for an effective regulatory system that protects both consumers and the financial system. Gordon Brown may have been aware of this when he set up the FSA in 1998, but he was less able to convince the world then than now. This is the time to set up a new financial system fit for purpose for the 21st century, given the global agreement that light touch regulation has failed. I don't have the answers when it comes to the detail but the principles are clear. The prime objective of regulation must be protection of consumers and, equally important, protection of the financial system itself, over and above the nebulous concept of "maintaining confidence in the financial system". It was over-confidence in the financial system that has led us to where we are today – on the edge of a precipice.

[righty]

Re: Deborah Arnott: How the FSA got financial regulation wrong

More labour spin.

Gordon Brown did nothing of the sort. It was he who transfered regulation from the Bank of England to the FSA in what he told the City at the time was all part of his 'light touch' regulation. A project incidentally which, despite the crisis, continues today. TS have very recently been given a new concordat requiring them to be more understanding of transgressors of the law................ this may explain why it's impossible to get TS to act against DCA who continually flout the law.......... that is unless there's a good photo op of course