Why We Need Better Regulation

[EXC]

I’ve long believed that the fundamental cause of unfair bank charges and the wider, almost systematic exploitation of consumers by the financial services industry as a whole, is a result of the ineffective regulation. They have simply been allowed to get away with far too much.

Banks, like any other business, operate as free-market profit making enterprises and enjoy all the benefits of commercial freedoms, the confidentiality and unaccountability that comes with it. But they also enjoy unparalleled privileges - not least the security offered by the nation anytime they come up short and as in the case of Northern Wreck, a publicly funded promise - to the tune of £3500 for every man, woman and child in the country.

As one observer put it recently, ‘’the profits are privatised and the losses are socialised‘’.

The Financial Services Authority was conceived by Gordon Brown and Ed Balls in 2000. It’s famous ‘light touch’ regulatory style was a deliberate and successful attempt to attract financial services companies to the UK from the more heavily regulated US and reap the benefits of the corporation tax these companies would add to the nations coffers. But for ‘light touch’, read ‘no touch’.

‘’The banking industry contributes £50 billion to the economy’’ spouts the BBA’s Angela Knight every time a bank announces record profits. The same line is taken by Barclays’ Chief Executive John Varley who appears annually on the Today programme to fend off accusations of profiteering each time his bank announces it’s yearly earnings.

‘’But just look at the number of hospitals and schools that are built on the taxation from our profits.’’ But this often quoted gift to the nation’s young and sick would put a wry smile on the faces of officials at Her Majesty’s Customs & Revenue who last year set up a department specifically to look into Barclays’ legendry tax avoidance scams. And even the tax they do pay doesn’t all end up in the UK as, for example, all the income from PPI goes to a subsidiary in the Republic of Ireland and out of the reach of the Exchequer, UK schools and hospitals.

According to the FSA, it has three aims:

1. Promoting efficient orderly and fair markets;
2. Helping retail consumers achieve a fair deal;
3. Improving our business capability and effectiveness

This boils down to 2 fundamentally opposing concepts:

1. To maintain the health of the financial services industry, i.e. encourage it’s profitability.
2. To regulate the industry on behalf of consumers which has the direct consequence of inhibiting profitability.

Thus the contradiction in the FSA’s reasons for being render it incapable of achieving either it’s aims.

On regulation, the biggest weapon in it’s arsenal is it’s power of enforcement but it is seldom, if ever, used. ‘’Two men arrested in FSA’s first criminal investigation’’ boasts the FSA last year. ‘’The is the first time we have taken this action and it shows that we will not hesitate to use our powers to protect consumers''. So, the FSA uses it's powers of arrest for the very first time since it's inception and this dispels any suggestion of hesitancy?

This head-in-the sand (and head in hands) attitude the FSA has to it’s perceived use of enforcement was clearly demonstrated in a speech given
last week by the FSA’s Director of Enforcement, Margaret Cole. In it she rubbished the perception that the FSA is far weaker on enforcement than their American equivalent, the Securities Exchange Commission (SEC).

‘’From the country that gave us Enron and Worldcom’’ she blathered ‘’I also saw in yesterday's US papers that the SEC is to be investigated by the US congressional watchdog after questions about whether it has enough staff and funds to police the markets. This seems to have been triggered by the fact that the total value of the SEC's fines have halved last year.’’

Here are 6 depressing facts uncovered by Harvard professor Howell E Jackson in a dispiriting compare and contrast exercise with the FSA and the SEC.

1 In the period 2002 to 2004 The SEC took out 3624 enforcement actions against financial institutions compared to the FSA's ..err ..72.

2 The FSA employs less than 15 percent of the staff of it's US counterpart.

3 40 percent of SEC staff work on enforcement compared to just 1 in 10 at the FSA.

4 FSA insiders describe a general malaise of low morale and high staff turnover. It's own staff have described senior management as being ''asleep at the switch'', especially on the enforcement side.

5 Last year the SEC filed 46 insider-dealing cases including some against British firms. And the FSA? Try none.

6 In 2005 the FSA did manage to fine hedge fund traders GLG Partners £750.000 for 'market abuse' while the SEC imposed a £1.7 million fine on GLG this year for the lesser charge of 'trading ahead of bond shares'. FSA Chairman Sir Howard Davies resigned shortly afterwards to take up the post of 'advisor' to ...GLG Partners.

[righty]

Re: Why We Need Better Regulation

Hang on AK claims "our profits" Profits it may be but it's our money

As far as regulation is concerned we don't just need it to be better we need it to be enforced without fear nor favour & they only way we are going to get that is to make sure those employed in the likes of the FSA are not part of the same club as the people they oversee

If any regulation has any chance whatsoever of succeeding we need fully independent accountable people staffing them as at the moment as most well know the regulators are considered a joke by most consumers with a genuine grievance

[Celestine]

Re: Why We Need Better Regulation

Found this interesting:
Credit crisis | Fixing finance | Economist.com


Crises are endemic to financial systems. Attempts to regulate them may do more harm than good



AS IF collapsing prices were not enough, American mortgage firms now have to cope with home rage. Borrowers vent their fury on the system that is repossessing their properties by smashing holes in walls and tipping paint over living-room carpets. Something similar is going on in the house finance built. Faith in open markets has been poisoned by a crisis that has spread from one asset to the next. First there was disbelief and denial. Then fear. Now comes anger.
For three decades, public policy has been dominated by the power of markets—flexible and resilient, harnessing self-interest for the public good, and better than any planner-in-chief. Nowhere are markets deeper and more liquid than in modern finance. But finance has stumbled and there are growing calls from all sides for bold re-regulation.
New rules became inevitable the moment the Federal Reserve rescued Bear Stearns and pledged to lend to other Wall Street banks. If taxpayers are required to bail out investment banks, the governments need to impose tighter limits on the risks those banks can take. This week Hank Paulson, America's treasury secretary, unveiled a longer-term plan to deal with this and other weaknesses in America's regulatory system (see article); and next week the G7 finance ministers will meet in Washington, DC, where they will discuss a report on the crisis by the Financial Stability Forum.
It is natural and right that regulators should seek to learn lessons. The credit crisis will damage not just the reputation of the financial system but also the lives of those who lose their houses, businesses and jobs as a result of it. But before governments set about reforming financial regulation, they need both to be clear about the causes of the crisis and to understand just how little regulators can achieve.

Arm's-length finance

The history of financial markets is not a stable one. They have imploded every decade or so, whether because French and Spanish kings reneged on their debt in the 16th century or because speculators inflated railway stock in the 19th century. But this crisis is unusually shocking, if only because the mild business cycle and the fast pace of world economic growth in recent years had lulled people into a false sense of security.
The view that the only sensible response to the 21st century's first serious financial crisis is a wholesale reform of the system is now gaining ground. Josef Ackermann, über-capitalist and chief executive of Deutsche Bank, summed it up in a call for governments to step in: “I no longer believe in the market's self-healing power.” The implication is that, if the market cannot heal the wounds it sustains as a result of its own risky behaviour, then it must be discouraged from taking such risks in the first place.
But there are two reasons to hesitate before plunging headlong into a purge of the system. First, finance was not solely to blame for the crisis. Lax monetary policy also played a starring role. Low interest rates boosted the prices of assets, especially of housing, which in turn fed into complex debt securities. This created a spiral of debt that is only now being unwound. True, monetary policy is too blunt a tool to manage asset prices with, but, as the IMF now says, central banks in economies with deep mortgage markets should in future lean against the wind when house prices are rising fast.
The second reason to hesitate is that bold re-regulation could damage the very economies it is designed to protect. At times like this, the temptation is for tighter controls to rein in risk-takers, so that those regular, painful crashes could be avoided. It is an honourable aim, but a mistaken one.
The inevitable crash

Finance is a brain for matching labour to capital, for allowing savers and borrowers to defer consumption or bring it forward, for enabling people to share, and trade, risks. The smarter the system is, the better it will do that. A poorly functioning system will back wasteful schemes and shun worthy ones, trap people in the present, heap risk on them and slow economic growth. This puts finance in a dilemma. A sophisticated and innovative financial system is susceptible to destructive booms; but a simple, tightly regulated one will condemn an economy to grow slowly.
The tempting answer is to try to wriggle free from the dilemma with a compromise that would permit innovation but exert just enough control to squeeze out financial failure. It is a nice idea; but it is a fantasy. The experience of the past year is an object lesson in the limited power of regulators.
Just look at their mistakes. Before the crisis, hedge funds were regarded with suspicion as vulnerable and irresponsible. But, with a few notable exceptions, they have weathered the storm less as culprits than as victims. Instead, the system's own safety features turned out to be its weakest points. The copper bottom fell out of AAA bonds when housing markets failed to do what the rating agencies had expected. Banks avoided rules requiring them to put aside capital, by warehousing vast sums off-balance sheet with disastrous results.
It would be convenient to blame the regulators for all that, but the system is stacked against them. They are paid less than those they oversee. They know less, they may be less able, they think like the financial herd, and they are shackled by politics. In an open economy, business can escape a regulatory squeeze in one country by skipping offshore. Once a bubble is inflating many factors conspire to discourage a regulator from pricking it.
And even if you could put all that right, regulators would still fail, because of the nature of finance itself. Financial progress is about learning to deal with strangers in more complex ways. The village moneylender, limited by his need to know those he did business with, was gradually superseded by ever-broader impersonal markets that can cheaply mobilise colossal sums and sell more complex products. The remarkable thing is not that finance suffers from booms and busts, but that it works at all. People who would not dream of lending £1,000 to that nice family three doors down routinely hand over their life savings to strangers in a South Korean chaebol or an Atlantan start-up. It all depends on trust.
Regulators cannot know how trust will ebb and flow as new markets develop the experience and practice they need to work better. They therefore cannot predict the peril of new ideas. They have to let new markets develop, or stifle them. The system learns—dangerous junk bonds are reborn as respectable high-yield debt; bankers will now be scared of extreme leverage—but it is delicate, as the world learned last summer. The regulator is condemned to muddle through.
The notion that the world can just regulate its way out of crises is thus an illusion. Rather, crisis is the price of innovation, so governments face a choice. They can embrace new financial ideas by keeping markets open. Regulation will be light, but there will be busts. The state will sometimes have to clear up and regulation must be about cure as well as prevention. Or governments can aim for safety and opt for dumbed-down financial systems that hobble their economies and deprive their people of the benefits of faster growth. And even then a crisis may strike.

[righty]

Re: Why We Need Better Regulation

A well considered article

If the private institutions such as the banks (together with their profits) are being supported by our taxes then I want tighter regulation & a greater say in their overall strategy

What I don't want is the banks refusing to lower interest rates when the BoE continually lowers the base rate with absolutely no benefit to the borrower/taxpayer

[scoobydoo]

Re: Why We Need Better Regulation

I agree with the above - however we also have to remember the banks involvment in ther sectors such as building offices/housing developments etc.If house prices were the only concern then a lot of people could sit tight as long a they could pay their mortgages and as you say if the banks took a longer term view and passed on the reduction it would help.However if the banks can not fund investment in other areas as well then jobs will start to go big time. What power they hold!

I am a bit worried we are talking ourselves into a recession. Was it only Oct we were all being told that we are not building enough houses by thousands? therefore houses will be in demand and house prices will remain boyant? Its all so confusing.

One fact is that if the banks and BS had not increased the salary ratios for loans - none of us would have been able to take out large loans - which would have kept prices down And we were all suckered in to that - including me an ex BS employeee who should have known better!

jan