In banking, the debate over “moral hazard” takes place. But where do we see any debate extend to the FSA’s failures which represent the very same “moral hazard” – where the cost of such failures fall not on the FSA but on everyone else?
Why is that we see no practical ideas coming forward for change, not from politicians, the authors of the previous failures, but from within those affected, from IFAs and from investment managers? Ideas which crucially have as their genesis changes that would truly benefit the investing public.
The FSCS is, and always was, designed to be an answer for failure – the failure, not the success, of the regulatory system itself. Consider this quote from Hector Sants to the Treasury select committee in November last year as he looks forward “… I am trying to wean people off an expectation that you operate a no failure regime …”. Hector Sants, soon to be chief executive of the Prudential Regulation Authority intends to simply continue a system which anticipates and allows for more failures.
Think back over just the past 20 years or so, make a list for yourself: Keydata, Equitable Life, Northern Rock, RBS, HBOS, Lloyd’s Syndicates, Independent Insurance, Lehmans, the LTCM’s … keep going, and don’t forget the Farepak – it is a long list. Add up the costs of such failures – can we afford such costs? Can we suggest alternatives to this catalogue of failures?
When Hector Sants expects everyone to meekly accept a future of more failures, perhaps we should all ask- can a better one be designed?
Here are some initial and wholly random thoughts – they point in the direction of a new market, one which does not yet exist, but which may have every reason to be considered:
1) When we hear of sovereign debt, it is unlikely that we will not also hear of Credit Default Swaps, an insurance against default – with, importantly, the “price” of purchase being a key indicator of the risk involved.
2) Down a peg or two, you will find the Export Credit Guarantees Department offering a form of insurance against potential defaults – where again the levels of cover given and the “price” to be paid are key indicators of the risks involved.
3) Venture a step further down and the recent news over the removal of credit insurance for HMV, and again you have what could not be a clearer indication of the levels of potential risk involved – where it is “there is NO price” against which cover will be provided – could there be a clearer signal of the levels of potential risks involved?
4) When your client buys a gold ring at £10,000 – would you expect him/her to insure it against loss? What if the same client invests in a gold commodity fund – same answer?
When the FSA’s best efforts fail, unlike an insurer whose money is at stake, the regulator pays no price for failure, everyone else is left to pay the bill.
For me that plays a key part in why there is every reason to debate these issues, and to consider alternatives. Or do we all just sit about waiting for the next failure, and then complain about “the price”?
One, of more than one, possible alternative, in sketch form only lies in the above examples, it is one which allows all those who seek to invest to determine through “price” the risks they may be taking on.
Clients understand, nearly instinctively, why the “price” of insuring an 18 year old Subura Impreza driver will be higher than a 55 year old Ford Escort driver – they know one carries a higher risk. When you ask them about their attitude to risk – do they understand, really understand the risks – do those who invested in Keydata?
What if they were given a “price” to insure against the risk – and the price quoted for Keydata was much higher than alternatives – would they not then better understand the true nature of such risks? What prompts all the complaints in these columns? Is it the “price” of regulation, is it the “price” to be paid out for compensation after the FSA fails?
In a market economy there is perhaps no better signal than that of “the price” – the evidence is all around. It is perhaps time that lessons were drawn from it and instead of just complaining, ideas for change debated.
Mike Fenwick is an industry consultant