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A real trial in a Kafkaesque world

Many years ago, when I was a teenager, my dad bought me an English translation of Franz Kafka’s book The Trial as a birthday present. He meant well, bless him, but I only struggled through about half of it before giving up.

What makes Kafka so problematic is that his writing style is incredibly dense. His characters meander on, unable to affect life or escape from it, trapped in a bizarre, distorted world without a beginning or an end. It is this distortion of reality that has given rise to the term Kafkaesque as a catch-all that refers to a powerful, seemingly logical but actually irrational – and uncontrollable – bureaucracy.

In the past few weeks, as all of us have learned more and more of the FSA’s failures to mount effective and timely investigations into the financial institutions it is nominally responsible for, I have increasingly been reminded of Franz Kafka.

We are not just referring to Pacific Consolidated, a company that journalist Tony Hetherington, a single man with a computer and access to the internet, not forgetting his filing cabinet, was able to expose at least a year before the FSA, with its multi-million-pound budget and thousands of staff, managed to do anything about.

Infinitely more frightening is the way that several of the UK’s high-street banks were able to engage in activities which, had anyone bothered to examine them in detail – what the FSA is there to do, after all – would have revealed in an instant that there were systemic risks requiring urgent intervention.

What I find most interesting and redolent of Kafka at his very best is not only the explanation for this failure but the consequences that flow from it. Baron Turner of Ecchinswell, former director general at the CBI and vice-chairman of Merrill Lynch Europe, part-time lecturer, writer of reports for the Government and latterly chairman at the FSA, is one of that peculiar breed of people who move easily in and out of public and semi-public service.

Their chief requirement is to sound utterly convincing, regardless of what they are called to explain or defend. They must never accept culpability, no matter what happened.

For example, when Lord Turner was asked recently to explain what went wrong at the FSA in terms of its failure to regulate the banks, he said: “With hindsight, the FSA – like other authorities throughout the world – was focused too much on individual institutions and the processes and procedures within them and not adequately focused on the totality of the systemic risks across the whole system and whether there were entire business models, entire ways of operating, that were risky.”

Yet this focus on “individual institutions” somehow failed to spot – to take just one example among many – that Northern Rock was offering 125 per cent mortgages to customers who could barely afford to repay them while expecting the property prices to rise indefinitely, something that would be unique in the history of the housing market.

Even more fascinating is Lord Turner’s defence of the FSA decision to pay an estimated £33m in bonuses to its staff this year, equivalent to around 15 per cent of their salaries. He says: “If you are saying we should cut the bonuses, you are saying we should cut their pay by 15 per cent. That’s against a background where we are being told we need better people. That is not the way to go.”

So let’s get this straight. For years, the FSA’s staff did not notice what was happening under their noses or, if they did and had any reservations, they failed to intervene.

Looking at it through Lord Turner’s eyes, however, it means they ought to be given a bonus worth up to 15 per cent of their wages. Why? Because if we don’t pay them, it means we are really saying that we don’t want “better people”.

In other words, the way to motivate someone who is not doing their job is not to get rid of them or even to warn them that their poor performance places them at risk of being fired, but to give them a bigger slice of our money that was, after all, supposed to be discretionary.

Even more amusing is the way that the FSA has decided that the way forward out of this dilemma is to get IFAs to pay a bigger slice of its bills. Not all advisers, of course. It understands that to ask for money from sole traders is like getting blood out of a stone, so there is no point in bothering.

The truly effective way is to focus on IFA firms with, say, half a dozen RIs, which it believes can afford to pay up to 20 per cent more in FSA and FSCS fees despite the fact that the hike has been caused by Icesave, Kaupthing Singer & Friedlander and Bradford & Bingley, among other banks, all going bust.

In the Kafkaesque world of Lord Turner, if you are not doing your job, you deserve to be given even more money than you were earning before. But if you are vaguely competent at what you do, you need to pay more – even if not remotely responsible for what happened.

Maybe I should have stuck with The Trial, it would have made more sense.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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