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Keep your eye on the big boys, FSA

If may be an unkind thought but I can’t help thinking that Zippy, George and Bungle could regulate the financial services industry during the good times.

Readers and their clients may have noticed that not every asset class is rising now. The FSA is facing its first property bear market and possibly its second equity one though it was in its infancy when the dotcom bubble burst.

The slightly unkind thought about the characters from the children’s TV programme Rainbow occurred to me last year when John Tiner gave himself a glowing end of school report as he left the FSA.

Among other achievements, Tiner decided he had saved the UK life insurance industry from itself. But how are things in Hector’s house today and indeed in the houses of all the other regulators worldwide?

I would say they are not very good at all. The first conclusion is that capitalism’s most reckless side is alive and well and untamed by regulation so in large part regulation has failed, defeated by the pace, sophistication in the nastier sense of the word, and lack of concern about the underlying loans from the secondary debt markets and those global banks which drove them. The greed and stupidity of the some of these global brands may well have left everybody in the SH One T as granny used to say.

To have a situation where market makers for credit backed securities were also some of the major buyers beggars believe. To see a bank guarantee to buy back underperforming assets if they did not perform strays close to madness.

These actions were stupid on a more spectacular scale than the original owners of the debt – the US lenders who pushed sub prime loans while telling their borrowers that if they couldn’t keep up payments they could always sell because property wouldn’t go down in price.

In comparison, even Northern Rock’s out-gone chief executive Adam Applegarth, the closest thing we have to a pantomime villain in the UK, was defeated as much by circumstances – the disappearance of his funding lines along with everyone else’s – rather than by any particular recklessness.

Now I’m not suggesting that all is rosy in the retail market. Directors of firms which offered property funds need to make sure they emphasised the fact that some restrictions might apply given the illiquidity of those assets and that advisers and their clients understood this. One also has to ask questions about asset allocation and risk profiling when the first move into a new asset class such as commercial property came at the top of the market. In all the arguments about asset allocation, Mark Dampier seems to have got this essential point right. I also have more than a sneaking suspicion that many investors had a lot of more their portfolios in property than the oft-discussed 10 per cent.

I would also bet my bottom dollar – even as it becomes worth less and less in Sterling terms, that if property prices fall and UK repossessions climb further and faster than expected then the lenders and mortgage brokers are going to take one hell of a verbal beating from the Government. It will be something of a measure of whether the FSA is the Treasury’s patsy if it makes similar noises or if it resists the pressure to find a scapegoat. Good mortgage advice remains good mortgage advice and bad mortgage advice bad, regardless of what the Government thinks, though admittedly the bad advice may become more obvious this year.

While I would never suggest that the retail market should escape regulatory scrutiny, I wonder whether the FSA should really be planning to spend so much time on the retail market.

Many things have gone wrong in the past and been exposed by falling markets – precipice bonds and split caps have been the most notorious failings but tech funds and overoptimistic drawdown plans should get mentioned in the grim list of failings too. It also seems the bad habit of chasing performance just before the peak has still not been kicked. It would be nice if that could be left to the day traders but that probably is a pipe dream. But in cases where risky products were pushed too hard or mis-marketed or where some bad advice was given, there was at least the ombudsman and the compensation scheme. The system worked at least up to a point. Contrast this with the big investment banks, which despite their battalions of compliance officers, whose actions have helped push the global economy to the brink of a recession.

Now we have a rogue trader, discovered at Soc Gen, by reputation supposedly a very well run bank. The hole was discovered, thank goodness, but not before he had managed to cost £3.7bn. It will probably be impossible to tell if Soc Gen’s unwinding of its position contributed to stock market falls globally. But as one fund management chief said to me over lunch this week if, in this world of gearing and debt, he hadn’t been found until next month or the one after what then? Could £3.7bn have turned into £37bn?

To rephrase my slightly facetious point at the start of this piece, John Tiner for all that he achieved a lot in terms of reorganising the FSA had life relatively easy in a period of rising markets. Hector Sants does not have that luxury. I only hope he is looking in the right place. And I don’t think IFAs – for all the fact that they may represent a massive collective pain in the backside for FSA staff – are the right place to be looking. The chief exponents in translating the greed of the financial system into fear for everybody else are to be found elsewhere and that is in the big institutions not the small. They are also better at hiding their misdeeds until it is too late.


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