Exactly how many financial regulators do we want to see in the UK? Two? Three? Four? Do we need that many? If so why?
I’ve been pondering these questions over the past week or so, ever since the recent publication of a report by the Treasury Select Committee, which called for the FCA and PRA to be broken up and for both regulators’ enforcement divisions to be merged into a separate body.
The Select Committee’s proposal appears to have met with warm support from some financial advisers, judging by an online poll held by Money Marketing over the past week or so.
Almost two thirds of those taking part support the idea, despite the views of many experts quoted by MM, who questioned the relevance of breaking up a system that has barely been up and running for a couple of years. They said the current regulatory regime needs more time to bed in before any decision on further changes is considered.
I’ll come back to this opinion poll later. But first, let us accept that there were serious errors in the way not just HBOS but all the banks were being regulated in back in 2007.
Even before the Treasury Select Committee report, two separate investigations, one in November last year by barrister Andrew Green QC last year into the collapse of HBOS in 2008, and also the Parliamentary Commission on Banking Standards in June 2013, both attacked standards in the banking system and failings in regulatory structures.
The PCBS, chaired by MP Andrew Tyrie, who also chairs the Treasury Select Committee, was biting in its assessment that a “lack of personal responsibility has been commonplace throughout the industry.
“Senior figures have continued to shelter behind an accountability firewall.
“Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace.”
Andrew Green QC’s equally scathing report criticised regulatory structures that led to the collapse of HBOS, as well as the failure to investigate key players involved, including former chief executive Nick Hornby.
Hardly surprising, then, that the TSC’s own findings a fortnight or so ago said “prudential failings” led to the collapse of HBOS and previous “light touch” regulation had led to serious flaws in the supervision of the bank.
Nor should we amazed at the fact that one of the key remedies for these regulatory failings, both in 2014 and last month, is the separation of enforcement from supervision at the FCA and PRA.
The common links between the June 2013 PCBS report and the latest one by the Treasury Committee is Andrew Tyrie, whose views clearly have not changed in the intervening two years. Which is fair enough: if he and his colleagues on the Banking Standards commission felt so strongly about it two years ago, it would be ridiculous to expect them to have change their minds since.
But we should not fall into the trap of believing that somehow there is a plethora of independent reports all coincidentally calling for the same thing again and again, and that what is holding up their implementation is simply Government intransigence.
The reality is that there is an equally powerful argument, voiced in Money Marketing last week, that hiving off the enforcement functions of both regulators is the answer to a systematic crisis that affected the sector 10 years ago, not today.
Moreover, it’s not necessarily the right answer: the laxness was as much in supervision throughout the 1990s as it was to do with enforcement.
So-called “light touch” regulation was politically driven by Labour in government, backed by the Tories, with Tony Blair even stating in 2005 that the FSA’s role was “hugely inhibiting of efficient business by perfectly respectable companies”.
It is now known that FSA chairman Callum McCarthy was privately seething at Blair’s intervention and wrote to Gordon Brown to complain.
What was surprising at the time was the fact that Blair’s remarks went against perceptions at the time that the FSA’s regulatory structures were far more preferable, for banks and financial institutions, than the more prescriptive rules-based approach found in the US.
Strikingly, the US is one country with a plethora of regulators, yet US financial watchdogs were no more able to identify and prevent the looming banking crisis on their side of the pond than the FSA was.
By adding a third regulator, responsible only for enforcement, what you are likely to see is an organisation which feels it has to constantly prove its worth by landing hard on perceived offenders, rather than working to ensure that appropriate rules are set and are being followed.
In essence, what the TSC has come up with – as several of the experts quoted in Money Marketing have pointed out – would in probability raise charges for financial advisers.
So why, one might ask, are financial advisers so prepared to see something that, rather than help them, is more likely to have a negative effect on the way they do business?
The answer lies not so much in a myopic attitude on advisers’ part, but a perception that anyone throwing ordure at the FCA needs to be backed no matter what the collateral damage.
I find that rather sad.
Nic Cicutti can be contacted at firstname.lastname@example.org. Follow him on twitter @NicCicutti