On December 1, 2001, the general public had the assumed extra comfort that there would be one central regulator with immense power, capability and expertise to offer ultimate regulatory control. Has statutory regulation worked?
I cannot dispute that firms such as Barlow Clowes would have been unable to trade under the present regime but we have still had pension misselling and the soon to materialise mortgage misselling debacle. A failure of the regime is that only lip service is paid to reputation.
If we compare regulation of the financial services sector with the Law Society and the Institute of Chartered Accountants, there is a significant difference.
For a start, members are proud to belong to these organisations. There have been scandals in both bodies but you can rest assured that both the Law Society and the Institute of Chartered Accountants take seriously actions which bring them into disrepute.
The problem in financial services – and this was highlighted in the Northern Rock affair – is that no one knows who is in charge of what. In my opinion, the FSA has unfairly borne the brunt of the criticism. The Government set up the FSA and the Bank of England should have been aware of the cavalier way in which Northern Rock was behaving.
I reflect on the days of the Building Societies Association 40 years ago when Northern Rock was cautioned for straying from the original ideals and making loans on commercial properties. Building societies in trouble would be quietly and painlessly absorbed. This is a far better scenario than the Government, Bank of England and FSA all wriggling and claiming: “Not me, m’lud.” The best way of abdicating responsibility is sharing it.
Could now be the time for the financial services industry to take charge of its own affairs? Would it make a better stab at preventing scandals? Would we have more confidence in our clearing banks? Would the life companies behave more sensibly?
We have not had good value from the present regime. The FSA’s budget is vast. Is the cost really worth it? The budget is over £300m a year and it spends up to £35m on consultants.
Could principle-based regulation result in the various sections of the financial services industry having their own professional standards, with the FSA overseeing them?
That arrangement certainly fits in with Government policy. Why have three layers of management when you can have four or five? The more the merrier – let’s really abdicate responsibility.
The worry is, would the FSA downsize? Would it feel that it should have more people and employ even more consultants?
There could be a dividend for the financial services industry to self-regulate. The industry understands the implications of what they and their fellow regulated firms do. I am sure that many regulated firms have either reported dangerous practices and been astounded that the firm reported carried on apparently without caution or just not bothered.
Disillusioned gamekeepers have converted to poaching. Mortgages of four times, five times, six times salary – how far can you push it? Where did they get to? Eight times salary at the peak?
Did any mortgage banks suggest that Northern Rock was throwing caution to the wind and, when nothing was done, joined the party?
Central regulation creates an us and them mentality. What can we get away with? Self-regulation becomes an us-only mentality. There is a difference.
Peter Hargreaves is managing director of Hargreaves Lansdown