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Sense of morality

Out for a drink last week, I bumped into an acquaintance I had not seen for ages. After swapping stories on what we had been up to over the past few years, the conversation somehow got round to issues of “principle”.

Despite the current recession, my friend told me that he was taking a very principled approach to his business. If a client did not smell right or his product was not one he felt comfortable with, my chum would refuse to have anything to do with that person or his wares.

All very ethically sound – until my friend then told me that several years ago, when offered the chance to seek redress for alleged personal pension misselling, he had taken it and got a bundle in compensation for his trouble.

“If I am totally honest, I probably should not have applied for compensation as I knew what I was doing at the time I took out my personal pension,” my friend said. “But I suspect anyone in my shoes would have done what I did.”

Maybe he’s right although when offered the opportunity to make my own misselling claim, I turned it down on the grounds that I had known exactly what I was doing, as I have done in the case of Equitable Life, after I took out a policy with that firm almost exactly a decade ago.

What makes my friend’s story so interesting is that it was told to me at the marvellously chaotic leaving do of Money Marketing’s former editor John Lappin and the person who told it to me was not a grubby scribe but someone working loosely as what one might call a “practitioner” in the financial services sector.

In other words, here is someone who has made his living out of financial services for the best part of 20 years and has basically taken the industry for a few grand more, even when it was indirectly not in his interest to do this.

On the train home that night, I thought of my friend’s confession as I flicked through a few emails on my laptop, including one telling me that FSA chief executive Hector Sants had made a speech that day in which he admitted: “A principle-based regulatory approach does not work with individuals who have no principles.”

Sants told delegates at a Reuters conference: “What principle-based regulation does mean and should mean is moving away from prescriptive rules to a higher level articulation of what the FSA expects firms to do. In other words, it helps emphasise that what really matters is not that any particular box has been ticked but rather that when making decisions, executives know they will be judged on the consequences – the results of those actions.

“Similarly, the FSA, when it supervises, needs to supervise to a philosophy that says ‘It will judge firms on the outcomes and consequences of their actions, not on the compliance with any given individual rule’. Given this philosophy, a better strapline is ‘outcomes-focused regulation’.”

Not surprisingly, everyone and his dog has sought to jump on the Sants’ bandwagon, either claiming to support his comments or arguing that this is what their vision of financial regulation had been all along.

One classic example of such a response came from the Financial Services Consumer Panel, a toothless, token pretence of direct consumer involvement in regulatory affairs.

Acting chairman Adam Phillips rushed out a statement saying: “The FSA’s new commitment to focus on outcomes is long overdue. We have argued for some time that the FSA’s supervisors need to see how things look from the point of view of the customers dealing with firms rather than relying on what firms tell the regulator. The FSA must follow this commitment up with the resources to do the job properly and evaluate the process appropriately.”

As it happens, I agree with that statement, even though it is a statement of the “bleedin’ obvious” – and the organisation voicing it has about as much ability to influence the FSA’s activities as a flea has to change the direction of an elephant.

The real issue, however, is neither the specific model of regulation – principle-based, outcome-based or rule-based. It is whether the FSA has a combination of philosophical awareness in terms of what is right and wrong, coupled with the strength of will to intervene decisively in the internal affairs of financial institutions and demand that they alter their behaviour.

What is striking about almost every single financial collapse of the past 20 years, not just in the time the FSA has been the lead regulator but every one of its predecessors, is how warning signals were being widely given off – yet totally ignored. Again and again, regulators showed no appetite for taking on the financial services industry, preferring to take its word that everything was alright, even when it patently was not.

The bottom line is that if you have industry practitioners whose sense of morality is so skewed that, in order to benefit themselves, they are prepared to bend rules ironically designed to help consumers, it will take a lot more than platitudes from Hector Sants to sort out the mess.

Nic Cicutti can be contacted at


The bountiful game

I enjoy rugby union but regular tinkering with the rules is confusing and suggests the underlying principles of the game need constant modification. I am a football man and believe simplicity of the rules is its strength. I was thinking of this when I looked at the changes that the Association of British Insurers’ protection committee are making to total permanent disability.


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