View more on these topics

TSC blames FSA and banks’ recklessness for market turbulence

The Treasury Select Committee says recent market turbulence has been a result of reckless behaviour by UK financial institutions and deficient warnings from the Bank of England and the FSA.

In its Financial Stability and Transparency report, the TSC says the search for yield in the benign macro-economic and low interest rate environment of the past few years encouraged many investors to invest in products they did not always understand.

It says these complex products have introduced increased opacity into the financial system which is demonstrated by continuing uncertainty over the scale and distribution of losses in the banking sector resulting from exposure to sub-prime mortgages.

Chairman John McFall says: “The ‘best and the brightest’ at our top investment banks have expended great energy designing ludicrously complex financial products, which you need a Nobel Prize in physics to understand.

“Whilst financial innovation and securitisation have brought real benefits and allowed for risk dispersion through the system, it has come at a cost. Product complexity has introduced increased opacity into our financial system, making it almost impossible to determine where risk lies and making it much more difficult to achieve financial stability.”

The TSC also blames the Bank of England and the FSA for having deficient warning systems and recommends that in future the authorities clearly highlight the two or three most important risks in a short covering letter to financial institutions, for discussion at board level. It says the Bank and FSA should seek confirmation from those institutions that the warnings have been properly considered and publish commentaries on the responses received.

McFall says: “The Bank and FSA can no longer hedge their bets, throwing potential risks out into the ether and then washing their hands of the consequences. We must ensure that in the future such warnings are heeded and acted upon by those at the top of financial institutions.”

The report says the credit crunch has highlighted inherent and multiple conflicts of interest in the credit rating agencies’ business model, as well as flaws in their rating methods. The TSC calls for agencies to tackle these perceived conflicts of interest urgently if they want to regain trust and confidence.

McFall says: “The rating agencies have not emerged from the current episode of market turbulence smelling of roses. We need to have a serious debate about a root and branch reform of their business model to tackle perceived ‘conflicts of interest.’ If the rating agencies procrastinate on reform then we will have to seriously consider whether new regulation is necessary.”

Liberal Democrat Shadow Chancellor Vince Cable says: “The committee is right to highlight the deficiency of current financial warning systems. The existing arrangement, where warnings from the Bank of England and the FSA are brushed recklessly aside, cannot continue. It is vital that action is taken quickly, particularly in respect to credit rating agencies who carry responsibility for the breakdown in securitised markets.

“The fact that financial institutions no longer trust each other is mainly due to misleading credit ratings. If confidence is to be restored without heavy-handed regulation then the financial services industry has got to clean up its act very quickly.”

Recommended

Housing built on sound fundamentals

The Halifax house price index reported no change in house prices for January. Although prices in the three months to January were 1 per cent lower than in the previous quarter, house prices in January were 4.5 per cent higher than a year ear-lier. The average price of a home in the UK has increased by £7,628 over the past year to £197,244.

FSA warning on return to broker funds

The FSA says it is concerned about advisers launching their own fund ranges, warning there must be no return to the “bad old days” of broker funds.Speaking at the Cicero Forum on platforms last week, FSA director of retail policy Dan Waters said the FSA was worried about distributor-influenced funds for three reasons – adviser […]

Abbey pre-tax profits up £436m

Abbey says its profits on continuing operations increased to £864m in 2007 – up from £428m on the previous year. In a preliminary results announcement made today, the Santander-owned bank says despite challenging market conditions its retail banking income benefited from asset growth of eight per cent. Net interest income of £1,499m, compared with £1,228m […]

Thumbnail

Employer iPMI responsibilities could continue to escalate, says Jelf

New laws in Dubai will put the burden of providing international private medical insurance (iPMI) firmly on the shoulders of the employer in order to maintain the country’s leading healthcare facilities. With 10,000 UK nationals having moved to the country since 2007 and only 16.5 per cent of the total 8.2 million people living there being Emiratis, Jelf Employee Benefits believes this move was inevitable and employer responsibilities could continue to escalate in future.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com