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Why has the FSA’s role in banking failure been missed?

Since the Libor fixing scandal hit the news there has been a great deal of political manoeuvring over the type of inquiry that should take place. On Thursday evening the Government won the day and initially at least, a parliamentary committee will conduct the inquiry.

However, the role of the FSA seems to have been missed during the political debate. Much of the discussion has centered on a culture that puts profit before everything and which led directly to various scandals, such as payment protection insurance misselling, interest rate swaps and now Libor-fixing. If such a culture exists it has developed and thrived under the eye of the FSA since 2001.

When FSMA came into being in December 2001, it was hailed by the Government as a new all-powerful statutory regulator with sweeping powers to really make its mark.

The powers granted to the FSA under FSMA are wide. There is no question in my mind that the failure of the FSA to regulate the banking sector effectively is not a case of the regulatory structure being wrong.

It is more a case of political interference (the explicit encouragement of light touch regulation in the section of the financial services industry which has done the most damage) and incompetence of the FSA itself and the management team. It had all the powers it needed to do the job properly, it just singularly failed to do so.

The FSA has a web page on its thematic work which “involves analysing a particular product, market or practice to see if there are widescale issues that we need to act on”.

The FSA should have been doing thematic work on the banking sector to nip any corrosive culture in the bud. Instead, if you look at the thematic work it has done it includes insurance comparison websites, work on financial promotions and investments for children.

It smacks of the FSA doing the easy things rather than tackling the big jobs.

So where does this leave us? We may have a new regulatory structure on the horizon but most of the staff will simply transfer over from the FSA and I do not consider there was that much wrong with the structure anyway.

This is really quite worrying – we could be sleepwalking into another decade or more of regulatory failure.

Also, shouldn’t the inquiry that is to take place include as one of its main terms of reference the role and failure of the FSA in dealing with any corrosive banking culture.

It is time that the FSA was put under the spotlight and made to face up to its own dismal failings. In doing so, maybe there is a chance that things may change for the better. Otherwise, we will be back here again before we know it.

Alan Hughes is a partner at solicitors Foot Anstey

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There are 22 comments at the moment, we would love to hear your opinion too.

  1. PRECISELY !!!

    Or is that the FSA dont get anything wrong ?

    This is a prime example of the tail wagging the dog !!

  2. They were more interested in getting rid of commissions and forcing through RDR(bearing in mind that at one meeting they considered not implementing , but were worried about saving face) It was easy to target IFA,s especially small ones instead of getting on with the work that really needed doing. Ones got to question the sudden departure of some of the top dogs just before the LIBOR hit the fan. Did they know what was happening and got out before the proverbial hit the fan. I notice Mr. Sants(be very afraid) has suddenly gone quiet. Does he think he needs to be very afraid of whats coming out which will point to his incompetence for wages beyond most working peoples dreams.

  3. When the ‘top people’ are employed on incredible salaries within a broadly government linked organisation such as the FSA, then it runs the danger of those people not wanting to ‘rock the boat’ because it quite literally could be more than their ‘jobs worth’!
    It needs those in a legal position to make direct representation to the government and FSA. If enough solicitors wrote complaining and making clear public observations of the legal implications of failure by the FSA it may have some impact.

  4. Alan Hughes is 100% spot on.
    The FSA and FSMA 2000 does not need a complete re-write/replacement
    They had/have all the powers they needed (as IFAs have seen used against them), but political interference resuletd in those powers being used against the minnows (IFAs) rather than the big fish.

  5. The FSA have let the banks get away with it – what do you expect when the majority of the FSA come from banking backgrounds.

    Back in 2008 there is an article in another trade publication that has Phil Melville of Argyle Financial saying “While the FSA was kicking the IFA’s, it was letting problems with the banks get to this level. The RDR is a joke. The level of regulation is so disproportionate it is ridiculous. PBR (principle based regulation) has proved to be cobblers – Northern Rock showed how inneffective regulation is.”

    Ken Davy of Simply Biz said “It is laughable that the FSA thought it more important to worry about IFA’s earning ‘a bit of commission’ when bank executives are earning multi-million pound bonuses for wild bets that have proved problamatic for us all.”

    Both accused the FSA of having the wrong priorities.

    But still the FSA seem to get away with it – why is that? Why have the banks got off so lightly for so long?

    Perhaps Mr Tyrie & the rest of the committee will get the FSA hierarchy in to ask them?

    Are you up to the task Mr Tyrie of finding out why the ‘Regulator’ has failed – again?

  6. Personally for what it is worth I have no doubt that Andrew Tyrie will handle the latest task efficiently and thoroughly. Also that the role of the FSA will come under close scrutiny as a result.

    Just a word about staff swapping over-the majority of the FSA staff simply do what they are told and in my dealings with the rank and file they have been helpful and (believe it or not) quite affable. No one should have any problems with them effectively keeping their jobs. It is the men and women at the top, the decision makers, whose feet should not touch the ground. Most of them appear to have taken the hint already.

  7. The article poses the question, “Why has the FSA’s role in banking failure been missed?”

    The answer for me is very simple: it hasn’t, it’s just that it is the ‘elephant in the room’ that neither the FSA nor Parliament wishes to deal with, because to do so would mean both admitting their own respective failures.

    That Parliament failed to hold the FSA accountable is no surprise. Why would they when getting to grips with the fine detail of the workings of the financial universe is so hard and there is *apparently* a tough and uncompromising regulator on the case – no need for politicians, even those on the Treasury Select Committee, to get too bothered by any of that stuff.

    That the FSA failed is no surprise either: employing former bankers hoping (in my opinion) to be future (higher paid) bankers is a clear conflict of interest.

    Allied to this conflict we had the “don’t just stand there, do something” mentality which lead them to set about that hotbed of systemic risk, the IFA community (which let’s face it can’t even agree amongst itself about the simplest issue, let alone agree on how to manage the FSA attack). This has however been sufficient for many years for the FSA to justify itself as a proactive and effective regulator – the very same tough and effective regulator upon whom Parliament placed so much reliance.

    The benefit of hindsight shows us the reliance of Parliament on the Regulator was wrong; the free reign given by Parliament to the Regulator was wrong and the lack of any perceptible questioning of the Regulator by Parliament was, and continues to be, wrong.

    We also know, and have had amplified with hindsight, that most of the past 12 years has been spent with the FSA persecuting the adviser sector whilst pretty much have a Nelsonian view of the banking sector.

    The fines that were imposed on the Banks were the equivalent of a slap on the wrist, which were simply treated as a cost of business by the Banks. No action was ever taken against those people responsible for the identified failings to remove their fit & proper status (and don’t forget that Mr Diamond was only pushed as a result of the Bank of England deciding to “have a word”).

    In summary FSMA & FSA were an abdication of responsibility by Parliament and the FSA was, at best, ineffective and, at worst, incompetent and used the smokescreen of RDR to cover their own, as well as Parlianment’s failings. The smoke screen is now clearing….

  8. When we look back and consider the evolution of systemic failures the FSA will be one of the more obvious examples of malfunction.

    The detriment resulting from bank mis-selling, rate fixing and other obvious and yet to be discovered conniving will be seen to dwarf the other so called examples of consumer detriment which have been trotted out as the basis of the RDR.

  9. There was a film about global warming i believe called ‘An inconvenient truth’.

    That springs to mind here.

  10. Government = buffoons
    FSA = Incompetent and with a conflict of interest,
    Banks = underhand & manipulative + expensive lobbying (bribery)
    Insurance companies = opaque, disappointing
    IFA = Honest, isolated, SCREWED by Govt, FSA & Banks.

  11. The FSA re above the Law, they have no-one to answer to. All having been employed by the banks in the first place has put them in a very good postion in order to ignor the goings on, Why you may well ask, simple

    Because they can

  12. Exasperated Me 13th July 2012 at 2:50 pm

    Why would the politicians attack their own creation?

  13. Garry Anderson 13th July 2012 at 3:24 pm

    Alan B answers the question; “Why has the FSA’s role in banking failure been missed?” with the response; “The answer for me is very simple: it hasn’t, it’s just that it is the ‘elephant in the room’ that neither the FSA nor Parliament wishes to deal with, because to do so would mean both admitting their own respective failures.”.

    This is partly correct – failure implies they tried to deal with the problems. I have proven the FSA lack integrity with an official complaint against them.

    The main problem is that the FSA are PR for the finance industry – they see main objective as keeping “market confidence ” – the other 3 statutory objectives merely ‘would likes’. This is why they keep wrong-doings hidden e.g. HBOS and kept Libor secret since 2009.

  14. Richad Lamborn 13th July 2012 at 4:08 pm

    Well considered article. It might be well if the IFA community had one Professional Body (robustly) representing it, thus avoiding its current fractured position. Comprising practioners from the Advisory community.
    In the first instance such a Body might act as a stanch defender of IFAs against some serious and unreasonable attacks in the last 5 years. It might then move quickly to being an SRO. At least then IFAs would have the confidence that knowledegable & practical persons were in charge.
    A good SRO would constructively supervise training and policing, in the way that other professions are.

  15. We did have the IFAA with Gary Heath but he got sidelined. Bring him back.

  16. Garry Anderson almost has it right. Quite simply there is no body to investigate the behaviour of the FSA. The TSC have tried in the past with stunningly little effect. Who else is left? Nobody.

  17. Julian Stevens 14th July 2012 at 5:24 pm

    “The powers granted to the FSA under FSMA are wide”. Indeed they are, so wide and so sweeping that, combined with a wave or two of its now very tattered flag of consumer protection, the FSA can, at least to its ow satisfaction, justify pretty well anything to anyone.

    The article states that “the failure of the FSA to regulate the banking sector effectively is not a case of the regulatory structure being wrong”. I disagree. What is most wrong with the regulatory structure is a complete absence of accountability, particularly as far as any individuals are concerned. As seen with Clive Briault, those who fail in their duties are either gently eased out with a massive pay-off or they step down voluntarily before the brown stuff hits the fan, with six months of very generously paid “gardening leave”. Such a system cannot possibly be right.

    Let us hope that both Margaret Cole and Hector Sants are called to appear before the TSC to expain, if they can, just why the FSA failed to take much earlier action on these gross malpractices within the banking sector.

  18. Larry in London 16th July 2012 at 11:57 am

    Animal Farm. Read Animal Farm. It’s all there:

    ‘All animals are equal, but some animals are more equal than others.’

    When Brown set up the FSA, it’s lack of accountability to parliament was a precursor to his staying on at No. 10 without the inconvenience of a General Election. Socialists’ actions speak volumes about the contempt in which they hold us.

    The fundamental principle of democracy that the FSA breaks everyday is that they are above the law. Nobody should be above the law. They have ignored parliament, they have ignored everyone. They have treated the British electorate with utter contempt.

    The bewildering complication of RDR is the result. Nobody has voted for it. Nobody wants it (the fee option always being available for those that choose that business style).

    The only way to get these jerks away from usurping more power is by way of the ballot box.

    USE YOUR VOTE…

  19. Julian Stevens 16th July 2012 at 9:51 pm

    USE YOUR VOTE? To vote in who in place of the current coalition government? The LibDem’s? Labour? UKIP? They’re all as bad as each other.

    What is need (sorry to say it yet again) is an all-party Independent Regulatory Oversight Committee with the unassailable power to say to the regulator of the day: This is wrong and you aren’t going to do it or: You’ve failed to discharge your statutory responsibilities and this is how you’re going to pay for that failure. No golden parachute, no lavishly paid gardening leave, no moving on to another massively paid job in the City. You’re OUT, the fine is going to be £XXX,XXX and your City career is OVER.

  20. Julian thats a bit radical – applying normal commercial practice to the banks and the FSA – the higher up in the food chain you go your responsibility reduces in line with the increases in your salary as there’s always someone junior to blame!

  21. @ Larry
    Use your vote?
    I did that the last time. It made no difference.
    I am staying home next election.
    I will not participate in this sham democracy. What is the point of voting a party into power when it will have no power to veto an unaccountable quango?
    Our daily lives are ruled by people we did not vote for and our leaders have the gall to protest at the lack of democratic process abroad.

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