Regulatory Consulting’s Insight & Foresight Newsletter - June Review 2012
Dear Readers
June was a fascinating month for clues about how regulation really works in the UK; how it might work in future and the realities of the slowly evolving crisis that threatens seriously to dent the prosperity of we Europeans. On one day alone, the 12th, there were enough stories reported in the Financial Times to fill this review with comment.
Poacher turned gamekeeper?
The announcement that John Griffith-Jones, KPMG’s UK chairman is to become non-executive chairman of the new FCA is an interesting choice by the Chancellor. He is a man with impeccable City credentials but no consumer credentials to speak of. Why the choice? On one view, the Chancellor is taking a pro-business stance and putting people in the high command at the conduct regulator who see the business implications of the drive for higher consumer protection standards. Martin Wheatley, after all does not have a long track record of consumer protection. Another view is that the Whitehall spin doctors are at work and the appointments simply give the illusion of a less myopic regime.
However, the reality may lie in a different plane. The two main tasks the FCA will inherit from the FSA are the protection of retail consumers from what might be termed high street retail risk and the policing of the markets to rid them of insider trading and similar crimes. The focus has very much been on the former but much of Margaret Cole’s campaign was targeted on the latter. Figures were released during the month to show the amount of pre-bid announcement price movements had diminished considerably. The CEO and Chairman appointments could indicate that wholesale markets will become a focal point. The American legislature, even if for self-serving reasons, is exerting a great deal of pressure on the UK about market abuse. A case of the pot calling the kettle black possibly but it is a view we possibly do not readily think about.
We are placing no bets on any reduction in the regulatory burden retail markets face even if Mark Hoban appeared to intimate at the CityUK summer debate that there would be a structured review of financial services regulation in due course.
So farewell then Hector
Hector Sants left the FSA at the end of the month. He spent much of it opining to journalists in valedictory vein. Two main messages were reported: that the Government could have forestalled the run on Northern Rock and that the financial services industry is too slow to change its business model in the light of events. This has the look of a 1-1 draw after extra time and a penalty shootout.
The former claim brought an immediate rejection from Alistair Darling, the then Chancellor, possibly because it was expressed as a bail-out loan to the then Lloyds TSB sans HBOS to buy Northern Rock. This looks so plausible as to be worthy of further consideration. It seems Gordon Brown from No10 invited Victor Blank, then chairman of Lloyds TSB, to look at taking on HBOS to save it from collapse. Clearly then this sort of rescue was in mind at the time. We have it on fairly reliable grounds that the FSA was disgruntled with Treasury Ministers at the time because they would not face up to the need to “take the punch bowl” away. In the period between Northern Rock foundering and HBOS following them, a gap of nearly a year, many experts could not comprehend the insouciance of the Government and the FSA towards an evidently growing liquidity crisis which had solvency a short way behind it. Hector’s version of events is far more plausible than the two Chancellors of the 1997-2010 Labour administration. They claimed to have eradicated the boom and bust cycle and could not draw back from that now obviously absurd claim.
Hector’s second contention about business models is harder to fathom. The need for change appears to derive from a perceived need in the UK to bear down on retail pricing which would require significant efficiency gains. This is unique to the UK. In mainland Europe the fuss about adviser remuneration, its nature and amount, is simply non-existent. Likewise in the Far East. In the US some market efficiencies are offset by other inefficiencies and retail securities regulation is simply non-existent in some of the less-populated States. No doubt good innovation would be good for all market stakeholders but it appears a curiously British obsession that financial services must undergo radical change to be fit for purpose.
Sponsor a civil servant anyone?
At first sight Lord O’Donnell’s maiden speech in the House of Lords appeared a mite odd. The former head of the civil service and before that the Treasury was advocating that the banks should pay a hypothecated amount to increase the pay of civil servants at the Treasury. One would think that he would be acutely aware of the obvious drawbacks of this approach, not least conflict of interest and the well-rehearsed arguments against hypothecation. And presumably existing civil servants in the Treasury would have very mixed feelings about such a suggestion.
However, this seemingly dotty proposal is a serious way of communicating a serious problem. There are too many civil servants in the outer reaches of the bureaucracy and not enough of good enough quality at the centre. The Treasury has for too long been taking a short ruler to itself to encourage other Departments to spend less. This short-sighted policy denudes the Treasury of a cadre of officials that can deal with complex policy problems such as a global financial crisis. Whilst the problem is not directly soluble using Gus O’Donnell’s supposed solution, in true mandarin style, he has started a debate which may lead us to a slightly better place.
The nightmare that never ends
The sight of formerly well to do Greek families now homeless and relying on food hand outs is sad to see. We may say that the Greeks in the round brought this plight down on their own heads but the effect is random at the individual level and must be very hard to take. The political leaders of the Eurozone appear tacitly to be saying that this outcome is the lesser of two evils. The other evil is some ill-defined nightmare in which a break-up of the Eurozone leads to break up of the European Union itself paving the way for ultimate war in mainland Europe. How this cause and effect chain is supposed to work is never made clear. And the odd thing is that no European leaders, and increasingly their parents, have any first-hand experience of war in Europe. Even the main Greek political parties wish to remain in the Euro. Even on the bizarre terms they think this will be allowed, it appears to fly in the face of economic reality. Greece has always paid for its structural inefficiencies by depreciating its currency as anyone old enough to have holidayed in Greece over several years will attest. Once that avenue is closed off its economy doesn’t work. In a recent straw poll at a Lansons regulatory event 100% of the audience believed Greece would exit the Euro within 12 months.
Why is this important to financial services regulation? Well these same leaders for the same obsessive reasons seek a single European market in goods and services and will pursue that aim through financial services regulation inter alia. In time, the maximum harmonisation route will become routine, particularly through horizontal acting regulations that national governments have no say in implementing. It will be interesting to see whether a more pragmatic approach is forced on Europe. If Greece left the Eurozone and life went on, even prosperity returning eventually, we might see a more pragmatic Europe with more pragmatic rule books. We do not suggest you hold your breath.
Yours sincerely
The Regulatory Team