It has to be said that February was not a very inspiring month. The prudential regulators have been packing their plastic moving crates and heading off to Moorgate. Their new boss was confirmed as Andrew Bailey which was inevitable. Lloyds was fined again for being slow to pay out PPI redress, which had a certain inevitability about it. The FSA announced the results of their mystery shopping of bancassurers to the surprise of no one. Less visibly, the Secretary General of EIOPA gave a sorrowful defence of the Solvency 2 process and Andrew Bailey said it was shocking that Solvency 2 had cost the UK industry £3bn so far to implement.
Bank gets 3 points on licence for driving too slowly
Mis-selling of PPI was a pretty egregious affair and banks involved should hold their heads in shame. But to judge by the number of text messages this writer gets suggesting I seek redress for PPI I didn’t buy in the first place, the banks must be pretty fed up with the parasites that accompany any mis-selling scandal these days. There is no sign of the regulators doing anything about the false claims industry, certainly a financial service but not a regulated activity. But the regulator can fine Lloyds another £4.2m. A big bank is a soft target. It is easy to get at and big banks each have large share of the market so a big proportion of the whole market can be reached in one action.
The trouble is what good did this further fine do? It is not of a scale to send shock waves through the bank and it is hard to see how it will make the bank go any faster compared with, say, a hard-nosed conversation with its CEO. No doubt the FSA will argue that somehow it will provide credible deterrence to other banks who might be going slow. But this is all happening in real time. Either they are going fast enough or they should be fined too. Either way, the policy looks odd.
Credible deterrence is not a statutory objective of the regulator. There is no evidence that credible deterrence works in a financial services market. Perhaps it would be hard to find evidence that it does. Just as it is hard to say whether the endless conveyor belt of punishment for an industry that never appears to improve has the effect of frustrating one of the regulator’s statutory objectives to promote confidence in financial markets. 25 years of modern regulation seems only to have persuaded consumers that all players in the market are against their interests. There is not much evidence for that too except for hearsay. But our regulation is supposed to be evidence based and outcome focused. What evidence is there for supposing that fining Lloyds a middling amount of money will make much difference?
Could it be that these parent/child transactions, where the regulator tries to punish the industry into doing its bidding, are ultimately futile? Could it be that the statutory objectives properly conflict in such a way that the degree of punishment needed to modify behaviour would simply cause the systemic weakness that the regulator is charged with avoiding. In which case, perhaps the regulator and the industry need to have an adult to adult conversation about the market conduct required.
Mystery shopping shock
No, the FSA did not find horse meat in bank branches but they did find that banks continue to give a significant proportion of poor or suspect investment advice, mostly based on defective attitude to risk assessment. Perhaps these banks should all be fined too. It seems one has gone into enforcement so it will be. At one level it is hard to see why this problem has persisted for so long. The FSA has complained about it before and their mystery shopping exercise was both predictable and actually sign-posted. Banks do their own mystery shopping so they must have known what the FSA would find.
Looking beneath the surface, this issue appears to have several inter-acting root causes which big fines will not address. At the operational level the banks appear to be trying too hard to sell products. This is not simply because they are greedy and utilise inappropriate remuneration and employment strategies. The great British public is not economically rational (views about this vary but the commoner view at least is that they live for today which is short-sighted). They also fail to grasp risk-adjusted returns. They won’t pay for good advice. The regulator assumes transparency somehow changes this behaviour. And banks’ senior management think that business television is an effective form of communication through all levels of an organisation.
No amount of mystery shopping, whether or not coupled with enforcement action will have any impact on this situation. It calls for a different kind of engagement between the government and the industry. Unfortunately, the new financial services legislation perpetuates the same old conversation. There will be more mystery shopping and more enforcement action because customers are not treated fairly in terms of the conversation currently in place. Ho hum!
If this is the solution…
Andrew Bailey, the newly announced Deputy Governor of the Bank of England and head of the Prudential Regulatory Authority expressed incredulity that the cost to the industry of implementing Solvency 2 had been £3bn so far. It would be fair to say that an extra £3bn of buffer capital under the current regime could have been a better outcome. In Frankfurt, Carlos Montalvo the Secretary General of EIOPA gave an interview broadly defending his organisation against charges that it was all its fault. EIOPA is a political football. The EU Parliament and EU Commission Services find it quite convenient to remit any awkward issues, such as what to do about long-term guarantees, to EIOPA to work out a technical solution when none is readily to hand.
In practice Solvency 2 will take nearly 20 years to implement. It is the extended time-scale as much as the technical complexity that drives cost. EIOPA did not invent any of this. It is as hamstrung as any other EU organisation. Like a convoy, it moves at the pace of its slowest member, and there are 30 of them including the three EEA countries. Solvency 2 is a sound approach to measuring insurer solvency better by capturing risks and their management. But perhaps no more than 6-10 Member States were up to it. Until the EU learns to implement in a more sophisticated way (i.e. in stages) and stops the best being the enemy of the good, we must expect new regulatory requirements to arrive too slowly and cost much too much. But kicking the cat won’t change anything.
The Regulatory Consulting Team