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Regulatory Consulting’s Insight & Foresight Newsletter – October Review 2012

Dear Readers The highlights of the month centred largely on our beloved regulator.  Our parliamentary scrutineers laid into the FSA again over various matters, not least its handling of RBS and the RDR.  Meanwhile, the regulator itself stuck manfully to its task, including dismembering itself, with the publication of a discussion document called “Journey to the FCA” We couldn’t do anything, we’re only regulators Predictably, the Treasury Select Committee was having none of the FSA’s self-defence that it could not stop RBS buying ABN-Amro because it might have been viewed as a shadow director.  We shall most probably never know why the FSA did not block a deal that many commentators at the time thought was madness that granted the jilted Barclays a lucky escape.  The FSA must have had similar qualms.  But they could not have been accused of being shadow directors had they blocked the deal.  A shadow director is someone from whom a company’s executives have grown used to taking instructions who is not on its board.  Leaving aside the statutory protection, the art of blocking M & A by a regulator is the studied refusal to grant any decision so not one instruction would have been given to RBS.  All the FSA need have done is drag RBS’s application for change of control into the long grass and lose it there.  RBS would have been furious and thrown all the resources of a magic circle law firm at the regulator.  What fun!  It is for just such moments that the best regulators yearn. Some decent sport at last.  The truth was that RBS’s liquidity and solvency could not conceivably stretch to this act of great hubris: it only remained for the FSA to choose from one of several options to spike Fred Goodwin’s guns.  Odd how the FSA can now be intensive and intrusive with the same powers and handicaps! Really Dim Regulation Various Tory politicians used the Conservative Party Conference to kick the RDR around.  In part this is pique which we may properly overlook.  The FSA handled the Treasury Select Committee carelessly and they will have to continue to pay for that.  But the politicians have a good general point.  The FSA (Lord Turner apart) seems incapable of grasping that regulation is an optimising process and that improving one variable may cause deterioration of another.  Thus the MPs bemoaned the fact that the FSA appeared insensitive to idea that raising standards might help the wealthy but it disenfranchised the majority from those higher standards because they would no longer have access to advice.  We might debate whether that advice was good enough but a level 3 adviser with a suite of simple products might just be what the mass market needs. Martin Wheatley’s rhetoric hints that smarter regulation may be on the cards but the RDR is only two months away now.  We shall be embarking on a live experiment without crash test dummies.  When we crash it will hurt. Journey to the Centre of the Earth, hmm, No, Journey to the Edge of the Universe, hmm, No, Journey to the FCA, well that’s it The trouble with using clichés is that people make cheap jokes at your expense.  The trouble with using Hollywood clichés is much worse.  Hector Sants used “be afraid, be very afraid” to trumpet the intensive and intrusive regime so soon after the RBS could not be stopped from buying ABN-Amro.  Which is a shame because we need better regulation and we need a better regulator. Journey to the Centre of the FCA is a curious document.  It relies heavily on rhetorical devices such as juxtaposition of opposing thoughts ( a political device: “tough on crime; tough on the causes of crime”, etc) without ever really explaining how the dichotomy will be resolved.  It has some half-baked thoughts, which can be forgiven in some respects, although it is a bit late in the day for that.  And it has some interesting clues to a change in direction towards something more thoughtful than we have seen in the past decade. The rhetorical ploy currently in vogue is to match every threat of coming down hard on the industry with a promise that the regulator really doesn’t want to stifle innovation and it recognises that FS is a driver of the UK economy and a source of its competitiveness in the World. But it does not say how it will reconcile these thoughts.  In short it needs to say how it will tell what is good innovation and what is bad.  It cannot be post-hoc review along the lines it didn’t work so it must be bad.  Rather, it will require a regulator that can work out the intent of an innovation.  Was it to scam the punter, shall we say capital or accumulation units, or was it to offer the punter what research showed they wanted badly, capital protection but some yield enhancement?  The current regulator appears to hate both. To be a better regulator the FCA recognises it will need better people.  Sadly, it is half baked on the topic too.  It says it needs to create careers for its people and it is doing this by improving training.  Yes, but training people only makes them better qualified to do a better paid job in the industry.  They will have to try harder than that.  Especially since more of their work will be done in contact centres in future.  This looks suspiciously like dumbing down.  First, the FCA will have to decide whether it can provide careers at all, or whether it is a stepping stone in a CV for those on their way up, or on their way down. The people on their way down may be more valuable than the FSA supposes.  The paper envisages a whole new division devoted to forward looking work to spot problems below the horizon.  They need not bother.  Buy a few old timers a drink and they will tell you what needs nipping in the bud (assuming one wouldn’t be a shadow director nipping things in the bud).  Too many people were screaming in the FSA’s ear that PPI was going to be a scandal for them not to have heard.  It is a sadness that of the six years it has taken to bring RDR on stream the practitioner working groups had but six weeks to come up with ideas.  The FCA need to develop sounding boards and GCHQ type radar to hear the signature signals of trouble looming up. The new division may not be entirely without merit.  The paper says that the FCA will take behavioural economics much more into account.  Too late for the RDR but if it really does the root cause analysis promised it might find some insights that lead it to more nuanced policies. And one final thought.  The proto FCA has put its head above the parapet.  Where is the PRA equivalent.  Could it be that Mervyn King’s scant regard for transparency and oversight means he has no intention of stating how the PRA will go about its work? Yours sincerely The Regulatory Consulting Team