Pushing Laxity
From Crisis to Confidence: ^x
Plan for Sound Banking
comments by
Stephen Wynn

Acronym = name (suggested name):
CPA = Consumer Protection Agency (Personal Finances Protection Division)
FPC = Financial Policy Committee (Savings Protection Committee)
FRD = Financial Regulation Division (Savings Protection Division)
FSC = Financial Stability Committee
FSMA = Financial Services and Markets Act (2000)
MPC = Monetary Policy Committee

1. Introduction

This Conservative Party policy White Paper says:

This paper sets out the Conservative plan for sound banking that will lead the British economy from crisis to confidence.

But it has a plan for the entire industry regulated by the FSA, not just banks:

What is needed is a root and branch change in financial regulation in the UK in comparison to the way it was conducted prior to 2007.

Although it has headings Part 1: What Went Wrong and Regulatory Failure, it does not mention non-bank regulatory disasters such as the "regulation-free zone" ^x Equitable Life, which resulted from a failure to challenge Equitable management, as discussed in a debate in Parliament in 2008:

The failings found by Lord Penrose flow through to the ombudsman’s findings. She found 10 counts of maladministration. They included the regulator’s failure to challenge the fact that the same person occupied the roles of chief executive and appointed actuary, the lack of effective scrutiny by the GAD and the fact that the FSA failed to act on behalf of the Treasury from 1998, both before and after the House of Lords decision.

There can be no doubt that if the regulators had performed their role properly during that period, they would have protected policyholders from a management team that put the society and its members at risk. The regulators repeatedly failed to use the information they had to challenge Equitable’s management, and each time they failed to challenge management was an opportunity missed. ^x

Lord Penrose wrote:

There was a general failure on the part of regulators and GAD to mount effective challenge of the management. ^x

But the regulation of insurance companies seems to be an afterthought in the White Paper. "Insurance companies" are mentioned only four times always preceded by "including", and there is no mention of "policyholder", "saver" ("savers" is mentioned once), or "salesforce". The regulation of insurance companies is conflated with the regulation of banks:

The Bank will also be responsible for the micro-prudential regulation of all banks, building societies and other significant institutions, including insurance companies.

Further scandals are: personal pensions mis-selling, mortgage endowments, split capital investment trusts, high income bonds, structured products: ^x

"Poor investment performance" is an understatement when someone invests £200,000 in a product advertised as 100 per cent capital secure and then wakes up some weeks later to find that their investment is worth precisely zero. But "poor investment performance" is the phrase that the Treasury likes to use in this case. .. How could it have allowed financial advisers to market products as "100 per cent secure" and "100 per cent guaranteed" when there was obviously an inherent risk? ^x

Perhaps with this scandal in mind, the White Paper says the CPA will "look at product suitability", which is encouraging. And of course there are the bank bailouts. Banks have been challenged to "come clean":

The prime minister has demanded that banks admit how many "toxic assets" they have on their balance sheets. ^x

The financial crisis is said to have been caused by bank deregulation as the result of lobbying. ^x

2. "Powerful" and "Strong"?

The White Paper says the new regulator will be "powerful" and "strong" (mentioned 27 times). But its proposals are designed to make it weak and feeble. They are "pushing laxity": ^x

1. Insurance companies are not regulated by the CPA, which therefore does not regulate their conduct of business. "Salesforce" is not mentioned.

2. Under the heading Financial Crime, there is no mention of the FRD.

3. The FPC has "independent members", who will probably be from the industry.

4. Consumer representatives are not recommended on the FPC.

5. They are only a small minority on the Board of the CPA.

6. The FPC is weakened in its role to oversee the FRD, by being given other tasks such as monitoring systemic risks and maintaining financial stability; and by overlapping with the MPC (diagram on page 5 and 24) and apparently also the FSC.

7. Only the Deputy Governor for Financial Regulation on the FPC is specifically concerned with financial regulation, rather than the entire committee. The external members and Deputy Governor for Financial Stability are concerned with maintaining financial stability.

8. There is "the protection of": "consumers" and "depositors", rather than savings and deposits.

9. There is a focus on banks. "Bank" is mentioned 424 times, "insurance companies" 4 times. "Fund management company/ies" is never mentioned.

George Osborne is reported to have said:

The fact that people in the City give us money, even though we are promising tougher regulation, is a sign that many people in the City understand that there needs to be change. ^x

They want the industry to stay in the driving seat, which the FT Adviser describes as more of the same in the name of consumers. ^x Plus ça change, plus c'est la même chose. ^x

3. "Delivered by the private sector"

The personal accounts scheme is a self-perpetuating oligarchy ^x "being delivered by the private sector". David Taylor MP said:

the idea of it being delivered by the private sector will make people nervous. And he warned given the track record of the private sector, he does not feel it is the "natural area of society or the economy" to give responsibility for delivering such an important system, ^x

The industry is currently, and is likely to remain, in the driving seat. The Conservative Party proposals for a reform of the regulatory system have the same problem. It is also "being delivered by the private sector". It is based on a report by Sir James Sassoon, ^x a former Vice Chairman of UBS Warburg, and industry champion, "the Treasury’s Special Representative for Promotion of the City". ^x This is a recipe for more light-touch regulation and failure to challenge the industry.

Governments should govern rather than offload political problems onto the private sector in this way. The report of the Pensions Commission also seems to be "delivered by the private sector", which is to be expected since the Chairman, Lord Turner is a former Vice President of Merrill Lynch and director of Paternoster. For example it is over-enthusiastic about annuities. The Second Report mentions "annuity" ("annuities", "annuitisation") 250 times, "drawdown" only 13 times. On page 384 it says:

Guidance to individuals approaching retirement with NPSS funds should set out the advantages in principle of price-indexed annuities. .. But individuals should be free to decide if they wish to purchase non-index linked annuities. The argument in favour of the former approach is that it could deliver better value for customers. The arguments for the latter are that: (i) the annuity market is fairly efficient and transparently priced;

This is contrary to the report of PADA Securing a retirement income:

value for money of escalating annuities is worse than that of level annuities (footnote 43) ^x

The government is continually going cap-in-hand to the industry to advise it how to solve problems, which of course produces a solution which tends to favour the industry, whilst claiming to be "fair", "transparent", "accountable" etc, and taking into account "macro", "systemic" and "global" considerations, and also the need not "to undermine the prospects of an internationally successful financial services industry based in London".

4. "We ended self regulation"

The Chancellor, Alistair Darling said:

We ended self regulation eleven years ago and put in place a different system of regulation. ^x

But the White Paper says:

There is no consumer representation on the existing FSA Board. Ten of the twelve members are currently, or have previously been employed in the financial services industries. This may have diminished the regulator’s understanding of consumers and willingness to challenge the industry.

This is "revolving door politics". ^x There are announcements on the Treasury's website, such as in 2008:

All members serve in a personal capacity but bring particular experience to the Board's deliberations. Ms Black, Mrs Nott and Dr Saggar are appointed as non-practitioners in the interests of the public. Mr Whitson brings banking experience. ^x

This implies that the other members are appointed in the interests of the industry. Otherwise what is the definition of "appointed in the interests of the public"? This refers to "the public" rather than "consumers". It does not seem to automatically follow that just because someone is "appointed in the interests of the public", they are knowledgeable about relevant financial topics. The White Paper does not recommend consumer representation on the FPC, except for the Chief Executive of the CPA, if he (or she) can be said to represent consumers. It is not clear that consumers will be in the CPA driving seat. EDM 1700 requests consumer representation on the board of the FSA:

That this House notes with concern the dominance of people with a financial services industry background on the board of the Financial Services Authority (FSA); .. urges the FSA to ensure that suitable consumer representation is reflected on the board as a matter of urgency. x

What is the definition of "suitable"? Just having a consumer representative on the board is inadequate. He or she would be out-voted by industry interests. The FPC will have "external expertise" meaning probably members "currently, or have previously been employed in the financial services industries":

The Financial Policy Committee will include independent members in order to bring external expertise to bear on the problem of maintaining financial stability.

If these Conservative Party proposals are implemented self-regulation will still not have ended. The industry will still be in the driving seat. The FPC needs to consist of people who have not previously worked at a senior level for the industry.. The FSA does not just "fail to challenge the industry":

The corollary of the unsustainable business models pursued by several British banks was aggressive marketing of risky and often unsuitable financial products. In part this resulted from the FSA’s failure to challenge the industry.

"This was permitted by the FSA, which failed to challenge the industry." seems clearer. The FSA actively helps the industry, to the disadvantage of savers, as discussed in my evidence to the Treasury Select Committee. ^x

5. Protecting savings

The White Paper has a heading The protection of retail depositors. What about for example charities? They are also depositors. Deposits, or the interests of depositors need protecting rather than only depositors. The industry regulator should be concerned with protecting savings. The FRD might be called the "Savings Protection Agency". But protecting savings is being buried under other roles such as "financial stability", which relates both to micro and macro-prudential regulation:

we will ensure that micro-prudential regulation is geared towards financial stability .. The FPC will operate a series of macro-prudential tools in order to reduce the risks to financial stability across the financial system.

"Geared towards" is vague. They seem to be focussing on financial stability because of the credit crunch/financial crisis. What is financial stability? Opinions seem to differ. ^x The White Paper does not give a definition, or indeed any definitions.

"Part 3: New regulatory tools to ensure financial stability" (referred to as "Section 3" on page 25) gives "a new 'toolkit' of policy instruments that work at both the micro (institutional) and macro (sector) level in order to ensure financial stability". This list includes for example: "Actively shape the intellectual debate on European and global regulation more proactively than is happening at present.", which surely cannot be describe as a "regulatory tool to ensure financial stability". The objectives of the FSA are being hived off onto the CPA as discussed below. They will apparently be replaced by "financial stability".

"The Government’s recent White Paper on financial regulation" is Reforming markets, ^x which only refers to "markets" in the title, just as the Conservative Party White Paper review to "banks". Which is a minimalist approach to titles, if not also to contents. The Government's White Paper mentions "insurance company" only once (in a definition on page 24) and also "insurance companies" only once (in a footnote on page 41). The Tripartite Review (2009) by Sir James Sassoon says:

The objectives of financial regulation have been defined as:

Safeguarding the system against systemic risk; protecting consumers against opportunistic behaviour by suppliers of financial services; enhancing the efficiency of the financial system; and achieving a range of social objectives [using the financial system to achieve social/political objectives such as supporting the housing market]. ^x

The White Paper has a heading The failure of prudential supervision. There has been a failure to protect savings, as in the case of Equitable Life. Protecting savings is a more general concept than prudential supervision. Prudential supervision is "depositors are protected by the institution in question being financially sound". Protecting savings implies protecting deposits rather than depositors, even if the institution goes out of business, and all kinds of savings, not just deposits.

"Consumer protection" sounds like a job for bodyguards, and "Consumer Protection Agency" like a protection racket exploiting consumers. The terms "consumers" and "regulation" are vague. Even the Consumers' Association is less enthusiastic about "consumers". It has changed its name to "Which?". x A financial regulator should be concerned with protecting the finances of the public:

What needs protecting by the financial regulator	From what?
individuals/the public	worry and time-wasting about personal finances
personal finances	mis-selling, excessive debt, crime
savings	incompetence, recklessness, greed, of the industry; crime
the taxpayer	the cost of bank bailouts

Most financial instability comes from abroad. There need to be global solutions to global problems. That is solutions which are "internationally coordinated":

A Conservative Government will:

Develop an internationally coordinated macro-prudential toolkit that can be operated by the Financial Policy Committee to control systemic risks at a sector or economy wide level.

There have already been so many international meetings and conferences such as G20, ^x it seems surprising that such a "macro-prudential toolkit" has not yet been developed. This seems a job for the Financial Stability Board. Global instability is unimportant provided savings are protected, and the UK taxpayer does not have to fund bank bailouts. This is "meeting the challenge of global markets".

The FRD should be split into two for: 1) banks, building societies; 2) insurance companies, fund management companies. This is a division corresponding to what is being protected. 1) includes taxpayers.

6. "Consumer protection"

An example of vague terminology, is describing "fund management companies" as "fund managers", so it is unclear whether this is referring to companies or people. Another example is "consumer protection". There is a definition of "consumers" in the FSMA.

138 (7) “Consumers” means persons—

(a) who use, have used, or are or may be contemplating using, any of the services provided by—

(i) authorised persons in carrying on regulated activities; or

(ii) persons acting as appointed representatives; ..

So that according to the FSMA a fund manager using the services of a stockbroker is a "consumer". The FSA and White Paper likes to describe everyone as "consumers". That is "consumers of financial products and services".^x Describing "consuming investment products" as "investing" seems contradictory. In the White Paper the number of mentions of "consumer(s)" is 170, "individuals" 8, "investor(s)" 9, "people" 9, "saver(s)" 1, "The protection of consumers" is a confusing expression. What does it mean? Does this mean only retail consumers? What about for example charities and local. authorities? "Consumer Protection Agency" is vague, in comparison to "Personal Finances Protection Division".

The White Paper mentions "consumer protection" 45 times and has a heading:

The FSMA explains:

The protection of consumers
5 (1) The protection of consumers objective is: securing the appropriate degree of protection for consumers.

which is a tautology. This is a change from "the protection of investors", in the Financial Services Act (1986). "Personal finances" or "the public" seem preferable to "consumers". The FSA has "Strategic Aims":

Promoting efficient, orderly and fair markets;

Helping retail consumers achieve a fair deal; and

Improving our business capability and effectiveness ^x

Where did these "aims" come from? They seem to be an FSA interpretation of "the protection of consumers". They are not in the FSMA, which specifies "general duties" and "objectives". ^x The FSA is involved with political topics, such as its "aims" and "principles", ^x and what is "socially useful". ^x Lord Turner, Chairman of the FSA and FSC, ^x is reported in the Financial Times to have said: "I am happy to consider taxes on financial transactions." (28/8/9, page 3). ^x

7. The Financial Regulation Division - "a mixture"

The FRD will be largely staffed, and entirely financed, by the industry:

However, experienced regulators are highly sought after in the private sector, therefore we will also ensure that the Bank has sufficient resources to offer salaries that are sufficient to recruit and retain high-quality regulators. This will mean increasing the industry levy, which will continue to cover the cost of financial regulation under the new arrangements.

We will also increase the expertise at the Bank by requiring regulated firms to participate in a secondment programme. This type of secondment scheme has been extremely successful at the Takeover Panel, and will help to bring more market experience to bear on the task of regulation.

This will promote self-regulation. The Takeover Panel is described as:

One of the most well-known and arguably successful examples of self-regulation in the UK. ^x

The Executive is staffed by a mixture of employees and secondees from law firms, accountancy firms, corporate brokers, investments banks and other organisations. It is headed by the Director General, usually an investment banker on secondment. ^x

So the FRD will be "a mixture" of employees and secondments. The FSA says in Practitioner involvement:

The industry needs to be prepared to second, and to make available, its best people. .. They should act as independent individuals, not representatives. ^x

It seems unlikely that these "best people", appointed by the industry, will "act as independent individuals". The FRD should be staffed by career civil servants.

Why does the White Paper mention the secondment program of the Takeover Panel, rather than that of the FSA? Because, since the FSA is being abolished, this would suggest the questions: Which aspects of the FSA are being abolished? Is it really being abolished - or just renamed?

In addition to its secondment program, the FSA has two-way recruitment with the private sector. For example, John Tiner left Arthur Andersen shortly before it was broken up in 2002, joining the FSA in 2001. ^{x x} He left the FSA in 2007, and now works for Resolution.

NOBODY should underestimate John Tiner’s role when he was chief executive of the Financial Services Authority (FSA) in helping Clive Cowdery launch his acquisition spree on closed life funds. .. So what better way for Cowdery to show his appreciation than asking Tiner to become chief executive of his resurrected acquisition vehicle which is again called Resolution. ^x

Allowing the regulator, that is the FSA, to be entirely financed by the industry has been a false economy. The FSA fees for 2008/9 were £324.4 million. ^x The White Paper gives an IMF estimate of the eventual cost of the bank bailouts - "over £130 billion". This is the cost of the failure to challenge the industry. The regulator should be financed by a special tax on savings, so that savings pay for their own protection. The FSA says:

We are financed by fees levied from the firms, large and small, that fall within our remit. ^x

He who pays the piper (with someone else's money) calls the tune. Savers actually pay for the regulator by "regulatory fees", which can be seen for example in the accounts of unit trusts. For this reason a tax on savings would be preferable to "fees levied from firms" to pay for the FRD and CPA. Asking the industry to finance the CPA seems invidious.

The FRD regulates both: 1) banks, building societies; 2) insurance companies, fund management companies. Only the former are concerned with financial stability and require government guarantees. The regulator of insurance companies should not be concerned with financial stability, the special resolution regime or macro-prudential regulation, which relate to banks. The FRD and FPC should be split into two. So that only one half is concerned with these topics.

8. The Consumer Protection Agency - "a genuine consumer champion"?

The White Paper says:

the Bank in charge of prudential regulation and the CPA in charge of consumer focused issues

So the CPA is a City Protection Agency, protecting the City from "consumer issues". If a "consumer" goes to the Bank of England which regulates: banks, building societies, insurance companies and fund management companies; with a concern about the behaviour of one or more of these companies, it can say: "None of our business, you need to go to the CPA." The White Paper says the CPA will have:

A strong consumer focus

We will give the CPA a mandate to act as a genuine consumer champion .. the CPA will be a far more consumer- orientated, transparent and focused body than the FSA.

If the CPA really is "a genuine consumer champion", even though it is financed by the industry, how will this manifest itself? Will it issue press releases, publish articles, lobby MPs, hold public meetings? The Chief Executive of the CPA will sit on the Financial Policy Committee - where he will be out-voted by industry interests. This seems a recipe for public arguments between the CPA and the Bank of England, which regulates the industry. The CPA trying to persuade the Bank to be more consumer friendly.

The FSA describes itself as a "consumers champion" (endorsed by the Consumers' Association ^x) and "transparent organisation". ^x Why will the CPA be a more genuine consumer champion than the FSA? How is the FSA orientated? A consumer-orientation was promised when the FSA was set up. It was welcomed by the Consumers' Association. The White Paper proposes:

"The CPA will .. take on the responsibility for consumer credit regulation that currently lies with the Office of Fair Trading.

By consolidating licensing requirements into one body it will also reduce the burden on firms."

Is this argument valid? The FSA is being divided into two bodies the FDR and CPA. The White Paper does not apologise for increasing the burden on firms because there will be two bodies rather than one.

Personal finances should be protected whether "consumers are treated fairly" or not. Warnings about investment scams is protecting personal finances rather than "standing up for consumers". Perhaps people should not actually be consumers. By the time they are consumers it is too late. There are many Equitable life policyholders who regret becoming policyholders. They needed someone to advise them not to become policyholders. The public needs protecting in the first instance rather than consumers.

We will abolish the Financial Services Authority, and will create instead a strong new Consumer Protection Agency. .. Consumer regulation, like prudential regulation, requires regulatory judgements.

The CPA does not seem to be "strong" or "powerful". ^x "Agency" sounds weak in comparison to "Division". The White Paper describes the CPA as a "regulator". But it will not have much scope for "regulatory judgements", because the only organisations it regulates are: IFAs, insurance and mortgage brokers:

Although Independent Financial Advisers and other small firms such as insurance and mortgage brokers are an important part of our financial services market their regulation is not mainly concerned with prudential judgement. These firms must be regulated but their supervision is primarily concerned with protecting consumers. Therefore they will be overseen by the CPA.

The direct salesforce is missing. There is no reference to "salesforce". The conduct of business for the salesforce of insurance companies will be regulated by the FRD. So the CPA does not even regulate all conduct of business.

Consumer representation on the Board of the CPA seems feeble:

We will require that the CPA’s Board always contains at least two members who are specifically appointed to ensure that the consumer perspective is fed into the whole of the Board’s policies.

Does this imply that at least two members come from the National Consumer Council (now Consumer Focus ^x ), like Deirdre Hutton who was on the board of the FSA? No doubt the other members will be feeding in the industry perspective. Should not the entire Board have a "consumer perspective"?

The public needs helping in the first instance rather than "protecting". Especially to avoid getting into debt. Under "What we do" on the website of the FSA we find: "Helping retail consumers achieve a fair deal", ^x which refers to "helping" rather than protecting. Though this seems to be sales promotion, because perhaps someone should be advised to do nothing. The FSA is pro-deals. (At least it was before the 2009 Mansion House speech of Lord Turner: "not all trading plays a useful role". ^x) How does allowing salesmen to describe themselves as "advisers" help "achieve a fair deal"? ^x Or for example, allowing banks to rip off the elderly? ^x

"Having submitted Fairchild and Madoff to our comprehensive Due Diligence program, we concluded that this fund was an attractive opportunity for our clients." ^x

The White Paper is apparently proposing that the CPA is a quango. It should arguably either be part of the Bank of England or come under the OFT. "Trading Standards Officers enforce the law and regulations that govern goods and services which we all buy, hire or sell." But not financial products, although they are referred to as "consumer goods" on the website of the FSA. ^x

A "Consumer Financial Protection Agency" is being set up in the US: "to look out for the financial interests of ordinary Americans". ^x How can it do so if it does not regulate insurance companies ^x and fund management companies? It seems to be intended to do work, such as reforming credit cards, which should be done by the bank regulators.

Housing the Consumer Financial Protection Agency at the Federal Reserve Would Be a Grave Mistake ^x
The Federal Reserve shouldn't be allowed to regulate the banks. ^x

9. The Financial Stability Committee

The White Paper points out, that the FSC was established in the 2009 Banking Act, although it describes the FSC as only "proposed" in: "The Government’s proposed Financial Stability Committee" (page 20). "The Banking Act received Royal Assent on 12 February 2009", ^x when the FSC became forthcoming rather than "proposed". It now exists ^x and the White Paper does not apparently propose that it should be abolished.

The FPC is described as "working alongside" the MPC, but the diagram on page 5 and 24 shows them overlapping, rather than "alongside". Which aspects of these committee are overlapping? This diagram does not contain the FSC, although:

The Financial Policy Committee will include independent members in order to bring external expertise to bear on the problem of maintaining financial stability.

Should these people not work for the FSC rather than the FPC? There is a "Deputy Governor for Financial Stability", who is on the MPC and FPC, but the FSC seems to have faded away.

10. The Financial Policy Committee

The Board of the CPA is concerned with the CPA. But the FRD does not have a Board. It has to make do with the Deputy Governor for Financial Regulation on the FPC. The FRD should be overseen by a "Financial Regulation Committee" rather than a "Financial Policy Committee". "Policy" is vague. It is a red herring in the direction of light-touch regulation.

The external members of the FPC is a recipe for infiltration by the industry. William Buiter ^x wrote:

"The FSC does not need people who currently make a living in these markets or in these financial institutions. They are the ones that screwed it up." ^x

That should be "currently or formerly made a living in these markets or in these financial institutions". This also applies to the FPC. The people concerned with overseeing the regulation of 2) insurance companies and fund management companies, should consist of experienced investors, who have not (like Sir James Sassoon) worked at a senior level for the financial industry.

11. Objectives

The first objective of the FSA 1) "market confidence", is not even mentioned in the White Paper. The FSMA says:

3 Market confidence
(1) The market confidence objective is: maintaining confidence in the financial system.

Lord Turner, Chairman of the FSA, therefore has the statutory duty to be a cheerleader for the industry, ^x instead of saying:

It is not my job as Chairman of the financial regulator to be the industry’s cheerleader. ^x Not all parts of the financial system need fixing, ^x But not everything that a financial system does is socially useful, ^x

He also does not like the statutory duty of the FSA to "facilitate innovation":

2 (3) In discharging its general functions the Authority must have regard to —
(d) the desirability of facilitating innovation in connection with regulated activities;

We need radical change. .. not all financial innovation is valuable, .. it was almost part of our DNA – that we assumed that financial innovation was always beneficial, .. ^{x x}

To say "not all financial innovation is valuable" is more of a U-turn in policy than a "radical change". (This is not his only U-turn. ^x) Does he like any of the FSMA? Perhaps he thinks "not all parts need fixing". The regulatory system is mainly determined by the FSMA. So that "radical change" is only possible with a new Act, and a call for "radical change" is a criticism of the Act. It is surely his job as Chairman of the FSA to administer the Act, rather than say he does not like it, and call for a new one. An article in the Times When bamboozling spins out of control (2009) says:

A financial plumbing system that should be as small as possible, simply channelling money from savers to borrowers as cheaply and unobtrusively as possible, has instead transformed and furred up into a vast, Byzantine system of gold-plated pipes and valves of ludicrous complexity.

Most of the so-called financial innovation claimed by the banks is designed not to give a better or cheaper service to clients but simply to bamboozle them more effectively. ^x

The next two objectives will be taken over by the CPA. ^x

Another important aspect of the CPA’s remit will be promoting 2) public understanding of the financial system (currently one of the FSA’s statutory objectives)

The CPA will inherit the FSA’s responsibilities for 3) consumer protection. ^x

Under the heading 4) Financial Crime the CPA is mentioned, but not the FRD:

We will ask the CPA to review its capacity to bring prosecutions and will ensure that the regulator has all the powers it needs to pursue criminal cases. We will also look at the case for a single regulator to tackle financial crime.

We believe that in order to provide a credible deterrence to firms the CPA should impose fines that are significantly larger than those that have historically been levied by the FSA.

What about the FRD? The White Paper does not say it will also "impose fines". Responsibilities are being given to the CPA which only regulates IFAs, insurance and mortgage brokers.

12. Paying attention

People should be encouraged to be private shareholders rather than "consumers of investment products". ^x But being a shareholder requires paying attention from time to time, and unfortunately can cause worry. The FSA encourages "consumers" to pay attention, "shop around" ^x and do "deals". ^x It "helps consumers to become capable and confident", ^x and "achieve a fair deal". It is constantly trying to turn "consumers" into investors. It issues "consumer alerts" ^x provides "consumer information" ^x to promote "consumer awareness" ^x and "consumer education". ^x It should not permit the industry to take advantage of people who are not "capable and confident", "alert", "aware", "educated" or "informed", by allowing poor deals.

Those people who like to pay attention to financial topics can be investors and buy shares. The first duty of the regulator should be to look after savings, rather than "developing capable and confident consumers" ^x and "maximise choice", ^x which require people to pay attention. The FSA does not pay attention itself:

the FSA concentrated on its responsibility for conduct-of-business supervision (concerned mainly with consumer protection) and did not pay full attention to micro-prudential supervision (the solvency and sustainability of individual banks)

As Lord Turner has said, 'we focused too much on the conduct of business and not enough on prudential'."

But for example, the Treasury Select Committee said to the chairman of the FSA, Sir Howard Davies: "You failed as a conduct of business regulator, did you not?". ^x There has been a pan-regulatory failure, not just banks, not just prudential supervision, and not just systemic risk:

This crisis revealed weaknesses across all dimensions of the financial system, all of which will need to be addressed.

Force banks to be more transparent about their retail consumer charges. Effective competition relies on consumers being able to make informed choices. Increasing transparency on charges will help consumers compare products.

Why only retail consumer charges? What about other kinds of consumer? This is the only reference to "retail consumer" in the White Paper, though "consumer" always seems to mean "retail consumer".

The regulator should oblige banks to reduce charges where necessary. The FSA has allowed banks to make excessive charges for overdrafts, and compounded this error by giving banks a waver:

When the court case was announced last August, the Financial Services Authority (FSA), the City regulator, issued a waiver which meant that banks and building societies did not have to settle any more complaints until after the judicial ruling. The Financial Ombudsman Service has also stopped investigating claims for bank charges.

This decision has been widely criticised by consumer groups because while customers have had their cases put on hold, the banks are still levying the fees." ^x

Reducing charges protects savings in the first instance, rather than consumers. Such as "banning excessive interest rates on store cards" proposed in the White Paper. This is more effective than relying on competition "based on a comparison of competing products" to lower these interest rates.

13. Levels

A letter from a Treasury minister. Melanie Johnson MP, says:

Legislation establishes the FSA as a powerful regulator that is independent of the industry as well as of the Government. (16th December 2000)

This implies the FSA is a loose cannon. Statements can be right or wrong according to the level. Going to the next level, on the website of the FSA it says: "It is operationally independent of Government", rather than just "independent". ^x The letter continues:

Mr Wynn claims that the FSA is controlled by the industry. I am sorry he has come to this view, which I refute entirely.

At the highest level it is controlled by the Treasury. It is answerable to the Treasury. But it is controlled by the industry at the next level. At the highest level, a structured bond may be sold as "guaranteed". The next level asks: who by? The Lehman Brothers guarantee was worthless. Stakeholder pensions are described as "low cost", but at the next level they have "high charges". The White Paper Personal Accounts: a new way to save refers to: "the relatively high charges associated with pension products" (1.3). ^x Firms may be described as "regulated by the FSA". But at the next level activities are "regulated". Firms are only "authorised". ^x

14. "The most important flaw"

The White Paper describes many "failures" ("failure" in mentioned 48 times) in the regulatory system:

Given the size of the numbers involved we should never forget that this has been a public policy failure of historic proportions.

failure of coordination between the three tripartite authorities and a lack of effective procedures for dealing with failing banks.

The failures in the banking system exposed numerous failures in corporate governance

These macroeconomic and financial developments were combined with a massive failure of regulation. The regulatory framework failed to ensure that banks had enough capital ..

The biggest failures of the British regulatory system stemmed from a fundamental misunderstanding of the deep links between macroeconomic policy and financial stability.

The most important flaw in the British regulatory system was that nobody was responsible for putting together all the different warning signals and acting on them.

The most important flaw is regulatory capture ^x - the regulators controlled by and acting for the industry. ^x There is according to Harry Markopolos, author of No one would listen (2010), ^x the same problem in the US. He describes the SEC as "captive to the industry it regulates". ^{x x x}

"Regulatory failure" over the years has resulted in endless reorganisations: "new regimes", "new approaches", "new powers", "new reforms, "new principles" and so on, ^x without solving this underlying problem. And Lord Turner wants further changes:

We need radical change. Regulators must design radically changed regulations and supervisory approaches, but we also need to challenge our entire past philosophy of regulation. .. We have had to change that mindset and we have now done so. .. This reform programme amounts to a radical change in direction. .. But if regulators need to change and face complex challenges, so too do bankers .. ^x

Regulatory capture continued with the FSMA, and excessive influence of the industry such as: Study reveals true extent of 'old boys network' between Government and banks ? ^x How can savers and investors have more influence?

The White Paper says: "The international context of the crisis is now widely understood." So is the London context. AIG Financial Products is widely described as the "epicentre" or "ground zero" of the credit crunch. ^x It is part of the London branch of Banque AIG which was authorised, but not properly regulated by, the FSA. Although Gordon Brown said:

To meet the challenge of global markets we created a single unified FSA. ^x

15. General confusion

The White Paper describes the regulation of banks as "confused":