1. Cash, markets and savings
The financial industry divides into: 1) cash, 2) markets, 3) savings. Cash is the business of banks. Markets are "financial markets and exchanges" such as the London Stock Exchange. Savings are held by life assurance companies, building societies, fund management companies. Banks are concerned with liquidity and financial stability. London as a financial centre and talk of "light touch regulation" x relates mainly to markets, which on the contrary seem to benefit from instability:
"Volatile market conditions contributed to very strong trading across the equity order books of the London Stock Exchange Group during September. £302.8 billion (€383.1 billion) worth of equity trading was carried out during the month, an increase of 24 per cent on September 2007." x
The first "objective" in the Financial Services and Markets Act (2000) is "market confidence". But "confidence" relates more to cash than markets. People need to be confident they will not lose cash deposited in banks and building societies.
Regulation should be concerned with maintaining liquidity, efficient markets and protecting savings. But there is nothing about looking after savings in the FSA's "Principles of good regulation" x or "What we do":
Promoting efficient, orderly and fair markets; Helping retail consumers achieve a fair deal; and Improving our business capability and effectiveness x
The FSA seems to be clearer about what does not do, as listed in the Appendix below.
2. DistractionsThe first duty of a regulator of the financial industry should be the protection of savings. Not from stock market fluctuations, but for example from excessive charges and incompetence. The Financial Services and Markets Act (2000) introduces all sorts of distractions pointing the FSA away from protecting savings, such as "objectives" as in:
"We supervise firms according to the risks they present to our statutory objectives." x
Clearer would be:
"We supervise firms according to the risks they present to personal saving."
Some distractions are:
1. Markets.
The Treasury seems to be focussed
on markets. It says:
And the Act has a market focus such as the first "market confidence" objective. An article in the Financial Times says:"1.3 The purpose of financial regulation is to make financial markets work better, more efficiently, more fairly, and to avoid financial instability." x
"The problem is that prudential supervision - the raison d'etre of any regulatoy body - has become a secondary consideration. All the glamour is in markets and and securities regulations, and public policy." (Financial Times, 18/19 October 2008, The Lex Column, page 28)
2. "Consumers"
Instead of protecting savings the Act refers to "the protection of consumers". What does this mean? The Act says:
"5 The protection of consumers
(1) The protection of consumers objective is: securing the appropriate degree of protection for consumers."
Which is a tautology. Much of the website of the FSA is concerned with "helping consumers" x to do "deals": "Help retail consumers achieve a fair deal". x
3. "General duties"
The Act gives the FSA various "general duties" and "objectives" rather than simply "duties". The protection of savings is not a "general duty" or "objective". The general duties include "facilitating competition" and "facilitating innovation".
3. "Not a product regulator"
Savings are harmed by inferior and dangerous "products". But the FSA says: "The FSA is not a product regulator except in certain circunmstances ". x These "circumstances" are collective investment schemes such as unit trusts. The FSA could arguably regulate products if it wanted to. It could approve the wording of contracts. "Not a product regulator", "not a contract approval authority", x just seems an excuse to do nothing. The Sandler Review x stressed the importance of product regulation and recommended "substituting product regulation for the current regulation of advice" (10.13) But products are regulated to some extent, and the extent to which advice is regulated is debatable, such as:
"It’s worth remembering who was the author of the original regulatory farce, which saw 'tied' and 'multi-tied' agents masquerading as 'advisers', while shamelessly promoting inappropriate products to a bewildered audience, and trousering hefty commissions in the process. Step forward, the FSA." x
The income drawdown policies of Equitable Life are an example of "not a product regulator". They are discussed by Simon Bain in Whatever happen to princples, such as:
"The cases of 200 dissatisfied former Euitable clients, reported that every single one had featured lack of information and misrepresentation at point of sale. Alan Steel was convinced that for virtually all of these clients, doing nothing or taking a phased retirement plan had been the best advice." x
A contributor to a discussion board said:
4. "Economically and politically powerful""The FSA has wriggled into every possible dimension in order to avoid coming to the conclusion that the product was, in itself, unsuitable for its target market. Can it be that Equitable is far from being unique in offering such products?" x
The latest (October 2008) manifestion of the credit crisis is the collapse of the UK branches of Icelandic banks. Does the FSA supervise Icesave? The Icesave website says:
"Authorised by Fjármálaeftirlitið (The Financial Supervisory Authority, Iceland) and the UK Financial Services Authority and is Regulated by the Financial Services Authority for the conduct of UK business:" x
But this does not specify who is the prudential supervisor, only conduct of business. Icesave was "passported" into the UK:
"Some banks had been allowed to open branches in the UK through a process known as 'passporting,' which meant they were not regulated by the FSA, explained Lord Davies." x
Prudential supervision is the responsibility of Iceland. There is an article Central bank governor says his warnings were ignored suggesting that Iceland has a light-touch approach to regulation::
".. the growing belief that Iceland's banks had become so economically and politically powerful that they could disregard central bank guidance." (24th October 2008, page 7)
The crisis was caused by securitised mortgages:
"Speculators and banks speculated, and lost, and now the American taxpayer is stuck with the bill." x
They were criticised back in 1989, in the best selling book Liar's Pocker by Michael Lewis (1989):
"After the first CMO, the young turks of mortgage research and trading found a seemingly limitless number of ways to slice and dice home mortgages." (page 163)
A letter in the Financial Times Negative power of political donations says:
"Legislation has been repeatedly brought before Congress over the past eight years that would have reined in the predatory lending practices of the banks, but was voted down as the result of substantial donations to both parties." (21 st October 2008)
That is the industry is too "economically and politically powerful" to be regulated properly.
Of course the purchase of securitised mortgages by government is a high risk approach to solving the credit crisis. Another risky approach is for government to buy the shares of banks. x
Appendix
"The FSA is .. "
What is the FSA? This is explained on its website:
"The FSA is a principles-based regulator." x
"The FSA is a risk-based regulator." x
"The FSA is a company limited by guarantee." x
"The FSA is not a product regulator except in certain circumstances." x
"The FSA is not a 'contract approval authority'." x
"The FSA is not an enforcement-led regulator." x
"The FSA is not an economic regulator." x
"The FSA is not an investment manager." x
"The FSA is not a statutory prosecutor." x
"The FSA is not a guarantee of the safety of a firm or product." x
"The FSA is not a competition authority." x
"The FSA is not a government body." x
"The FSA is not a law enforcement agency." x
October 2008