Passing Money into the Future
l. General problems with this consultation
This legislation is intended to create a regulator which protects the industry, while claiming to
be neutral between the industry and consumers ("advances the interests of all users and participants"). "The overwhelming majority of respondents"
are from the industry.
a) The first sentence
George Osborne says in the Foreword:
Over the past few years, a clear consensus has emerged that the shortcomings of the "tripartite" model of financial regulation were a significant factor in the UK's failure to predict, or adequately respond to, the financial crisis that started in 2007.
What are these shortcomings? The White Paper says:
Perhaps the most significant failing is that no single institution had responsibility, authority or powers to oversee the financial system as a whole.
The most significant failing was the FSA not doing its job, because of regulatory capture. It is in effect, controlled by the industry.
The UK was responding to the credit crunch. This developed into
a crisis especially because Northern Rock, RBS, HBOS, Bradford & Bingley,
Kaupthing Singer & Friedlander became bankrupt/insolvent. The FSA was not
doing its job to regulate them properly. Had it done so then the Tripartite model
would have worked. We need a model which requires the regulators to actually regulate.
b) Not consulting on the main issues
There does not seem to be consultation on the main issues, such as whether the
twin peaks system should be reintroduced.
c) Wrong focus
There should be a focus on protecting personal finances, especially savings. There is
instead a focus on "persons", "consumers", "the financial system" and various further abstractions.
The FCA should ensure that business is conducted in a way that is not harmful
for savings and investments, rather than in a way that
"advances the interests of all users and participants".
d) Conflation
The industry divides into a) paying bills - banks, b) investing - markets, c) saving.
The regulator should be divided accordingly, but instead the PRA regulates "banks, insurers and complex investment firms". So the regulation of insurers is
muddled with the regulation of banks, that is muddling a) with c).
.. creation of the FCA as an authority with the remit and capability to specialise in protecting consumers ... The FCA will fulfil this role for all consumers of financial services, from retail savers to the largest institutional investors.
This is muddling b) with c).
Different kinds of consumer are also conflated.
e) Too many abstractions
Such as, counting words: "stability" 211, "conduct" 204, "competition" 148 , "consumer protection" 34. The FPC and PRA will have "responsibility for
financial stability". But this would not have prevented the credit crunch, which
developed in the US, especially with the bankrupcy of Lehman Brothers. The White Paper
does not mention "credit crunch" or "credit squeeze", which turned into a crisis because banks were not properly regulated.
f) Vagueness
"Consumer protection", "conduct regulation", "stability",
"objectives" are vague expressions.
The latter are goals which may not be achieved. The word "objective/s" is mentioned 353 times
in the White Paper and not at all in the Financial Services Act (1986).
What does "judgement-based/led" mean?
We had "principles-based regulation" and "risk-based regulation", and
now have "judgement-based regulation". Who are "consumer groups"?
g) Too complicated
The White Paper says the Bank, FPC, PRA, FCA "have resposibility for", "promote" or "enhance": "stability", "confidence",
"safety", "soundness", "integrity", "competition", "choice", "efficiency", "resilience" in:
"the UK financial system", "firms", "financial services", "markets" etc. This is too complicated.
The regulator should have the duty to protect savings and more generally personal
finances from harm, and get on with the job. What actually happens depends on who is in charge.
h) Confusion
The exact difference between the PRA and FCA seems confusing.
The PRA will apparently have the same relationship to the Bank as the FCA
has to the Treasury. It will be "an operationally independent subsidiary of the Bank" and "a limited
company formed under the Companies Act 2006". How will the PRA be more
of a "subsidiary" than the FCA or FSA?
The
FCA has a "consumer protection objective". The PRA has an "insurance objective" which is a policyholder protection objective:
The PRA's insurance objective is: contributing to the securing of an appropriate degree of protection for those who are or may become policyholders.
Why stop at policyholders? What about depositors
and unitholders in banks and complex investment firms regulated by the PRA?
Of course policies, deposits and units need protecting rather than
policyholders, depositors and unitholders. The regulators should have the duty to protect savings, and more generally personal finances from harm.
The PRA has a "general objective" and FCA a "strategic objective".
2. Protecting the industry
The PRA's general objective is: promoting the safety and soundness of PRA-authorised persons.
The first duty of the regulator should be to help people pass money into the future. Personal finances should be protected by the regulators in the first instance especially savings, rather than "persons" or "consumers". "Consumer protection" has a sales orientation.
The FCA's strategic objective is: protecting and enhancing confidence in the UK financial system.
It is the job of a trade association to promote confidence in an industry rather than a regulator as
pointed out by John Kay in the Financial Times
(28/6/11)
A flawed approach to better consumer protection.
3. The division of the financial regulator
The PRA's general objective:
is to be met primarily by -
(a) seeking ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the UK financial system,
But stability is the concern of banks. The bailouts Northern Rock etc
were banks. Therefore the regulation of banks should be separated. Firms should not be regulated by more than one regulator,
to avoid under/overlap problems.
The regulator should be divided according to: a) banks,
b) markets, c) building societies, insurance companies, fund management companies.
Separating the regulator in this way, enables different regulators to be
concerned with different kinds of consumer:
a) depositors, b) investors, c) savers; who: a) pay bills; b) invest
- apply money for profit; c) save - transfer money into the future. The latter are generally
just members of the public.
The twin peaks system of
regulation is being reintroduced. Conduct of business will be the responsibility of the FCA. It says on the
Treasury website:
A new Prudential Regulation Authority (PRA) will be responsible for the day-to-day supervision of financial institutions that are subject to significant prudential regulation.
The Equitable Life collapse started with the problem of honouring GAR policies.
Finally, one of the core lessons to be learnt from the various reviews of the regulation of Equitable Life Assurance Society prior to its closure to new business was that it was undesirable for prudential and conduct of business regulation to be undertaken separately, and that the much better model was for prudential and conduct of business regulation to be fully integrated. It would be wrong for these important findings on how to improve regulation to be ignored.
(Memorandum submitted by Berwin Leighton Paisner LLP in response to the
Treasury Select Committee's consultation about the reform of financial regulation.
www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/financialreg/m18.htm)
4. Exploiting inertia
The FSA permits the industry to exploit inertia and prevaricates itself.
We need a regulator with a different character.
Instant access savings accounts with banks often or usually quote an interest rate
which includes an initial "bonus" for one year. After a year the bonus is no longer included so
the interest rate drops. New accounts with a new "series number", tend to
offer a higher rate of interest. This is exploiting inertia because some depositors do not move their funds when
a better account is available. They may be unable to act because they are ill.
There are regular complaints on MoneySavingExpert such as:
Is there anything the government can do to make banks look after existing customers. I'm not too bothered about getting the top rate for my savings, but an account that gave me a reasonable rate over the long term would be hugely beneficial as I've got far better things to do with my free time than chopping and changing accounts every year or so!
Will the FCA ban initial bonuses and stop the resulting proliferation of savings accounts? The FSA already has the power to do this. Which? gives an example:
At Lloyds TSB the website indicates that they have at least 30 different variable rate accounts including: Advantage Saver with bonus (opened after 9th August 2010), Advantage Saver without bonus (opened after 9th August 2010), Easy Saver, eSavings, Cash ISA saver, Advantage Saver (Premier Bonus), Advantage Saver (Platinum Bonus), Advantage Saver (Gold Bonus), Advantage Saver (Silver Bonus), Advantage Saver (Select Bonus), Advantage Saver without Bonus (opened prior to 9th August 2010), Easy Saver, Easy Saver 2012, Exclusive Saver, First Save, Flexible Savings Account, Gold Saver, Incentive Saver, Incentive Saver (opened prior to 5th May 2010), Instant Access Saver formerly Guaranteed Tracker, Instant Access Saver formerly Guaranteed Saver, Instant Gold Savings, Internet Saver, No Notice Saver, Online Saver, Platinum Saver, Premier Saver, Standard Saver, Select Saver, Cash ISA.
Whether or not particular products
and practices are banned depends on who is in charge of the regulator.
5. The bailout reports - FSA prevarication
5.1 Investigations by the FSA
A problem with not having an independent enquiry and leaving this to
the FSA is that the work becomes tangled with various other enquiries and reports
of the FSA, providing an excuse for delay. The FSA press release of 2 December 2011
FSA closes supervisory investigation of RBS produced a political
storm, so the investigation was reopened. A letter from Lord Turner
to Andrew Tyrie of 28 March 2011 discusses the: "Supervision Report This report looks at the
effectiveness of the FSA supervision of RBS between 2005 and end 2008.".
There have been Section 166 investigations of RBS and HBOS.
Why are these necessary before starting work on reports for the public?
Lord Myners discusses the RBS report:
The problem stems from the fact that the investigation was commissioned from accountants Pricewaterhouse-Coopers as a "Section 166" report, ensuring the confidentiality of all evidence. "The FSA set out on a route of investigation in the knowledge that it would not be able to produce a report which named names and quoted from evidence given. I think the first mistake was to use this method. Secondly, it doesn't look as though PwC, which was commissioned to carry out the report at a cost of over £7m, interviewed everybody that one would have expected to be interviewed senior directors of RBS or the senior executives of the FSA. They didn't interview government ministers or Treasury officials, so I think there was always going to be a mismatch between what the FSA could do with the RBS report and what the broader public might consider to be a good and proper review. Unfortunately the same process is being used to investigate HBOS and Bradford & Bingley."
http://uk.finance.yahoo.com/news/Lord-Myners-I-want-things-tele-2961043703.html
The Enforcement Report of RBS is mentioned in the FSA press release
of 28 March 2011, and the enforcement investigation of HBOS in the press release of 11 July 2011:
Once the investigation process is completed and the final result announced, however, we would intend to begin work on a report into HBOS, .. We propose that, as with RBS, there should be a role for external reviewers, to help provide assurance that the FSA is being open about any failings of its own.
5.2 Few interviews
A 2,300 page report about the Icelandic banking crisis was presented to the Icelandic parliament last year 2010.
About 300 people were interviewed. This contrasts with the UK. For example Paul Moore said in January 2011:
There could not possibly have been any sensible investigation by the FSA into the failures at HBOS without my involvement. But I have not been approached.
www.ianfraser.org/moore-fsa-lacks-competence-to-investigate-bank-failures
How can the RBS report have been "produced" by April 2011, if even the non-executive directors had not been interviewed?
An article by Robert Peston on 31 May 1911 says:
The Financial Services Authority is only now arranging to interview all of Royal Bank of Scotland's non-executive directors from the era when the bank failed, some two years and eight months after the collapse and rescue of RBS.
www.bbc.co.uk/news/business-13600060
The number of people interviewed by the FSA for the RBS report was 29 before 26 April 2011, and 57 between 26 April and 8 August:
www.whatdotheyknow.com/request/rbs_report_interviews
5.3 Postponement of the RBS report
In its press release of 15 December 2010 the FSA promised to "deliver" a report about RBS in March.
But publication is constantly delayed. They promised to produce a report and have done so,
but have changed the status to a draft. This like a girl being promised marriage,
and discovering after the wedding that it is only a marriage of convenience.
The TSC press release of 28 May 1911
Terms of reference for review of FSA's report into failure of RBS independent review
links to three letters from Lord Turner to Andrew Tyrie:
| 15 December 2010 | We would suggest delivering the report to the Government and the Treasury Select Committee by the end of March. |
|---|---|
| 17 February 2011 | We are now planning a delivery date in mid-April and will let you know the precise date nearer the time. |
| 28 March | All these reports could be ready for publication in early May, ..
Our aim will be to agree a timetable which allows publication of the report and delivery to the Treasury Select Committee in good time before the summer recess. |
| 07 June |
What we hold at present is information that will lead up to a finalised report being published. (www.whathotheyknow.com/request/rbs_report#incoming-180474) |
| 23 June |
.. as I read drafts of the report we will produce later this year on the Royal Bank of Scotland (RBS). (www.fsa.gov.uk/pages/Library/Communication/Speeches/2011/0623_at.shtml) |
But the TSC says in the press release that the RBS report has already been "produced":
It is why we have appointed independent advisers to assess the report produced by the FSA on the basis of those findings.
/www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/review-of-fsa-report/
Another example of prevarication is my three cases of fraud reported to the SFO:
www.whatdotheyknow.com/request/how_are_my_three_cases_progressi
One of these is about the Equitable Life reinsurance treaty, leading to a Freedom of Information request.
The SFO say they cannot disclose information about Equitable
Life because this may be needed for a future prosecution, even though they have
not prosecuted, or even had "a full criminal investigation", since the Society closed for new business in December 2000. The case is before the Information Tribunal
(EA/2011/0084), with a hearing on 27 September 2011. There are details on my website:
www.comparativetables.com
6. Enquiries
Reports about the RBS, HBOS, Bradford & Bingley, Kaupthing Singer & Friedlander implosions in 2008 should have been published
before the present consultation. Why was this left to the FSA without setting up official
enquiries? The FSA says it will not
publish reports about the Bradford & Bingley or Kaupthing Singer & Friedlander insolvencies. The former was caused by excessive borrowing on money markets
- like Northern Rock.
Finally, we have considered whether similar public information reports should be published in relation to other firms that failed in the crisis. We believe not. This is because: .. - none of the other institutions that failed in 2008 was of the scale of RBS and HBOS. (FSA press release 11 July 1911)
Surely this size argument is invalid because the FSA did for example write a report about Dunfermline (www.fsa.gov.uk/pubs/other/response_Dunfermline.pdf). Under the new system there will have to be "an investigation and report" in certain circumstances:
The draft Financial Services Bill sets out a clear mechanism for the new regulators to conduct regulatory enquiries. Under this mechanism, unless the Treasury direct otherwise, an investigation and report will be needed from the PRA where public expenditure has been incurred, or events have risked a significant adverse effect on the safety or soundness of an authorised firm, which might not have occurred but for a serious failure in regulation. (FSA press release 11 July 1911)
The regulator should arguably write a report following every failure of a firm irrespective of size, or above a certain size.
Badly defined criteria such as "serious failure of regulation" seems unsatisfactory.
Vince Cable was interviewed about RBS on television (Channel 4, 15/12/10), and was asked twice:
"Is the FSA the right body to look into this? Shouldn't we get someone else do it?"
He did not reply. It is pointless asking questions with no reply. In the same interview he said: “I campaigned for openness in opposition and again in government.”
www.channel4.com/news/rbs-collapse-no-blow-by-blow-account
He said: "I argued in opposition that what we needed was a proper investigation into what were very serious matters." (Sky News 15/12/10)
So now he is in government why has he not set up an enquiry? The reason seems to be the cost. It is cheaper for the government to leave
this to the FSA which is financed by the industry. But the industry does not want to be investigated - hence the prevarication.
news.sky.com/skynews/Home/Business/City-Watchdog-To-Publish-Its-Report-On-Near-Collapse-Of-RBS-In-March/Article/
201012315855954?f=rss
At present it seems rather hit and miss whether there is an enquiry and report or not. When a firm above a certain size fails, the regulators should
publish a report and there should in addition be a public enquiry if it is sufficiently large.
7. "New powers"
When the FSA was set up it was described as
"a powerful new authority", like the FCA, and was given all sorts of powers. It cannot be claimed
that these have been insufficient, which the White Paper seems to suggest. The FSA says in its June 2011 paper
The Financial Conduct Authority: Approach to Regulation
Conduct issues since 1990 have been a major factor, particularly the significant instances of widespread mis-selling of financial products to retail consumers. These include personal pensions, mortgage endowment policies, split capital investment trusts and payment protection insurance (PPI). Millions of consumers have suffered detriment on a large-scale and, together, the industry has had to make compensation payments of approximately £15 billion, with most PPI redress still to come. Such outcomes would be regarded as unacceptable in other sectors of the economy. They demonstrate that a new approach to conduct regulation is essential.
This surely demonstrates the need for a new approach
to product regulation rather than conduct regulation.
Mis-selling is no more a conduct issue than reckless lending.
Therefore the PRA could also be called "a conduct regulator".
The FCA will have "new product intervention powers". But the
FSA already has such powers, such as those concerning unfair contract terms. If it wanted further such powers it could have asked the government for
them. The FSA and industry are continually referring to the merit of
"consumer choice", whilst actually exploiting consumer inertia as mentioned above. Consumers prefer
the choice of a smaller number of high quality products than a large number of
poor quality ones.
B.63 Finally, there was strong support for the statement that the Government does not support the pre-approval of products by the FCA.
But the FCA should be permitted to pre-approve particular products if it wants to.
What does "new product intervention powers" mean if not "pre-approval of products"? It seems to mean: "We will intervene faster
if things go wrong." But they should not go wrong.
8. "Deficiencies in regulatory philosophy"
In his article about RBS in the Financial Times Rules to make bankers honest (7/12/10) Lord Turner blames regulatory failure on "deficiencies in regulatory philosophy":
It would be possible to add a report looking just at the RBS story. Such a report would be more comprehensive than the FSA's internal investigation, which focused solely on whether individuals broke FSA rules. But it would add little, if anything, to our understanding of what went wrong. It would reveal the same deficiencies of regulatory philosophy already identified, under which the FSA simply did not believe our remit included preventing the ABN Amro acquisition – which was highly risky but breached no regulation.
The FSA's discussion paper on product intervention (DP11/1) says:
In the past the FSA's regulatory approach was based on the assumption that effective consumer protection would be achieved provided sales processes were fair and product feature disclosure was transparent. But this approach has not been effective in preventing waves of severe customer detriment. We have therefore come to recognise that there are fundamental reasons why financial services markets do not always work well for consumers. In response, we are adopting a new regulatory approach, ..
So there have been waves of taxpayer and consumer detriment because the FSA has had the wrong philosophy,
rather than lack of "product intervention powers"! The FSA adopts whichever philosophy
suits the industry. When this becomes politically unacceptable it says: "Sorry we had the wrong philosophy."
"Promoting competition is a key element of
the Government's reform programme." But competition may be harmful. For example, competing
for outlets by paying increasing commission to advisers has been harmful for savers. RBS competed
with Barclays to take over ABN Amro with disastrous consequences. But then RBS is not mentioned
in the White Paper, and the RBS report has not been published as discussed in Section 5 above.
Equitable Life competed for new business by paying bonuses it could not afford.
"The discipline imposed by competitive markets" was not "a significant driver of good conduct".
The duty of the FSA to "facilitate innovation"
in the FSMA reflects another "deficiency in regulatory philosophy". Financial innovation has been
discredited especially because of credit default swaps.
9. Who's in charge?
The fundamental problem of financial regulation is capture
of the regulators by the industry.
What happens depends on who is in
charge. The FCA will have:
- a board, with a majority of non-executives to be appointed by the Treasury;
- two non-executives to be appointed jointly by the Treasury and the Department for Business, Innovation and Skills; and
- a Chair and Chief Executive appointed by the Treasury.
This seems much the same as the appointment of the board
of the FSA, which produced for example the HBOS/Sir James Crosby - Paul Moore scandal.
The new approach to regulation is business influencing government and law enforcement at the expense of the public.
This is one reason for example for: the bank bailouts, the New Labour expansion
of the work permit system, the Draft National Planning Policy Framework
"to promote sustainable growth" which starts: "The purpose of planning is to help
achieve sustainable development." It should be to protect the environment. Similarly the purpose of financial
regulation should be to protect personal finances
from harm, especially savings - not to "advance the interests of" the industry.
10. Fees
The regulator should not be financed by fees levied on firms, but by a tax on savings. Otherwise there is a he-who-pays-the-piper-calls-the-tune
problem. Savers pay for the regulator by charges on their savings, but these are passed on as though they come from firms.
11. "Authorised", "regulated", "registered", "exempt"
The difference between them seems likely to
become more confusing with the introduction of the PRA and FCA.
Activities/firms/groups will be authorised/regulated/registered/exempted by/with either
the PRA or the FCA (or both).
The FSA explains:
Most firms and individuals can only conduct regulated activities in the UK if they are 'authorised' by us to do so, or are otherwise exempt. However, there are certain firms that can instead be 'registered' with us. .. You can search our Register to find out whether a firm is authorised.
In my
response to A new approach to regulation: judgement, focus and stability, at Section 3.1, I mentioned the confusion between "regulated" and "registered" in the case
of Crown Currency and the topic "unregulated activities within regulated groups".
12. Summary
1. The objectives of the PRA and FCA seem more concerned with protecting the industry than consumers.
2. Lessons from the RBS, HBOS, B&B, KSF insolvencies have not been learnt because of the lack of official reports.
3. Lessons from the Equitable Life scandal have not been learnt because there is the reintroduction of the twin peaks system.
4. The industry is left in control of the regulators.
5. The method of financing the PRA and FCA by regulatory fees is wrong.
Addendum
"Working closely with"?
The Treasury consultation says:
1.15 This is an ambitious programme of reform. The Government recognises that it must work closely with all stakeholders to make sure that it gets it right. That is why it has engaged in a detailed process of consultation and policy development, working with the Bank of England and the FSA, with direct input from industry and consumer stakeholders.
The "direct input" in my previous response to A new approach to financial regulation: judgement, focus and stability seems to have had no effect, nor did that of Tony Shearer, who says in his response:
The Blueprint contains a false analysis for the reasons that I gave in my responses to "A new approach to financial regulation: building a stronger system" (see Appendix 1) and "Interim Report of the Independent Commission on Banking" (see Appendix 2). Not one of my points has been addressed, ..
1. The Tripartite model failed because the people operating it failed to do their jobs, not because the model itself was deficient; ..
This is not "working closely with all stakeholders to make sure that it gets it right. ..
engaged in a detailed process of consultation and policy development, .. with direct input from .. consumer stakeholders."
Sending a notification of the White Paper to people on a database
is described in previous consultations as "engaging directly with relevant stakeholders": Word count of the White Paper
www.whatdotheyknow.com/request/financial_regulation_consultatio
new 584, stability 208, competition 148, disclosure 72, protection 67, transparency 36, clear 36, choice 33, consumer protection 33,
efficiency 30, accountability 27, integrity 28, competent 25, confidence 22, (economic) growth 21, soundness 21, effectiveness 19, safety 15, efficient 14, strong 14,
transparent 13, new powers 12,
proactive 12, good 11, resilience 11, focused 10, strengthened 10, accountable 9, enhanced/ing 8, beneficial 6, excellence 2, efficiency and choice 21,
safety and soundness 14, efficiency and effectiveness 5, stability and resilience 4. transparency and disclosure 4.
Words not mentioned: bank account, banker, bond, bonus, broker, credit crunch, credit squeeze,
dividend, dealer, (investment) growth, oeic, saver,
(money) savings, shareholder, stock, stocks, stockbroker, stockmarket, unit trust.
Mentioned only once: bail-out, units.
"Over reliance on risky wholesale funding"
Why did the FSA permit "the emergence of risky bank business models"? The FSA report on RBS, 12 December 2011, says there was "over reliance on risky short-term wholesale funding". Lord Turner said in March 2009:
we saw the emergence of risky bank business models, overly reliant on wholesale funding - Northern Rock, Bradford and Bingley, HBOS.
www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0318_at.shtml
In the case of Northern Rock, 73% of total liabilities were covered by
wholesale funds on 30 June 2007:
www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/56we14.htm
But Hector Sants told the Treasury Select Committee in the same year:
in terms of the probability of it getting into difficulty we had it as low-probability
www.publications.parliament.uk/pa/cm200607/cmselect/cmtreasy/uc999-ii/uc99902.htm
He must have thought the same about the RBS takeover of ABN Amro, otherwise as
Chief Executive of the FSA, he would not have approved it.
The RBS report says the FSA Board could have prevented the RBS
bankruptcy, but did not do so because of "current financial sector roles",
that is senior positions in the industry:
The FSA Board did not play any operational role in decisions relating to the supervision of specific firms, though it did receive briefing on current issues from the executive and was therefore in a position to ask questions and challenge assumptions. .. a very different composition of the FSA Board would have been required, involving members with no potential conflicts arising from current financial sector roles .. (para 689)