Regulators need to think big, not small
What Lord Turner’s review of financial regulation fails to mention is that the Financial Services Authority spent too much time protecting consumers from banks and not enough protecting banks from themselves. In the end, curbing the banks would have been the best consumer protection.
The FSA, which Turner now chairs, spent its early years searching out mis-selling of pensions and life policies and forcing financial institutions to pay vast sums of compensation – even on endowment mortgages when homebuyers had made a hefty profit.
If a bank had sold someone an unsuitable product the FSA thought its job was to concern itself about the financial state of the consumer, not the bank. We now know it was right not to worry about whether the bank’s own financial state left its shareholders poorer but the watchdog should have worried whether the bank’s finances risked damaging the greater financial system.
If the system collapses, it matters relatively little whether the consumer has the right financial product or the wrong one: everyone is in trouble, even those with otherwise suitable investment vehicles.
The problem was not that the products were faulty or fraudulent, merely not suitable for every investor. The FSA acted as though its job was to stop grannies being sold Porches. The penalties and compensation awards imposed on the product providers merely weakened them when markets were already doing the same.
In the radical new world of regulation that Turner proposes it is important that watchdogs like the FSA turn their attention away from the micro to the macro: individual banks are still not the prime subject of regulation but it is the financial system that matters more than any individual consumer.
And that is a lesson the Office of Fair Trading could learn too. The amalgamation of HBoS, Lloyds, Northern Rock, Bradford & Bingley plus Royal Bank of Scotland under one common ownership has escaped investigation but the OFT persists in worrying about unauthorised overdraft charges. It needs to look at the bigger picture.
