Criticism begins at home for FSA
Light-touch regulation is about to be axed but self-regulation still exists in one quarter of Canary Wharf. The Financial Services Authority has been allowed to identify its own deficiencies and remedy them. Again.
Lord Turner, the watchdog’s chairman, is producing his plan to reform bank regulation in mid-March – his proposals for closing the stable door after the horses have bolted. His predecessor did the same thing after the FSA failed to prevent Northern Rock going under; now, following the London regulator missing what was happening in Edinburgh, it is coming up with even bolder reforms.
Expect strict new rules, not only on how much capital a bank needs, but on liquidity. Expect to see proprietary trading – banks betting their own money rather than ours – quashed. Expect hedge funds to be subjected to bank-style controls. Expect rules on pay and directors’ competence. Expect condemnation of credit-rating agencies. Expect bans on complex investment products even if rocket-scientists can understand them.
But if Turner – who joined the FSA only last September, so has clean hands on the past omissions – is to reform banking practice he must put his own house in order too. The FSA needs to change its attitude to regulation.
The watchdog worked on the principle of imagining the worst scenario and doubling it. Then doubling it again. If a bank could survive that it was free to take whatever risks it wanted. We now know that was not nearly enough.
The regulator must stop thinking it is another auditor, satisfied so long as the numbers add up on the directors’ assumptions. Banks will always believe their business model works: that’s why they chose it. The FSA must in future question the direction a bank is going, not merely its method of getting there. It needs to ask more ‘What ifs’?
It must say not only can this bank survive but can the financial system survive? That requires a wholesale change of attitude inside the watchdog.
As a newcomer, Turner can do it. The FSA fell into the complacency that infected the whole financial services industry that nothing serious could go wrong, but it is still the best agency to provide tough supervision in future. But his criticism must be directed internally as well as to the outside world.
