FSA’s last blunder is symptomatic of UK’s regulatory woes

Allister Heath
WHEN you return to your offices on Tuesday after the Bank Holiday, dear readers, the Financial Services Authority (FSA) will be no more. In its place will have arisen the Financial Conduct Authority and the Prudential Regulation Authority.

In truth, the FSA’s dissolution comes not one second too soon, with the regulator yet again excelling itself in its ridiculously disproportionate attack on Tidjane Thiam, the excellent CEO of Prudential yesterday.

CEOs who were at the helm of collapsed banks, whose downfall humiliated the City, have not received any sanction or censure from the regulator. Even those who have since been fined for PPI, Libor, and money laundering misdemeanours have not been sanctioned in this way.

Yet Thiam’s decision not to tell the FSA about his attempted bid for AIA for two weeks – he was worried the story would leak if too many people knew about it, and it eventually did – means he is the only FTSE 100 financial chief executive to receive a sanction – and his firm is being hit with the FSA’s fifth-largest fine ever. At best, this is case of using a sledgehammer to crack a nut. The regulators need to do their real jobs, something they spent many years failing to do, not go after the likes of Thiam.

The reality is that the regulatory situation in Britain is still deteriorating, and will reduce growth and jobs without net benefits. The unwarranted European assault on the insurance industry continues; as Richard Ward, the Lloyd’s of London boss put it, the City’s insurers could almost have bailed out Cyprus given the amount of money they have already spent on Solvency II (in Lloyd’s case, the bill has already reached £300m).

The EU continues its mission to impose idiotic bonus caps; the latest target are fund managers. This makes no sense: there is no evidence of any kind linking bonuses in wealth management to the financial crisis. Why is this happening? And why are the UK authorities not stopping this? It is vindictive madness which will further cripple the City and – by forcing up fixed wages – make fund managers more fragile and thus increase the likelihood of another crisis.

I’m not convinced either by the decision to hike capital requirements further for UK banks, by the constant uncertainty and even less so by the increasingly prescriptive way in which the banks in question will have to do this. The authorities are deliberately trying to de-internationalise UK banks, in a damaging attempt at financial deglobalisation. Instead, they ought to be focusing on reintroducing market forces into banking, and devising ways of resolving global banks, thus removing perverse incentives at excessive risk-taking.

All of the regulators concerned should take a look at a short document published by the Institute of Economic Affairs, penned by Forrest Capie and Geoffrey Wood. As the authors point out, there were no capital requirements or rules of this nature until 1979 – and yet the banking system went through decades of stability, with institutions voluntarily holding the equivalent of 13-14 per cent capital ratios between the 1920s and 1960s.

If you were a shareholder in the Pru, HSBC or Standard Chartered today, to name but a few, the question you should be asking is why does your company not move to a more rational jurisdiction? We are lucky that none of these giants has so far done so.

That said, I wish all of the new regulatory bodies the best of luck, and hope that they find a way of harnessing market forces to strengthen, rather than weaken, the City of London. Happy Easter.

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