Wednesday, October 22, 2008

Once upon a time a sensible regulator existed

From Mr Stanislas M. Yassukovich.
Sir, The widening discussion about the failure of the regulatory system in the financial services industry still misses the point. How depressing to see Lord Turner missing it as well in calling for more money for the Financial Services Authority. As in so many areas of public service, throwing money at the problem is not the answer.
Regulatory complexity has been one of the causes of resource inadequacy and, ironically, of mission failure as well. It is now accepted by many that the removal of banking supervision from the Bank of England, as lender of last resort, was a near-fatal mistake. The agglomeration of services in single banking groups was never a valid justification for a super regulator. Multinational institutions had been answerable to several regulators for some time. The main loss was the Bank's market "feel" which it maintained because it was itself in the market on a daily basis.
Admittedly, its other main weapon as a supervisor - moral authority - was fading fast. To be in the bad books of the Bank was devastating, when reputation counted for something. Reputation risk now barely exists for institutions and even less for individual practitioners. It is the failure to accommodate this new reality that has undermined the FSA's enforcement process.
We have seen serious regulatory lapses, the subject of extended investigations, culminating in fines. These are shrugged off as a cost of doing business by the entities concerned whose franchises suffer no visible damage. Indeed, the heads of the institutions concerned continue as members of the financial establishment in good standing. Institutions are increasingly immune because shutting them down suddenly and entirely involves systemic risk (the Lehman failure tends to prove this). The answer is a more ruthless and urgent enforcement process against individual practitioners found in breach of principles - and this should include their corporate governors. Regulators in other fields seem to cope with the judicial process challenge this entails.
As to the suggestion that complicated, modern markets need even more expensive experts to regulate them, recent experience is not supportive. There is no financial instrument or market activity that cannot easily be subjected to the fundamental principle that higher returns automatically entail higher risks. The FSA seems to have had difficulty applying this test across the vast range of its regulatory mandate. The days of the all-encompassing financial conglomerates seem to be drawing to a close. It is time to review the concept of a conglomerate regulator.
Stanislas M. Yassukovich,
Bonnieux, France
Former Chairman, The Securities Association, and former Deputy Chairman, London Stock Exchange

Monday, October 20, 2008

Sheets off balance?

Both the Treasury and FSA have voiced their concerns regarding the transparency of the banks' balance sheet with particular regard to 'off-balance-sheet' transactions. I find it confusing, therefore, that they chose to rescue the Bradford & Bingley by providing a £14b loan to the Financial Services Compensation Scheme. Where, on either the government's or the banks' balance sheet, is this to be shown as it presumably is a liability that will have to be repaid by means of increased contributions to the FSCS and a loan no matter how long the intended term for repayment is still a liability.

Sunday, October 19, 2008

FSA needs more staff and more money?

Let's get the facts straight here, the BofE regulated banks quite well for a long time, in 1997 the task was handed over to the FSA along with the 740 BofE regulatory staff. Same people, different office. The main problem with FSA style regulation is that the 'activities' are regulated, not the institutions themselves as was the case with the BofE. The banks then decided to pursue 'activities' which were not regulated and made pots of money out of said 'activities'. The FSA couldn't do anything but watch the festering mass of fancy financial instruments, not that it was looking because these instruments were not regulated and therefore not their problem gov. To make matters worse this style of regulating meant that banks could sell whatever took their fancy as long as the 'compliance department' gave the nod. Regulation is bust, not fit for purpose. Strict supervision is the only way to stop this happening again, the FSA is incapable of doing that, at any price, because it is run by bankers.

Friday, October 17, 2008

Banks need to pay as much as IFAs, says Turner

Does Lord Turner think IFas pay too much? Are IFA fees far too high relative to the risk they pose to the system? Well IFAs would agree wholeheartedly. While his comments are most welcome the sentiment is a couple of decades late and we won't be expecting a reduction in IFAs any time soon, we have been bitterly disappointed many times over the years and still are.

The cost of regulation has increased out of all proportion to the actual detriment afflicted upon 'consumers', clients, and friends, as IFAs know them. The regulator may insist that all the 'reviews' were necessary but that doesn't make what actually happened right does it? Nor does it make up for the losses which turned into profit for many.

Sinking Ship or Ships

Further to the crises still unfolding, may I add a couple of observations.

The hands at the wheel of the sinking ship "S.S. UK Banks" are none other than the FSA- who have been strangely silent these last few weeks. Let me briefly revisit several other icebergs they hit whilst asleep; The Endowment mess, Equitable Life, B&B, Northern Rock and the rest of the flotilla. As we all know, only one eighth of an iceberg is visible and there are still more hidden dangers of which we aren't fully aware waiting to rip the ship apart.

However, would it not be only fair at this time for the FSA to come clean on a major disaster whose blame was laid solely at financial advisers? The endowment debacle was caused by 13 major insurance companies using a generic industry average charge on the illustrations they provided. These charges bore no shred of truth to the real charges on the contracts which outstripped any projection of growth. This practice was allowed to continue for years and despite the Freedom of Information Act, the FSA continue to refuse to release these companies' names. The reason given is that there would be a mass exodus from the companies, people would stop doing business with them and they may go bust. Isn't that what's been happening with the wrongdoing banks?

The FSCS (compensation scheme) itself is an untamed animal. When the interest on the loans to the banks becomes too much for the banking sector to support under the FSCS ( they pay an annual fee to finance the scheme), and when that figure rises above £2billion per annum, then the rest of the financial community who pay fees to the FSA,must pick up the bill! As an IFA who has not fallen foul of the endowment saga, I have already paid compensation to the FSCS on behalf of the advisers who shouldered the blame, and now it seems I personally will pay for the bankers who walk off with a sack of cash, having trashed our banking system.

Meanwhile back at the most expensive office spaces in the UK, Canary Wharf, the FSA party on by adorning the walls with expensive art, hold lavish leaving bashes for their dearly retiring servants (on a final salary scheme continued from previous employers the Personal Investment Authority) and recruit the disgraced bankers to positions of power. If you think this is not true then watch this space.

Dave King

Thursday, October 16, 2008

"Sorry" about failures

I refer to Hector Sants' speech of 15 October 2008.

The lessons of the Northern Rock should have been learned a year ago. I understand, although I am not certain, Ron Sandler's business plan which was accepted by the Treasury and the FSA contained an assumption that house prices would not fall!

Since then the FSA has overseen rights issues for Bradford & Bingley, HBOS and RBS all of which were plainly insufficient and the documentation did not reflect the severity of their positions.

The FSA also made a statement that HBOS had an "exceptionally strong balance sheet". If they knew this was not true it amounts to market manipulation - if they did not, it is negligence. Mr Sants says that they should have made sure the bank directors understood their business model. By this he is admitting that, even after the Northern Rock, the Regulator still did not understand the banks' business model and, therefore, could not regulate.

I hope the FSA understand the business models of the insurance companies!

Finally, who else would be allowed to get away with a second apology with no sanction? What about their jobs and bonuses and the 'golden parachutes' given to departed employees?

New bank business model

What does Hector Sants think of a business model that is forced to borrow money at 12% and then lend it out at a loss?

Wednesday, October 15, 2008

Who guards the guards?

John Tiner was, until recently, the manager of regulation in the UK, he was the most powerful regulator on the planet.

Have we heard any words of wisdom from Mr Tiner regarding the current financial crisis? Can he show us the way out of this mess?

Did he see this coming?

New government website expected soon

Due to the financial crisis the Government is expected shortly to launch a new brand new website -

Interested parties will be able to click onto the website as a handy “one stop shop” to see the most up-to-date explanations to questions such as why:

· The Government, The Bank of England and The Financial Services Authority all failed to stop our banks building up a mountain of toxic debts.

· “The head-rolling” is limited to a tiny group of bank chairmen and chief executives who have decided now is the time to jump ship.

· Despite the multi-billion pound bank bail-out, there is no direct help for ordinary businesses, charities, public organisations, let alone ordinary taxpayers pushed up to and/or beyond the brink by bank and financial market failures.

Unfortunately, due to technical reasons, the website will not contain a ‘contact us’ section, and will instead invite customer feedback on a future occasion which is expected to coincide with the date of the next election.

UK banks want to renegotiate the deal?

The grass is always greener as the saying goes. As a taxpayer I wish to see the banks return to their roots, they lost the plot and now they and their shareholders must pay the price for the folly which got them into the mess as well as the folly of accepting such onerous terms. They went into the deal with both eyes wide open, a contract is a contract, you comply with it and you will get out of it if the taxpayer receives what you promised. Now stop bleating and get us out of this frightening situation if you can.

Brown plan heads for Europe?

If Mr Brown is such a brilliant man where was he when the problems were being created?

The plan may have been overdone, do all other countries also crave control of the banking system?

Is regulating banker's pay the answer?

Is this an excuse to deflect from government and regulator responsibility?

The managers are the bank Board members, the Financial Services Authority, the Bank of England and the UK Government.

If the managers of all this weren't aware of the problems they should not be in charge because they don't have the necessary expertise, if they do have the required expertise they were negligent and should face the consequences.

Tuesday, October 14, 2008

FSA and FOS at odds?

I refer to Section 39 of the Information Tribunal Decision dated 13 October 2008.

It would appear that the FSA took advice from Leading Counsel regarding marketing literature. The advice given, apparently accepted by the FSA, was that if this material could show that it had sufficiently indicated the need for the product to achieve a higher growth rate then that firm could avoid a determination that it had entered into a contractual warranty. This is at total odds with the methodology of the FOS. The FSA's Counsel seems to advise that if it is in the literature then the policyholder should have read the documents and, if they did not understand, should have questioned the fact. The FOS does not accept that an illustration, product literature and a 'cooling-off' notice is sufficient for a complainant to understand there was a risk involved.

Presumably the FOS have also taken Counsel's advice and this conflicts with that given to the FSA. Why has this inconsistency not been addressed?

IFAs not on a level regulatory playing field

IFAs have been suffering under the workload of dealing with complaints relating to projected shortfalls on mortgage endowments and paying compensation for a 'loss' which has not yet materialised. Whether the compensation was paid directly or via the Financial Service Compensation Scheme is irrelevant because in the vast majority of cases the shortfalls were created by the life offices who wish to remain nameless and in the case of Standard Life has refused to make any offers of redress.

The Financial Services Authority claims that all the life offices have paid redress, this is untrue because the FSA's own definition of redress is to place the complainant in the position they would have been had they not purchased the contract and this has not happened. Instead the insurers have used various methods which include 'special bonuses', 'endowment promises' and 'enhanced allocation rates', none of these have assisted IFAs in avoiding overpayment of compensation which is calculated using the surrender value as the datum . This surrender value has been depleted because the premium paid has been much smaller than that required to achieve the target value at maturity so all charges and expenses have had an adverse effect on the smaller investment value.

The FSA also claimed that disclosing the names of the companies would breach their rights under Article 6 and 8 of the Human Rights Act 1998. The Information Tribunal has now dismissed an appeal against an Information Commissioner's decision to disclose the information requested.

FSA liability to bank shareholders

What liability does the FSA have to shareholders in RBS, HBOS and Bradford and Bingley?

Hector Sants admitted that the FSA had inadequate controls in place at the time of the Northern Rock problem. When testifying to the Treasury Select Committee he stated that "lessons had been learned" and changes made.

The FSA has since then stated that they were closely monitoring the financial position of all UK banks. How, therefore, were apparently inadequate rights issues allowed to proceed with offer documents that must have been seen by the FSA?

How could the FSA state they were investigating the short-selling of HBOS and state that the bank was adequately capitalised?

It has, within a matter of weeks, become apparent that these banks needed billions of pounds in order to be adequately capitalised. Investors relied on information provided by the FSA and have, as a result, lost substantial amounts. What responsibility does the FSA have?

Friday, October 10, 2008

Gordon Brown wants to punish reckless bankers

Financial services regulation in the UK is a mess. The manner in which regulation has been set up and run has added to the crisis. It has regulated the wrong things in the wrong way very badly. It has increased risk. The main achievement of the FSMA 2000 is that compliance departments end up running the business. It works like this. A banker has an idea for a new product. He takes it to his boss. ‘Before I even look at this, can you confirm that compliance has seen it and approved it?’. ‘No’. ‘Get them to check it and then come back’. ‘OK’. Later. ‘Compliance says it complies’. ‘Right, is it going to make money?’. ‘Yes’. ‘Get on with it’. In other words the bank or whoever never really thinks about the product. It relies on its compliance department. This is no good as compliance departments are staffed by people who are attracted by rules. They are especially delighted when the rule books are wonderfully, convolutedly prescriptive. They can spend hours playing games with the language and the rules. If the rules can be satisfied by a check box system, even better. Common sense is evident by its absence. The current regulatory regime is not only useless with its divided responsibilities it is useless because it is prescriptive and wildly over-complicated. It needs to be scrapped. Simpler regulation, or rather supervision, by experienced market professionals would be far more effective. The FSMA 2000 must be repealed

Thursday, October 9, 2008

Regulation – the constant fatal flaws

Think back, everyone is aware that we have had more than our fair share of major financial catastrophes in the UK - test your memory, remember when these financial institutions created headlines that filled the news and still do?: Equitable Life, Barings, Standard Life, Independent Insurance, Northern Rock, Bradford & Bingley. Then think about how many people were affected by tinkering with personal pensions, the LAUTRO shortfalls, supposedly guaranteed Occupational Pension Scheme benefits and so on.

Are these clear evidence that regulation contains consistent flaws?

The lowest common denominator in all this was regulation. These all happened after regulation, so is regulation the cause, not the solution?

The world's largest financial centre + the world's largest regulator = The world's largest financial black hole