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Should the financial regulator be fined for its mistakes?

The FSA has been slammed by MPs for its shortcomings, but why don't the bosses face harsher penalties?

 
Should the financial regulator be fined for its mistakes?

MPs have slapped the Financial Services Authority (FSA) on the wrist for failing to do its job properly and exposing consumers to what they describe as ‘some of the worst scandals in UK financial history’.

It’s a pretty shocking legacy that the FSA will leave behind when it is superseded by the Financial Conduct Authority (FCA) later this year. Since the FSA was established out of the Securities and Investments Board in 1997 it has dropped the ball on many occasion.

The most notable is obviously its failure to prevent the banking crisis that hit in 2007 which ended in taxpayer-funded bailouts and a re-organisation of high street banking. And let’s not even talk about the most recent banking debacle surrounding Libor.

Scandals that were smaller, but of no less importance to the individuals involved, that the FSA failed to spot can easily be reeled off: Arch Cru, Equitable Life, payment protection insurance (PPI) claims, split-cap investment trusts, precipice bonds, self-cert mortgages, endowment policies, Keydata. The list goes on.

The Treasury Select Committee was right to admonish the FSA over its ‘box-ticking culture’ which meant it failed to spot the scandals in front of its nose. So concerned was the FSA with filling out the forms that it didn’t bother investigating what was happening at the heart of organisations, or more importantly how consumers were being treated.

The comments in the Committee’s report are an embarrassing attack for the FSA and you could say its punishment is being abolished and replaced by the FCA.

But is this really punishment enough for those at the top of the tree who oversaw the organisation's failures?

Yes, it may an OK punishment for the underlings in the rest of the FSA to have to go through the shame of having their organisation scrapped but the top bosses who had ultimate sign off over what the organisation was doing should be held far more accountable.

The FSA has made some meek admissions to being in the wrong. In October Lord Turner, FSA chairman, said ‘bad rules’ were allowed to remain in place and ‘a lot of very clever people got it very wrong’ – what an understatement.

The fact is the FSA didn’t bother to put the rules right because the people at the top wouldn’t have to be accountable for it. In fact, they’re so unaccountable that they can be rewarded for their failures; take the recently knighted FSA chief executive Hector Sants.

You can oversee the collapse of the UK economy and still get a gong.

The FSA is very keen to hand out fines and ban people from working in financial services, but what if they had to live by their own rules and suffer punishment where it hurts; in their pockets.

How about we reduce bonuses and freeze pay for those who drop the ball? The taxpayer may not fund the FSA but it certainly picks up the bill when things go wrong.

The government should have more power over the financial regulator and it should be accountable to the people, but our one has for so long been an autonomous body.

Maybe a series of penalties for those at the head of regulatory failings would provoke a change of attitude, a change from box-ticking to real investigation, and ensure that the FCA doesn’t just become a rebranded FSA.

35 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Jan 21, 2013 at 13:12

Surely they should be rewarded with Knighthoods!!

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Rose G

Jan 21, 2013 at 14:26

FSA has absolutely no knowledge about banking; the only reason they get their post is by brown nosing those in the banking industry & their friends in high places; hence you will find that a large proportion of its workforce all have knighthoods for doing sweet F all.

If wea re to start punitive measures, I would start with Mr King, who has as much idea on how to deal with the myriad of problems in banking as you or I, but is being paid a fortune, & off course, the obligatory knighthood for doing F All!

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stephen57

Jan 21, 2013 at 16:51

Should the politicians be fined for leading us all into this ?

Or should we help clean their halos.

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snoekie

Jan 21, 2013 at 17:00

The FSA also had little knowledge of wrongdoing by their members and the law that governed what was going on, in fact not infrequently the ignored the law and made decisions that favoured their members, openly acknowledging they had scant regard for the law. Barclays was a favoured recipient of their justice to joe public who complainedabout their wrongdoings. Maybe that is why Sans was so handsomely rewarded in his new job.

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Richard Billington

Jan 21, 2013 at 17:27

In the UK we live in a madhouse and it is now official. So many people who perform badly and with ineptitude are rewarded with high salaries and medals. It is a sick joke. I once wrote to Hector and he ignored me.

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Keith Snell

Jan 21, 2013 at 17:54

Of course they should be fined but who would be given the job of regulating the regulator

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Rob Walker

Jan 21, 2013 at 18:25

I used to work in Financial Services (Prudential, Axa, Zurich, Capita etc) and it was clear when dealing with FSA 'initiatives' that although they were complex to understand and obviously drafted by people with high academic intelligence, the end result lacked any pragmatic outcomes with fuzzy objectives and theoretical controls which generally fell short of the internal processes already in place. (Consider FSA 'Arrow' for example). However the real crime is the lack of challenge to these government services on Auto-pilot. Whether it is phone hacking, Jimmy Savile or Border Controls it seems like the Police, the FSA, Home Office Immigration et al are a law unto themselves and we just tolerate incompetence that would never be allowed in most private enterprises.

When we finally learn that the crown jewels were stolen 10 years ago and replaced with plastic replicas, we may finally stop tolerating a below-average performance from our public servants.

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Muggle

Jan 21, 2013 at 18:57

What on earth is the point of fining a bank ? That will not punish the perpetrators. Surely the answer is to fire thosde responsible and claw back their bonuses

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A C Wiltshire

Jan 21, 2013 at 19:01

The FSA has failed miserably in it's duties. Will the FCA be any better? Your guess is as good as mine, but I'm not very hopeful.

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Mike R

Jan 21, 2013 at 21:57

Mention has been made of the FSA failings in the responses to this article, also of the competence of the BOE. Both these organisations continue today , by their utterings and actions to further damage the Banking Industry. An industry which having retrospectively been punished for its own significant failings,is now increasingly necessary to a country struggling to right its under performing economy. We need to hope for better from the new Governor and the FCA, before the next stage of recession grips. And certainly if the Taxpayer wishes for a profitable return from its Banking investment.

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RFH

Jan 22, 2013 at 06:49

Fines, what fines.

When you reward the man at the top with a knighthood for not doing his job and being a complete jerk, it sums it all up!

The world must be laughing out load.

Doesn’t it just make you feel proud to be British!

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Evan Owen

Jan 22, 2013 at 13:43

What mistakes? Everything the regulators do is handed down to them by HM Treasury, that is where the buck stops so why bother with a farcical TSC bear baiting session? They don't fool me.

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Steven Farrall

Jan 22, 2013 at 13:44

This is Kafkaesque in the extreme.

Firstly any fines on the Financial Shambles Authority are paid by the taxpayer - not one of the failed functionaries at this disgraceful and unaccountable institution would suffer financially in any way. It's be the taxpayer. That is us, as any tax notionally deducted form the (over) paid funcionaries at the Failed FSA is just a rebate to the rest of us in real wealth creating private business. They are simply parasites.

Secondly all its errors are entirely predicable since the Financial Shambles Authority has no market function whatsoever. Being a central planning bureaucracy, any grasp of the millions of different wants and needs of all the actors in the UK that come into contact with FS is entirely beyond it, and wil always be so. And as its successor plans to be more interventionist we will morph to the Financial Catastrophe Authority.

In the case of the various upsets listed above all of them were caused by this shambolic organisation. They happened because of its regulationism, not despite it.

If any of you take a little time to properly study the ecomonic philospohy of the Austrian School you will find all this mess clearly explained. But simply put Big Government and its satraps in the centrally planned quango state always and forever cock it up. The only way they can succeed is by implementing one or other form of totalitarism. That's been tried before. Its called communism / fascism and it failed.

The only way things are going to improve is if the whole rotten edifice spawned by the utterly corruptly framed FSMA2000 is shut down.

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RFH

Jan 22, 2013 at 15:21

“If any of you take a little time to properly study the ecomonic philospohy of the Austrian School”.

What makes you think we haven’t?

And even so, why should the Austrian School be right?

Does this make the, Chicago school, Keynesian, etc wrong, they’ve all have their golden times and their failings!

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Steven Farrall

Jan 22, 2013 at 16:06

@RFH

Nope. Austrianism is not a fad. And Keynes is just nonsense. Austrianism is an attempt to understand what actually goes on. It's not a plan to 'run an economy'. Its insights explain clearly why the Failed FSA would be and was a shambles.

You will also recall that there was a big debate in the 30's between Keynes and Hayek, and Keynes carried the day. Not because he was right, he wasn't and isn't, but because he was a skilled self publicist and his economic nostrums told gummint that by getting bigger and taxing and spending more they could be successful in running the economy. Duh! Well politicos and their Satrpas loved that, as it gave them a blank cheque to create unequal taxation and to spend money and get their tame central bank to inflate away the consequential debts to us, so transferring more wealth from the poor to the elites.

Keynes business cycle theory is in direct contradiction to the Austrian analsys. Keynes says that it is the market that creates business cycles whilst Austrians show that it is the fault of central banks.

In every respect using an Austrian view to analyse Brown Balls financial services interventions predicted pretty accurately the financial disasters that have befallen us.

Oh and I did not assume that you had not read studies Austrianism. I was just bringing to everyones intention that it predicted this mess and provided insights into its cause and solution.

The solution is clear. Stop doing what we are doing now and return our liberty to us to sort out our own lives. Stop creating a nursery and children - aka the client state. Liberty requires responsibility and as any of you in business will know that people thrive when given responsibility.

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Richard Billington

Jan 22, 2013 at 16:55

I want to hear more from Stephen Farrall. How can we contact each other? I heard a few days ago about a brilliant economist call Buchannan who died last week. We was also a pragmatist and not of the Keynes School of Inflationary Twaddle. Please put me right

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RFH

Jan 22, 2013 at 18:32

The Austrian school seems to be based a lot on the pure economics of the actions of individuals and minimal government intervention.

The real world is a political economic system; even Adam Smith acknowledged that, as did Marx.

Marxism seems to be being revisited at the moment mainly due to his insight into capitalism with in a political system.

My main argument is that things are never as simple as they first seem and fashions come and go, no one thing can really be right all the time.

At some point we always bump into law of unintended consequences.

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Steven Farrall

Jan 22, 2013 at 18:48

@RFH

Nope.

Marx had no clue, and certainly no 'insight into capitalism'. His whole construct is impossible. Using it no 'economy' is possible. As was demonstrated by the final collapse of the Berlin Wall. Essentially Russia spent the time betwen 1917 and 1989 spending down its resources until it was bankrupt. It created no wealth at all. And this is the same as we had in the UK between 1997 and 2010 - Brown Balls spent down the UK's capital and bankrupted us.

Adam Smith was a child of his times but he was more on the money than anyone else. His treatise has stood the test of time and it can be argued that Mises and the Austrains built on his work.

As I said, Austrianism is not at all a 'fashion'. It is the the analysis of what goes on in simple Human Action. The people that have worked on it - Rothbard, Hayek, Menger, Mises etc etc - have built a very coherent analysis of Human Action.

You can access this today at places like The Cobden Centre, mises.org, the Adam Smith Institute, The cato Institute and many others. (All of them on line).

The reason that it isn't mainstream is that it does for Big Government and bureaucrats, completely. Turkeys do not vote for Christmas. Mises work on Socialism, and its inherent contradictions and its economic impossibility are jewels of logic. As is his work on bureaucracy.

Your penultimate paragraph is a recognition of the fact of Austrianism. It is precisely because the world is complex and knowledge dispersed that no one person or small cabal of bureaucrats can ever work it out. But there is something that can, automtically - the free market and the price signal. Bureaucrats like the FSA distort the information flow and the price signal which sends false messages to human actors and entrepreneurs leading to mal-investment. This is EXACTLY what has happened since 1997 and 2001 (the latter date being the inception of the failed FSA).

So the answer IS simple. Shut down the FSA/FCA.

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RFH

Jan 22, 2013 at 19:05

I think we have digressed from the main subject. No one is saying that the FSA should not be abolished for the useless thing it is or was. But that doesn’t mean that the 100 plus year old Austrian theory as all the answers either.

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Steven Farrall

Jan 22, 2013 at 19:21

@RFH

Nope. Austrianism - which is not a '100 year old theory' but a school of vibrant economic philosophy, provides the logical arguments as to why the Failed FSA has, well, failed, and how its successor the FCA will also fail. It is the only thing that can be used to argue successfully for the death of regulationsism, of which the FSA is the cheerleader.

You will not ever win the argument on shutting down the FSA/FCA in any other way. These bureaucrats are skilled at bogging you down in trench warfare on the ground of their choosing. You have to meet them on your ground, and it has to be solid ground with logic they cannot refute, and Austrianism provides that foundation.

Without being disrespectful it sounds to me that you have not properly studied this. You - and all of us in fact - need to bone up on these arguments and make them constantly. It is the ONLY way we are going to win this. And be very clear regulationism infects all of society - we are just tackling our little corner of it.

And on a personal note, the reason that I am so determined is on behalf of the people I represent. My cleints. They are the chief victims of the Failed FSA - not us. It is they who bear the cost of all this bureaucratic mess.

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RFH

Jan 22, 2013 at 19:41

Yep’ I never studied it, I made it all up.

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Richard Billington

Jan 22, 2013 at 20:13

Fantasic and informative debat guys. I am learning so much. Pleasse keep it going

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Evan Owen

Jan 22, 2013 at 22:25

Me too also, no point arguing with the missus either.

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Steven Farrall

Jan 23, 2013 at 08:30

@RFH

I do hope that that was irony.

I think there is an error in labelling here. Austrianism, like capitalism come to that, is not an -ism at all. It just is. Mises called his magnum opus Human Action, which seems about right.

The good bit is that there are now well argued proofs as to why bureaucratic states always fail and how central planning cannot work, and how socialism (which is an -ism) prevents any formof economic calculation.

So, returning to the article fining the Failed FSA is pointless as the FSA doesn't pay the fine - we do, as in all real taxpayers in wealth creating private business.

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Evan Owen

Jan 23, 2013 at 10:10

Mike Fenwick asks who would pay the fines.

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RFH

Jan 23, 2013 at 11:52

@S F

Nope; I’ve never studied economics of any kind, but I can follow the argument.

Chaos Theory is more my line.

On a lighter note have a look at Max Keiser on Sky Channel 512 tomorrow, or Youtube, I think you’ll enjoy him!

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Cley123

Jan 27, 2013 at 10:42

When you fine the State you fine yourself. Whats the point! Now, sacking incompetent people without compensation, ha ha ha-------------

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Evan Owen

Jan 27, 2013 at 11:10

The regulators are funded by those they regulate, not the state!

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Cley123

Jan 27, 2013 at 12:41

That explains why they have never done their job properly.

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Cley123

Jan 27, 2013 at 12:47

Evan

Hang on a minute. In a ever increasing non competitive market your are correct in pointing out that the state will not pay. It will be the investors who do the paying as they pass it on down the line. Thats you and me!!

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Steven Farrall 2

Jan 27, 2013 at 12:49

@Evan

Nope. The regulationists are funded by the clients and customers of those they regulate. All such 'rents' are always paid by the least elastic factor of production.

@Cley123 - eggsaktly.

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White Stick follower

Jan 27, 2013 at 13:09

The FSA is, and always was, a totally useless 'old boys club' regulating what went right and ignoring what went wrong, until the wheels all fell off, when it spramg into action and carried out a review which it published saying what had gone wrong. It is not unreasonable to expect Regulators to Regulate in real time and act before investors lost fortunes. As it is generally it operates on the basis of 'this must never happen again' until it does very often with the same failed packages just renamed and remarketed.

By & large self regulation does not work, and does not work because the Regulators regulate their paymasters. Why kill the golden goose which provides substantial salaries and, it appears, Knighthoods for failures. (Honours have to be sponsored and refrred to the Honours committee so somewone sponsored Sants). As for the future, well it will be new titles,higher salaries, same bodies, same failures- and presumably same Knighthoods!

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Mike R

Jan 27, 2013 at 14:08

spot on White Stick-- in addition regulation seems to have got out of hand in the UK. It seems that UK Banks some government owned or partly so, are being regulated by Brussels, by the UK BOE, OFT,FSA , also fined by the US. regulatory authorities.

They now spend more time covering this exercise than helping to drive the UK economy forward. So goodbye AAA , Will Osborne Change track? will Mark Carney at the BOE in June change the tunes being played??. Let us all hope someone sees sense.

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Steven Farrall

Jan 28, 2013 at 14:06

@White Stick Follower

Bit confused I think.

Agreed that the Failed FSA was always totally useless - it can never be anything else as it is always ignorant.

Ah but genuine 'self regulation' does work. This is the nub. Centralised regulation by a bureaucracy with arbitrary powers of coercion and sanction will never work. Or rather it will only 'work' in an authoritarian state. All such cnetral planning bureaucrats are forever ignorant and behind the curve, and in large part that failure precipitates failure by increasing moral hazard.

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White Stick follower

Jan 28, 2013 at 17:18

We all have our views, but I know a couple of professionals in different disciplines who take the view that each of their specific Regulators are toothless and ineffective, but have to be paid for by the said professionals.

As for matters as changes of title, salary etc, believe you me, that will happen, indeed the new Regulatory Authorities let it be known last year that higher salaries would be necessary to attract the 'right sort of people'. Higher salaries for those at the coal face doing the spade work will inevitably mean higher salaries as one goes up the management chain- you have to maintain the differentials you know- and the bigger the subordinate empire the greater the rewards at senior level.

As for impact, nothing will change, other than, perhaps, just a few token scalps in the early days to give the impression that the new kids on the block are 'on the ball'.

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