Wednesday, March 26, 2008

Why is Northern Rock the FSA's fault?

I am mystified by today's media consensus that it is the Financial Services Authority that is to blame for the debacle at Northern Rock.

This Times leader is a good example:
The Financial Services Authority gets full marks for frankness, but nothing else. The regulator of the banking industry is there to safeguard the interests of customers and the integrity of the financial system. For all its boast of light-touch regulation in principle, the FSA appears to have taken a lackadaisical approach in practice. The findings of its internal inquiry into the demise of Northern Rock could not be any more damaging to public confidence. It is not so much that the FSA took its eye off the ball; the financial referee was only occasionally at the game.
And so it goes on without mentioning the people who are really to blame. Why is no one talking about Northern Rock's directors?

It was they who devised and implemented the strategy that ran the organisation into the ground and has potentially cost taxpayers billions of pounds.

If at any point you had queried the large salaries paid to those directors you would have been told that they were justified by the huge responsibilities they bore. Yet now things have gone wrong they are being treated almost as victims of the FSA.

They are like spoilt teenagers who demand to be allowed to stay out all night, get into trouble and then say to their parents: "You should have stopped me doing it. I'm only a teenager."

Why don't we treat the directors as adults and blame them for their appalling conduct of the business?


Alex said...

The directors *were* at fault and they have all been fired. The regulators (the FSA) were also at fault. They failed to regulate the bank properly. The directors can only ruin one bank, but a failure by the regulators can wreck the whole system. Nobody at the FSA has been dismissed.

In their report into their own failings the FSA stated that they did not consider liquidity risk to be a serious issue, because they expected the Bank of England to provide liquidity if necessary.

Shame they didn't consult with the Bank of England before NR went down the tubes.

Anonymous said...

Let's be very clear - the whole regulatory system set up under the FSMA 2000 is entirely flawed. It is not regulation, it is nationalisation lite. This is a deliberate policy of Nuliebour s having ditched cl4.4 they need another way to nationalise.

This recent 'failure' of the FSA exposes the lie that regulation, as currently constituted, is of any use at all. It's a free market out there stil, just. As such companies will make mistakes and righly so they will pay for those errors in failure. Similarly new businesses will arise that will kill off older inefficient businesses. This is the necessary creative destruction of anglo saxon libertarian democratic judeo christian free market capitalism with compassion.

The delusion is that regulators are any better at getting things right and not cocking up. They are not. I know this applies to the FSA as I work in retail financial services and it has taken 22 years for regulators to vaguely catch up to where we are in deliverig value for money and quality. We are now again moving ahead of the FSA. The only way the FSA (or any regulator for that matter) would be to stifle innovation. Worryingly this is already happening by the application of ever more complex rule books that only the most nerdy of compliance bods (mostly fugitive train spotters) ever read.

The solution is totally scrap the FSMA 2000 and the FSA/FOS/FCSC structure and start again.

Lastly, it is very important that banks fail. It stops them getting too arrogant.

Anonymous said...

Why should the FSA be blamed?

Simple really. If it can be shown that it's the FSAs fault (=the fault of the government regulator) then the shareholders should be compensated by the government.

I don't agree with this argument - you buy shares in a company you take the risk - but I suspect we'll see more of it in the coming months.

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