The utter shamelessness of the financial regulators

If there is anything that has particularly angered me about the whole financial crisis, it is the element of insouciant superiority with which the financial regulators talk about their role and their function, in the policing of the City of London, and their wholesale unwillingness to accept that they have been an abject failure at the job..

Yes, I use the word 'policing', and I do so deliberately, because that, at the end of the day, is their primary objective. They are there to ensure that the financial institutions interpret the law and work effectively to provide a profitable and legal environment to support the economic ambitions of Great Britain plc. They are also there to ensure that the banks obey the law and comply with the regulations. In that function, they have been singular failures, and the UK Treasury Select Committee has branded them as having failed in this respect.

Insofar as any financial regulatory body has done the job at all well in the past, the FSA has proved itself to be possibly no worse, albeit no better than its predecessors, but we, the general public are owed a better explanation and a more searching analysis of their inability to police these markets than we have so far received.

I have been recently engaged in reading another piece of evidence given by Lord Adair Turner, outgoing Chairman of the failed FSA, to the Select Commission on Banking, and it is in some of this evidence that I say that the FSA under Lord Turner's watch, has proven itself to be an arrogant and elitist entity, unwilling to examine the ordinary day-to-day needs of a regulatory interface, preferring to engage in high-level policy matters which are removed from the coal-face of regulation.

From the outset of the interview on 27th February 2013, the chairman, Andrew Tyrie asks:

Chair:  I have here an extract from your written submission to the Commission that cites three reasons why trust in UK banking has declined. What about regulatory failure?

Lord Turner: That is one of the things that lies behind that. It is clear-and the FSA has been more honest and open about that than any organisation across the world, just about-that a lot of the things we were doing before the crisis were not the right things to guard against these problems. I would still see regulatory failure as a supporting mechanism that allowed those other three aspects.

Q4410 Chair: But the public know there is a regulator, so they are likely to be more trusting of a bank if they think the regulators are doing a good job.

Lord Turner: That is a fair point. I believe that the FSA over the past four years-and I think it had begun before I arrived at the FSA-has taken the steps that are putting that right, in terms of our prudential regulatory regime and supervision, and our conduct regime....I have thought over the last four years that things had simply gone so wrong with the regulatory structure that there was almost nothing we could do at the FSA that would make people trust the brand name of the FSA...I think in substantive terms we have changed almost entirely over the past four and half years.

Q4411 Chair: But it is not the change of the regulatory structure I was referring to, but the regulation itself and the regulatory culture.

Lord Turner: That is what I am referring to. I think it has fundamentally changed.

Q4412 Chair: We have been given the task of looking at the culture of banking. It is clear from the evidence we have collected that there is something quite seriously wrong with aspects of the culture of banking. I am asking you, one, whether you think there has been something quite seriously wrong with the culture of regulation and, two: has it been fixed?

Lord Turner: Yes, I think it was wrong, and I think it has been fixed. There has been a continual process of fixing it, which had begun in about the year before I arrived at the FSA, and we have been in a continual process of changing it since then.

Q4413 Chair: Is there anything you want to add to that, Mr Wheatley, before I pass the questioning on?

Martin Wheatley: Yes, I think so. I agree that the regulatory failure, in a sense, was a failure of philosophy. It was a belief, for a period, that banks would self-correct, would know best and would put their customers first, because that was what was good for banks and good for shareholders-and a belief, therefore, that regulators did not need to intervene so strongly. It was also, in a sense, a backward-looking view, at whether firms were complying with a set of rules, not a forward-looking view, at whether firms were getting the right outcomes for consumers. Those are the sets of changes which, as Adair said, have been in process for some time now. The next change embeds them very fully in the new structure.

Q4414 Chair: You will be forgiven for a hint of scepticism, because what we get from the banks whenever they come to see us is, "Well, yes, there was something wrong with us. We did have a cultural problem, but we’ve fixed it." Then something else goes wrong and they say, "Well, yeah, there was just this extra little bit of the cultural machinery that needed attention and we’ve now fixed that, so you can rest easy." You gave us a clear answer: you think that you have fixed it.

Lord Turner: Well, I think one would be wary of saying that the fixing is complete, and I think the successor organisations will take it forward, but I think in many ways the way that we do regulation and supervision now is transformationally different from that before the crisis.

Q4415 Chair: You mean culturally better?

Can you see what I mean? There is no suggestion in the mind of Lord Turner that anything might have been wrong under his leadership. It was wrong but now it has been fixed.

Now I don't know about you but I would have thought that the last 4 and a bit years have seen some terrible failures of regulation, LIBOR, drug money laundering, whatever, but Lord Turner thinks that on his watch these have got better!

Martin Wheatley takes it a step further. He thinks it's all a question of 'philosophy'. He feels it was 'a belief', for a period, 'that banks would self-correct', 'would know best' and  'would put their customers first', because that was what was good for banks and good for shareholders- and a belief, therefore, that 'regulators did not need to intervene so strongly'.

Again, I never believed for one minute that the banks would self-correct, why should they. They were rushing like a load of greed-fuelled Gadarene swine towards the precipice, they were screwing their clients left, right and centre with PPI fraud, what on earth was going to make them pull back?

This statement by Wheatley is the most arrogant and elitist argument I have come across for years for simply doing nothing! It is a typical regulatory position which believes that banks are inherently institutions for good, and that they will not knowingly do anything wrong deliberately, and when they find themselves out of kilter with the system, they will self-correct, and put their customers first. Where has this man been all these years, what alternative time-warp has he been inhabiting?

It never occurs to these intellectual Mandarins that they might need to do something urgently because in reality, the banks are a bunch of organised criminal gangsters, busily plundering every source of wealth they can find! They just don't think like this, and because they don't understand this phenomenon, they are the most ill-suited to be running these bankster outfits.

This is what the SEC meant when they said to me that Americans assume that any institution which handles another man's money has the propensity to be a crook and they legislate for the likelihood, while the British assume that any institution that handles another man's money is run by gentlemen, and they are shocked and surprised when they find that the converse is true!

These men can't see any reason or even be bothered to learn from the lessons of history. Listen to this episode of drivel and frightening off-hand ignorance.

Q4416 Lord Lawson of Blaby: Lord Turner, as you are well aware, the banking crisis which we have all just lived through-and is still to some extent ongoing-is not a one-off event. Over the past 100 years there have been a series of banking crises. If you study these, you see that there are a number of common elements, yet somehow or other the lessons of history never seem to be learnt. To what extent are FSA staff taught about the history of previous crises? To what extent are they aware of it? To what extent are they looking out for the things that history might suggest they should be?

Lord Turner: That is a very good point. I have not looked at our training programmes; I will now encourage the PRA in particular to do that and to say, "Is there a history element of it?" You are quite right that there are a series of banking crises which have extraordinarily common features... I think it would be a good piece of advice- it is not something I picked up before- to the PRA in particular in future, to embed a bit of history of what happened before. This will matter, in particular, in 10 or 15 years’ time when there will be another "This time it’s different" myth...I think that is a good point.

Q4417 Lord Lawson of Blaby: I am glad to hear you say that. I think it would be helpful if they had this training. It is perhaps concerning that they have not in the past, but if they do that in the future, that would be excellent. It is not just the particular forms of bad lending that you mentioned. Particular forms of misconduct are also interesting because there are very great similarities. To that extent do you think it might be useful if not merely the PRA, but the people in the FCA also had some knowledge of the history of past banking crises and banking meltdowns?

Martin Wheatley: We have built into our training certainly the lessons from the recent crisis-the past five years. It is an interesting point as to whether we should take a more expansive view and look at the repeated crises over a longer time period,

Q4418 Lord Lawson of Blaby: It could not do any harm, could it, if you were to do that with your staff in both the PRA and the FCA?

This is almost so fantastical it is almost past belief. The Chairman of the FSA did not know what his staff were taught in their training courses! If it wasn't so serious it would be laughable. 'Errrrm yes, perhaps understanding a bit of history in this regard might be a good idea...I never thought of it before! Excuse me, but this is unforgiveable! Hasn't he ever heard of the South Sea Bubble, the Great Tulip Mania, The Great Railway Share scandals, Rolls Razor, The Wall Street Crash, the Great Depression and all the other major frauds and scams which have bedevilled the financial world for nearly 300 years. Does he not think there might be lessons to be learned here about the way in which ordinary people react when they are confronted by manias and financial delusions?

I've got news for you, Lord Turner, try reading 'Extraordinary Popular Delusions and the Madness of Crowds' by Charles McKay published in 1841,  you might learn something, and so might the staff of the PRA and the FCA.

I could go on but I don't see the point.

The real issue I have tried to amplify is that appointing people like Lord Turner and Martin Wheatley to these hyper-important roles is all very well, but they need someone to stand at their shoulder and constantly remind them that the financial sector isn't all made up of nice people who go to the Opera and Glyndebourne, appreciate fine wine and give to good causes. They also have more than their fair share of spivs and misfits and psychopaths who cheat and steal, and don't have a lot of time for regulators or rules or laws, and who will cheat steal and lie at every given opportunity.

It is not enough to stand by and simply assume that banks will 'self-correct (how I love that phrase) when the shit and the fan are about to come into contact with each other!

This country has suffered hugely at the arrogant hands of these regulatory apologists. I have been a financial regulator and I know first - hand what needs to be done to keep the financial practitioners in line, and it isn't a 'light touch' approach. The banks have been bailed out by the Government and the Bank of England in the naive belief that they will do the right thing because it is good for their customers. They won't, and that's all there is to it.

AS Simon Jenkins said in the Guardian today;

"...The culture of greed in the City was nothing to the culture of ineptitude at the Bank of England and the Treasury. They pumped out the money. Never in British economic history can so much have been so wasted on so fruitless a cause. And still no hint of remorse...."

Was Simon talking about the banks or the regulatory failures? Answers on a postcard please!