Wednesday, 23 September 2009

Regulation - escaping capture

Yesterday I talked about how regulation helped to shape the television industry in the UK. But what of industries that shape the regulator? Today two stories about regulation in the banking and finance industry caught my eye. Firstly the European Union unveiled its tentative plans for banking 'super-regulators', intended to form a supra-national banking authority capable of intervening in the regulatory affairs of member states. Its hoped that this structure, which would create a European Systemic Risk Board to monitor levels of future risk, as well as watchdogs specific to the banking, insurance and stock exchange sectors. It remains unclear what will be considered a bad risk or bad banking, insurance or stock exchange practice, but the proposal may well be a good one, especially as it appreciates the need for an international approach to what is today a very international industry.

Meanwhile back in the UK Lord Turner, Chairman of the UK regulator, the Financial Services Authority (FSA), argued last night that 'radical change' was required in the UK financial sector, in which banks must focus on their 'essential social and economic functions'. This is code for going back to the boring old days of the clearing banks which effectively operated as the cogs for the system, with merchant and private banks as well as building societies indulging in most of the risky stuff. Whether this should happen or not is another post, but first we should decide what we want our banks to do. Then to encourage them to do this we will have to remove people with banking or financial interests from the regulatory sector to prevent 'regulatory capture', in which poacher turns gamekeeper. Industries tend to be rather close knit, with management personnel frequently moving from firm to firm and knowing those at other firms well; they may even have attended the same universities or even schools. The potential, then for a banker who is hired as a regulator, no matter how well paid, to view his friends in a neutral way seems low, further they may even emphasize with practices considered fashionable in the banking industry but which are perhaps not in the public interest. If we are to create a European regulatory organization, the worst starting place would surely be to staff it with former bankers. Regulators need to be recruited from other areas - well informed, but with a different background and different interests to those they regulate.

By way of exemplifying the UK situation - the present CEO of the FSA, Hector Sants, has an impressive CV including having worked for Credit Suisse First Boston, as well has previously having been a director of the London Stock Exchange. Deputy Chair Hugh Stevenson is presently Chairman of Equitas Limited, an re-insurance company, and The Merchant's Trust Plc., an investment trust, and has numerous past positions in the finance industry. Sants and Stevenson would no doubt argue that their experience in the financial industry puts them in an excellent position to oversee good practice in the industry. But as Sants and Stevenson have both had senior positions at the FSA since 2004, well before the present crisis, does the reality of their tenure suggest that they have done this?

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About Me

London, United Kingdom
I'm Lecturer in Management at The York Management School, at The University of York, UK. I teach strategic management to undergraduate and masters students, as well as running the masters dissertation module. My research focuses on business and management history.