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?

British Television - an industry shaped by technological and regulatory constraints

The decline of the mainstream commercial television industry in Britain continues apace as the industry struggles to compete with the internet and the entry of digital and satellite channels, as well as the general diversification of entertainment. Today saw two separate news stories regarding the continued troubles of ITV plc., the UK's largest terrestrial broadcaster. This morning a story appeared warning that ITV, (which runs the UK's 'Channel 3' in England and Wales) as well as Scottish and Northern Irish franchisees STV and UTV could sink into deficit on their license payments to government by 2012 by £38-£64m. This would come on top of already substantial losses which are unlikely to be stemmed fully by 2012; ITV made a deficit of £2.7bn in its 2008 operating year. Additionally ITV and STV are at loggerheads as STV has dropped many of ITV's programmes from its schedules to save money, and today ITV, stung by the loss of a major client for its output launched a claim for £38m it claims it is still due from STV. Scottish viewers meanwhile find themselves unable to watch ITV's core entertainment schedule.

Many of these problems arise because of a historical straitjacket that ITV, STV and UTV find themselves in. Back in the 1950s when central government decided to introduce commercial television into the UK to compete with the public service BBC the amount of bandwidth available was constrained by VHF transmission technology then in use. Additionally the General Post Office, the government ministry which at that time ultimately controlled communications, was unwilling to license more than one commercial channel. However the 1954 Television Act required that 'adequate competition' exist between programme suppliers. A system of 15 or so local monopolies was thus devised which would sell each other programmes, as well as provide regional news and programmes for their region. More populous regions, such as London, the Midlands and North were given two programme companies, one of which would broadcast during the week, the other at weekends. These larger companies were also to be responsible for supplying companies in more marginal regions, such as North East England or the West Country with programmes. This contrasts with the system of affiliates which evolved in the USA or Australia for example, where a central company supplies programmes to a network of affiliates which produce nothing but local news. In practice there was little competition between programme companies, with a fairly standard schedule evolving across all regions. But the system worked, and the companies made money.

Coming back towards the present, the main competition introduced by the 1990s was from the state owned but commercially funded Channel 4 and from the satellite company BSkyB. ITV remained the only fully commercial terrestrial network in the UK, a position it effectively still holds, Channel 5 having been introduced in 1997 when the industry was already in decline. A system of premium payments for ITV license holders was introduced in the 1990 Broadcasting Act, which was also accompanied by a de-regulation allowing companies to own more than one franchise. The result was that many of the smaller companies were gradually swallowed up by the larger companies until the eventual formation of ITV plc in 2004, a consolidation of about 12 companies in as many years. The result has been a gradual rationalisation of content production, with local news areas merged together and the channel relying on a smaller portfolio of hit shows. The remaining TV audiences have left ITV for the BBC and newer operators, while it seems likely that the company's news production, which has gradually lost gravitas, will be bailed out by the 'top slicing' of the TV license fee, at one time unthinkable.

Had the UK adopted a system similar to that of the US, of competing networks based around a single supplier, in the 1950s we might now have a more healthy broadcasting industry. Such a system would have achieved the centralisation that ITV's management wanted to attain in the 1990s while providing the competitive incentive to keep standards high. Affiliated stations also compete for local news audiences in the US and such a system could have kept standards up in the UK, maintaining audiences for local news on television. Additionally a dispute such as the present STV/ITV could be solved by ITV finding an alternative outlet for its programmes in Scotland. Its even likely that the challenge of Sky in areas such as sport broadcasting could have been headed off more effectively with a wider range of bidders for sport in the first instance. The quality of news on commercial television generally would also be higher as channels competed with each other, rather than playing second fiddle to the BBC as ITV has. Unfortunately none of this was foreseen in 1954, and the opportunities for reform were not taken later, for instance when the first UHF channel was given to the BBC. Which is why today the BBC continues to dominate UK broadcasting with the commercial sector, much stronger in most countries, left far behind.