20 September 2012 Article By By Anthony Hilton
The Government is slowly moving towards giving the Financial Stability Board the tools that will help it act against future excesses in the banking system by, for example, increasing the capital banks have to put up when the business they are doing is thought to be getting too risky.
The Government is slowly moving towards giving the Financial Stability Board the tools that will help it act against future excesses in the banking system by, for example, increasing the capital banks have to put up when the business they are doing is thought to be getting too risky.
New Treasury Minister Greg Clark announced some moves in this direction only this week. But he did so against a background of disquiet and growing scepticism among regulators and others that the huge regulatory reform currently under way will actually deliver a safer system.
There are doubts lucidly expressed by the Bank of England’s Andrew Haldane that the more complex a regulatory tool becomes, the less effective it seem to be in providing an accurate picture of what is going on. There is also concern that putting more powerful brakes on a car does not stop accidents; it simply makes people drive faster. When the mood takes them, bankers will drive to the limit wherever that limit is set.
But it is not totally hopeless. Elsewhere in the system, the Financial Services Authority has published a paper on proposed reforms to the financial compensation scheme — the fund which steps in to compensate individual holders of financial products which have failed and where the seller is no longer around to provide redress.
The key issue is whether the fund should move away from a mutual system, where the whole industry gets involved in big claims, to a silo system, where only brokers pay for the problems caused by brokers, or financial advisers for the problems caused by other financial advisers. The current system starts on that premise but the industry as a whole has to cough up where large claims have exhausted the resources of an individual sector.
The great advantage of making firms exclusively responsible for the sins of their peers is that it might make them more aware of their responsibility for the health of the whole sector. People moan about regulators failing to spot wrongdoing, but the truth is that firms working in the same industry are far better equipped to spot something odd in a competitor than a regulator who is of necessity on the outside.
The further truth is that they often do spot it — but tend to look the other way. The culture of the financial services firm has always been to do nothing on the basis that if its suspicions are confirmed, the competitor will go bust, and with one less firm competing for business there will be more work for those still standing. The financial industry has never properly grasped that the failure of one firm does damage to them all when it leads to a further erosion of trust. It is time it did.
If the compensation fund was reorganised so that when one firm did something wrong, its peers had to share a massive bill for compensation, then they might take more interest in and responsibility for the conduct of others in their industry. Specifically, instead of keeping suspicions to themselves they might inform the regulator.
There will be those who will never be able to tell tales to teacher as they would see it. But that culture needs to change. Making whistleblowing when they see dangerous behaviour both the respectable and the responsible course of action offers a better hope for improvement in financial services provision than any amount of detailed regulation.
Forget Libor, we must look at RPI
When the row over the manipulation of Libor was in full swing a couple of months back it seemed churlish to point out that in economic terms it did not matter much. The winners and losers more or less cancel each other out when interest rates change. What it told us about the culture in the investment banks who thought such manipulation was all part of the day’s work was the important part.
In terms of impact on the public, the rate of inflation as measured by the retail price index is altogether a different matter. Though the state pension is no longer pegged to it, the annual increases paid by many private sector pension schemes still are. It is also the benchmark for the return on inflation-linked securities issued by the government and some private companies. In everyday life it is at the heart of the annual changes in the prices charged to consumers in regulated industries like electricity, rail and water. Formally or informally it is the measure by which the generosity or otherwise of pay increases is measured.
This week was confirmed what insiders have known for some time — that the statistical techniques used in calculating the index are so flawed that it consistently gives the wrong result, normally by making inflation appear higher than it actually is. This is a pretty startling fault in a measure so widely used, so a consultation is under way which is likely to bring in changes to the process to make it less subject to error. These changes, if adopted, are likely to result in a lower RPI and therefore lower payments on everything linked to it.
There is no dishonesty here, nor any message about the morality of those engaged in the task of revision. Yet it is surely bizarre that such a fundamental change in a key benchmark which will directly affect the pockets of everyone in the country should attract almost no comment. If Libor, which no one understood or cared much about, dominated the news agenda for weeks, one would have thought the problems with the RPI would merit at least a brief moment of fame.
There are doubts lucidly expressed by the Bank of England’s Andrew Haldane that the more complex a regulatory tool becomes, the less effective it seem to be in providing an accurate picture of what is going on. There is also concern that putting more powerful brakes on a car does not stop accidents; it simply makes people drive faster. When the mood takes them, bankers will drive to the limit wherever that limit is set.
But it is not totally hopeless. Elsewhere in the system, the Financial Services Authority has published a paper on proposed reforms to the financial compensation scheme — the fund which steps in to compensate individual holders of financial products which have failed and where the seller is no longer around to provide redress.
The key issue is whether the fund should move away from a mutual system, where the whole industry gets involved in big claims, to a silo system, where only brokers pay for the problems caused by brokers, or financial advisers for the problems caused by other financial advisers. The current system starts on that premise but the industry as a whole has to cough up where large claims have exhausted the resources of an individual sector.
The great advantage of making firms exclusively responsible for the sins of their peers is that it might make them more aware of their responsibility for the health of the whole sector. People moan about regulators failing to spot wrongdoing, but the truth is that firms working in the same industry are far better equipped to spot something odd in a competitor than a regulator who is of necessity on the outside.
The further truth is that they often do spot it — but tend to look the other way. The culture of the financial services firm has always been to do nothing on the basis that if its suspicions are confirmed, the competitor will go bust, and with one less firm competing for business there will be more work for those still standing. The financial industry has never properly grasped that the failure of one firm does damage to them all when it leads to a further erosion of trust. It is time it did.
If the compensation fund was reorganised so that when one firm did something wrong, its peers had to share a massive bill for compensation, then they might take more interest in and responsibility for the conduct of others in their industry. Specifically, instead of keeping suspicions to themselves they might inform the regulator.
There will be those who will never be able to tell tales to teacher as they would see it. But that culture needs to change. Making whistleblowing when they see dangerous behaviour both the respectable and the responsible course of action offers a better hope for improvement in financial services provision than any amount of detailed regulation.
Forget Libor, we must look at RPI
When the row over the manipulation of Libor was in full swing a couple of months back it seemed churlish to point out that in economic terms it did not matter much. The winners and losers more or less cancel each other out when interest rates change. What it told us about the culture in the investment banks who thought such manipulation was all part of the day’s work was the important part.
In terms of impact on the public, the rate of inflation as measured by the retail price index is altogether a different matter. Though the state pension is no longer pegged to it, the annual increases paid by many private sector pension schemes still are. It is also the benchmark for the return on inflation-linked securities issued by the government and some private companies. In everyday life it is at the heart of the annual changes in the prices charged to consumers in regulated industries like electricity, rail and water. Formally or informally it is the measure by which the generosity or otherwise of pay increases is measured.
This week was confirmed what insiders have known for some time — that the statistical techniques used in calculating the index are so flawed that it consistently gives the wrong result, normally by making inflation appear higher than it actually is. This is a pretty startling fault in a measure so widely used, so a consultation is under way which is likely to bring in changes to the process to make it less subject to error. These changes, if adopted, are likely to result in a lower RPI and therefore lower payments on everything linked to it.
There is no dishonesty here, nor any message about the morality of those engaged in the task of revision. Yet it is surely bizarre that such a fundamental change in a key benchmark which will directly affect the pockets of everyone in the country should attract almost no comment. If Libor, which no one understood or cared much about, dominated the news agenda for weeks, one would have thought the problems with the RPI would merit at least a brief moment of fame.
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