Who will guard us against the regulators?

The credit crunch era has led to demands for us to be protected against the risk of such an event happening again. This has led to changes in regulatory structures and an expansion of regulatory bodies. On the surface this looks like an attempt to deal with the problem but sadly the good news such as it is often ends there. The record of regulators improving things is weak in many cases and in the case of central banks seems to involve protecting the banks it regulates much more than the consumer or indeed the investor. Along this road we have the concept of regulatory capture. This was defined back in 1971 by George Stigler.

A central thesis of this paper is that, as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.

As you can see he is no fan of the concept and his work posed a challenge to the concept of regulation being for the public good. You may also note that according to his theory regulators do not have to be captured by the industry as they start that way.

UK Ofwat

Today news has emerged of criticism of the UK water regulator Ofwat or the office for water. As well as pointing at a clear failure of its role it has been exposed as developing one of the themes of this blog which is that the UK establishment is prone to institutionalised inflation. I will let the House of Commons Public Accounts Committee take up the story.

In its Fifteenth Report of this Session, the Committee concludes Ofwat has consistently over-estimated water companies’ financing and tax costs when setting price limits.

As a result, water companies made windfall gains of at least £1.2 billion between 2010 and 2015 from bills being higher than necessary.

You can see the issue here and it looks immediately like a clear win for the concept of regulatory capture and failure. The Chair of the PAC Meg Hiller MP put it thus.

“Ofwat was set up to protect the interests of customers, most of whom have no choice over who supplies their water yet must pay bills typically running to hundreds of pounds.

“Many householders will therefore be appalled to learn these bills could have been smaller had Ofwat adopted a different approach to setting price limits for water companies.

This poses quite a few issues as if we go back to 2011 when the UK was suffering from 5%+ consumer inflation then a regulator was pushing it higher! Also as a Londoner it reminds me of the proposed Thames Water Tideway Scheme which was criticised for being a very expensive way of doing the job. As the cost rose from £1.7 billion to £4.2 billion which makes you think now the Guardian reported this.

Project assessor no longer backs Thames Tideway Tunnel saying spiralling £4.2bn bill brings only limited benefits

Indeed Professor Chris Binnie went much further as you can see below.

The tunnel will do what it says it will do. But it is almost certainly a stupendous waste of money for very limited benefit.

One of the accusations was that Thames Water can charge a profit on capital investment like this but could not on the alternative suggested to stop sewerage overflow. Such criticisms have acquired additional force from the PAC report. George Stiger’s critique that regulators protect the industry and not the consumer seems to ring true in the water industry.

The Financial Conduct Authority

This is supposed to do the following according to its website.

We work to protect consumers from the harm that can be caused by bad conduct in the financial services industry.

Now let us look at what has taken place as summarised by the Financial Times.

A Bank of England official oversaw the move by the City regulator to scrap a review into Britain’s banks, it emerged on Tuesday, just a day after the Financial Conduct Authority insisted external pressure had not influenced its decision.

We see a variety of issues here and the obvious one is with so many banking scandals having taken place in recent times –  PPI miss selling,Li(e)bor fixing and foreign exchange fixing come immediately to mind – it is rather mindboggling that a regulator could scrap an investigation. There is also the issue of a Bank of England official seemingly enforcing this decision.

Megan Butler, an executive director at the BoE’s Prudential Regulation Authority (PRA), was a key figure overseeing the plans to drop the FCA’s inquiry into whether banks had changed their working culture since the financial crisis.

As she only arrived at the FCA in September its looks as if she was posted in with a specific objective which does not seem to fit with the Bank of England’s stated objective.

Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.

Actually this does remind me of something from the past. This time it is Bernard Woolley from Yes Minister offering the advice.

‘two basic rules of government’: ‘Never look into anything you don’t have to. And never set up a public inquiry unless you know in advance what its findings will be.’

I guess that they were afraid of what the findings might be. Also I am reminded of Sir Humphrey Appleby telling us in these situations that you “appoint someone who does not need influencing” . Although in the cases of judges this can go wrong as sometimes they are so obviously desperate for a conviction that the jury acquits out of bloody-mindedness!

Oh and as we mull the concept of “Never believe anything until it is officially denied” (Jim Hacker ) there is this from the FCA  too.

To suggest there has been any PRA/BoE influence on this decision is simply untrue.

Also there is a final point as we remind ourselves that the middle word in FCA is Conduct.

The FCA said it would not publicise “good” and “poor” practices at banks because it was not perceived as being the expert on working culture. Instead, it said the onus was on the industry to identify and measure good practices.

So it does not look at conduct? This leaves it open to the Adam Ant goody Two Shoes critique.

Don’t drink, don’t smoke, what do you do?
Don’t drink, don’t smoke, what do you do?
Subtle innuendos follow
There must be something inside

Bank of Portugal

This is not just a UK issue as those who recall my update on Novo Banco from the 21st of December. The nearly 2 billion Euro loss for Novo Banco bondholders has various regulatory issues. For a start Novo Banco was supposed to be a good bank reinforced subliminally by the choice of name. The Bank of Portugal is not only the central bank but is also the banking regulator (on behalf of the ECB) so let us remind ourselves of what it sais as Novo Banco was created out of the ashes of Banco Espirito Santo.

The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets.

Not that clean apparently…

Comment

Do regulators always follow a road to nowhere? That would be over harsh but there is many clear influences heading that way. Firstly there is the issue of members of it being chosen from a small group called mockingly by some but seriously by others “the great and the good”. They are often captured from the beginning. The second is the way that regulators are often captured by the industry itself over time.

There is nothing like a Dame

This type of issue was highlighted earlier this week by this announcement from Bloomberg.

Lin Homer, chief executive officer of Her Majesty’s Revenue & Customs, is to step down in April after a bruising four years during which she faced questions over the tax practices of companies from Google Inc. to HSBC Holdings Plc.

Only at New Year was she made a Dame.

For services to Public Finance.

As to what those services were I will leave it to Margaret Hodge when she was chair of the PAC.

“We don’t trust your judgment,” Hodge told Homer. “You have lousy judgment and the people making those judgments aren’t fit for purpose.”

 

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23 thoughts on “Who will guard us against the regulators?

  1. Ah but, the Regulators are always zealous against the small businesses they regulate! The capture is by the big guys….in other words we have corporatism, which is beloved of all political parties.
    Naturally, the big guys can offer the Regulators staff rather plum jobs when they leave the Regulator…..not, of course, that I would imply any such thing would ever influences decisions!

  2. Hi Shaun

    When I was at university, many, many years ago, I had an American tutor in politics. One day he said something that has stayed with me; he said: in the US everyone is standing up shouting whereas in the UK there is a desire to suppress conflict. He was right and this extends into many areas of our national life, quite apart from the economic sphere. A contemporary example of this will be the Chilcot Report which is most unlikely to be anything other than a whitewash.

    I’m afraid this principle extends into the area of regulation and the regulators are merely following a more general script as is suggested above; they may be different fish but they swim in the same sea.

    In general you do not change a general modus operandi like this by normal political evolution or change; fundamental change normally comes on the back of a major scandal or some event which requires a complete reset of the whole system.

    • I was hoping that the expenses scandal would lead to a sea change in attitude amongst our political betters,but the evidence since says ‘no’.

      Having said that,Trump/Sanders in the US and Ukip’s rise/Corbyn’s election, show that to some extent people are getting restless for change.

  3. I actually read Ofwat as Oftwat.

    TBH that mistake clearly indicates my feelings towards regulators; which essentially consists of lots of people, who wish to get highly paid jobs with the companies they are supposed to be regulating. Call it an integrity thing!

    intending to go and work for the companies they are supposed to be regulating

    • Hi Michael and welcome to my corner of the web.

      I do have some personal experience of that as back in the day I worked at Phillips and Drew where Hector Sants ran the New York office. I probably met him although I do not recall it. He is a summary from wikipaedia

      “In May 2004, Sants joined the Financial Services Authority as the Managing Director responsible for Wholesale and Institutional Markets.[6] He was appointed FSA Chief Executive in July 2007…….In December 2012, it was announced that Sants would take up the position of Head of Compliance and Government and Regulatory Relations with Barclays Bank from January 2013. It had previously emerged that after Sants stepped down from the FSA in June, in the same month the FSA fined Barclays £59.5m for manipulating the interbank borrowing rate Libor (Libor scandal). ”

      later of course he suffered from “exhaustion and stress”…

  4. I always remember hearing someone describe the UK’s response to the financial crisis as
    ‘handing over the management of the crisis to all the people who created it and still didn’t manage to see it coming.’

    Quite apt I feel.They lost all credibility in my eyes and haven’t really recovered it since.

    Particularly when you come onto places like this blog and you see the methodology behind their numbers exposed as either illogical,unrepresentative or just downright misleading.

    • Hi Dutch

      I was a fan of the switch of the regulatory authority to the Bank of England from the hapless FSA. Not because I had great faith in it but it was the better of two poor choices. But of course it has had a poor record as the Li(e)bor and Foreign Exchange scandals arrived with the deep suspicion that it chose to look the other way when it was told about it. What next?

  5. Maybe not all that far off topic to recall Orwell’s Appendix to “1984”, ‘The Principles of New Speak’, a language expected to finally supersede Standard English by about 2050. “The B vocabulary consistd of words which had been deliberately constructed purposes; words that….were intended to impose a desirable mental attitude upon the person using them.” “Such words, for instance, as joycamp (forced-labour camp) or Minipax (Ministry of Peace, ie Ministry of War meant almost the exact opposite of what they appeared to mean.” Orwell then went on to spell out the political uses and intentions of ‘telescoped’ neologisms (Nazi, Gestapo, Comintern, etc), culminating in his 1984 vision of a future Minitrue (Ministry of Truth, ie Ministry of Lies). The political purpose was a name that can be uttered without taking or provoking thought, a word without the associations or provocations to critical thought that the use of full, normal English vocabulary might engender. “The intention was to make speech…as nearly as possible independent of consciousness.”
    Ofcom, Ofwat, Oftel, etc? No accidents, these. Whether their inventors got there from reading of Orwell, or just went blithely down a road that Orwell foresaw, I cannot say. But 1984 NewSpeak it is: the language, the uses of the language, the Big Brother practices it cloaks.

  6. Commercial companies use anti-compete clauses in their employment contracts. Perhaps the tax payers should demand restrictive clauses that prevent regulators accepting “accent to heaven” roles in regulated companies.

    • Hi ExpatInBG

      You have a good idea there. The official mantra that somehow all this reflects the quality of the people is frankly laughable. The truth is that these people get jobs mostly because they are insiders with a valuable contact list. This is a big issue in many areas of public life as politicians,regulators,generals et al go to jobs with companies with which they had links. What value did the taxpayer get when it was paying them? The gravy train goes on…

  7. What also angers me about this is that a lot of people are being paid (admittedly some not entirely their fault) for failing to do the job for which they were employed and yet you don’t hear the heckles for them to be held culpable.

    From the few people I know who work for the likes of HMRC and the Financial Ombudsman it’s pretty devastating how little work it sounds like they actually do for the salary they are paid. I’ve been told that a senior manager at the FO actually advised a new joiner to install a mouse-clicker so that they could appear to be working when at home…

    My point being that a lot of these “independent” companies have significant flaws particularly in respect of the integrity of their employees.

    • Hi CJ and welcome to my corner of the web.

      I have long suspected that to be the case at the top of these organisations. There are large salaries and pensions to be hard for what is usually a record of failure. I had always thought though that all the work was done lower down and that some of those jobs could be pressurised and not well paid.

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