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.
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…
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.”