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Regulation, the truth is out. We don’t know what we are doing. But does it matter?

Something to consider – is the FSA and the Bank of England run by a bright and talented group of people who have amazing foresight? Or are they subject to the same limitations as the rest of us, where collectively they operate around an average, often dragged down by politics, albeit with some PR?

Surprise then when I read a speech made on 11th October 2011 by Andrew Bailey, Director of UK Banks & Building Societies at a APCIMS conference.

He was talking about the Prudential Regulation Authority (PRA) which will take up responsibility from the FSA on prudential supervision.

He asked a big question.

“…….do we understand sufficiently why we are undertaking this supervision?”

The answer was “no”.

This is a brave admission. Furthermore he went on to say.

“When I look at the Bank of England’s other public policy responsibility, monetary policy, I see a different state of affairs.  You can argue about whether you agree with the MPC’s decisions month by month, but what is undisputed is that the MPC has a very clear objective to achieve sustained low inflation and thereby contribute to stability of the economy……………………”

This was followed up by stating some objectives:

  • A stable financial system
  • Orderly failure of firms not a no failure regime
  • Improved articulation of standards
  • Counteracting the forward march of rule making
  • Enhancing the role for audit and risk
  • Improved confidence in solvency

What I don’t understand is, by this admission, since 1997 the FSA and now the PRA seems to have no clear remit about what it is supposed to be doing.

As the FSA is fond of reminding us this is surely a Board level responsibility. And it shows weaknesses in the way the regulator’s Board operates. There are clearly a lot of intelligent people in regulation. But the process just isn’t as efficient or as effective as it could be. How can you undertake your role of you don’t know what you are doing?

This reminded me of another piece I read entitled “Financial Regulation -Going Backwards” by Paul Killik (Killik & Co stockbrokers). He contends that the cost of regulation at over £5bn per annum is seven times more that the amount paid out in compensation. And asks, does regulation offer value?

After 13 years if the regulator can’t work out what it is supposed to be doing the answer is clearly no. Regulators and prudential authorities suffer the same difficulties as the rest of us, they make mistakes.

But unlike financial firms there seems to be no redress or sanction that applies to their senior management.

Things would be improved if this changed and yes it does matter because it costs you money.

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