Like army generals, the senior financial regulators are always fighting the last war. Here’s how the game works:
The regulator recruits some low-ranking bod from London to tell them what they need to know about the dastardly banks’ various nefarious schemes…
The big London institutions recruit high-ranking bods from the regulator…
Then the new recruits tell the banks exactly what they can and can’t get away with. And exactly how they should push the envelope.
It’s a ‘revolving door’ of staff succession between the central banks and the finance industry. It means the regulator is indeed, always preparing for the last battle. The bigger chequebook offered by the banks ensures they are always one-step ahead of the shoeshine.
I was catching up with an old mate the other week and together we lamented the regulatory environment (yes, these are the sorts of conversations old bores like us have for fun!)…
‘Well, Bengt, surely the regulator needs to be beefed up. They need to spend bank-level salaries and get hold of the top talent to keep this industry in check!‘
‘No, no, no…‘ says I. ‘What we need is anarchy…‘
Regulation just doesn’t work
In the run-up to the 2007/08 crisis, regulation failed. It’s practically bound to. When it comes to banking, we’re dealing with big-money power brokers.
There’s also the nature of global capital markets. If you don’t like the regulation in one country, then shift operations to another. That’s a powerful tool oft used by the banks. London, in particular, has benefited from open financial markets. Successive governments have kept EU regulation at bay, shielding our banks from legislation emerging from Brussels.
The point is it’s extremely difficult to regulate effectively. Either the banks won’t have it, or they’ll continually adapt to new legislation.
But the worst of it all is the uncanny ability of the regulators to score own goals.
Take the highly topical annuities furore here in Britain. Regulation has long-since been established to ensure pensioners (or the pension managers) don’t whittle away individuals’ savings as they go into retirement. The regulators decreed that most retirees on a private pension will have to buy an annuity (an income for life policy).
An IFA mate was just telling me how just about everyone she’s put into annuities over the last year has opted for a non-inflation linked policy. Nobody wants to buy an inflation-linked policy paying a pitiful £3,000 a year, for every £100,000 invested. Instead, they buy fixed annuities paying something like £6,000 on £100,000 invested.
These retirees could be alive for 30 years or more. Given the central bank’s monetary experimentations, these annuities could become all but worthless.
This is the law of unintended consequences…and it has an uncanny way of popping its head round the regulators door. So I was encouraged to see MP George Osborne breaking out of this way of thinking in his budget last week.
The government’s radical move
In the light of Osborne’s budget announcement to vastly scale back annuities, the insurance industry is up in arms. But with the government’s swift action here, it seems the industry didn’t have time to dispatch its lieutenants.
The industry is crying ‘foul!’ They say retirement funds will be whittled away. ‘Regulation is there for a reason you know!’
But their argument hides the truth. And that is, regulation is used by the big boys to protect their own interests and their carefully groomed markets. It adds reams of complexity to finance, maintains the status quo and thwarts competition.
The current system of regulation strips individuals of responsibility and hives it off to an industry highly undeserving of our trust. It all too often allows the industry free rein to siphon off vast sums of our money. A) Because somebody has to pay for all the compliance staff in the first place. And B) because the regulation hinders competition in the savings market.
Explanation, not regulation
I like the idea of simplifying finance. Simplifying pensions. Making it easy for people to understand and to look after their own finances by demystifying the industry. And yes, that means less complicated regulation. Explanation, not regulation.
The NHS has a very useful online flow-chart that helps individuals identify and help treat symptoms. The government could set a similar flow-chart for the health of an individual’s finances.
Let the investing public work it out for themselves. In so doing, I suspect many will be much more realistic about their retirement savings policy too.
But, I hear you cry, ‘Who’s going to look after individuals and make sure they don’t just get ripped off?’
Now, while that’s a concern, I don’t think it’ll be as considerable as you may think. Given today’s vast information network, it wouldn’t be too difficult to weed out the industry’s nasties. If eBay can set up a decent enough system to identify shamsters, then why can’t a government website do the same?
And anyway, it’s not as if there aren’t enough investment scams going on even in today’s regulated markets. I dare say many individuals are conned into land banking schemes, diamond investment fraud and dodgy wine investments because they think that the regulators are policing the whole system. Individuals put too much faith in the system.
Better to be honest about it. Osborne needs to go further. He needs to further demystify the financial system and let individuals get on with their own investments. That would open up the financial markets to more simple investment products that investors understand. Because I firmly believe that with a little help, investing is something anyone can manage on their own. While unregulated, the system would be an awful lot safer than what goes on behind the closed doors of today’s highly regulated investment banks!
Your money. Your look out!
Bengt Saelensminde,
Contributing Editor, Money Morning
Ed note: The above article was originally published in MoneyWeek.
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