The better, and in my opinion the correct, modern model of regulation – the risk based approach - is based on trust in the responsible company, the engaged employee and the educated consumer, leading government to focus its attention where it should: no inspection without justification, no form filling without justification, and no information requirements without justification, not just a light touch but a limited touch.I don't need to rant on about the hypocrisy of him blathering on about effective regulation, do I? The banks took their cue from the then Chancellor and acted accordingly. It is Gordon Brown's regulatory system which is to blame for the current shambles, and he cannot be allowed to escape from that blindingly obvious fact.
The new model of regulation can be applied not just to regulation of environment, health and safety and social standards but is being applied to other areas vital to the success of British business: to the regulation of financial services and indeed to the administration of tax. And more than that, we should not only apply the concept of risk to the enforcement of regulation, but also to the design and indeed to the decision as to whether to regulate at all.
In the new legislation we will publish before Christmas we will make this risk based approach a statutory duty of the regulators."
Saturday, February 28, 2009
Brown in 2005: "We Shouldn't Regulate At All"
A reader has kindly sent me an extract of a speech the Prime Minister gave to the CBI Conference in 2005...
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24 comments:
This won't bother Gordon too much.
Brown has totally re-written a new construct of history in his head where he made no mistakes and was always on the side of heavy handed regulation.
Gordon picks soft media interviewers and if ever challenged on his false version of events, he just skips over them with some drivel.
Hence the majority of the public have no clue how culpable Brown is with respect the current recession.
Personally I'd like to see Brown forced to do a 2 hour interview with Paxman.
There would be no shortage of quotes from Conservative politicians arguing the same. Light touch regulation has been very voguish in the last few years for god reasons. The extent to which regulation can both promote enterprise and prevent bad behaviour is a genuine dilemma. What would have been said if, three or four years ago, regulators or the government had started interfering with the lending practices of banks that were, on the face of it, highly successful? Any regulatory intervention would have made it harder for people to get mortgages (interfering with the rights of individuals to freely enter contracts to borrow money and buy property) and could well have stalled the housing market. It would have been widely attacked (including, dare I guess, on this blog) as nannyish interference in business.
If you believe that some sort of correction is inevitable after a boom period, there is little point in complaining that too little was done to prevent it....
No you don't need to rant on about his hypocrisy, we all know that to be self evident.
Amazingly, his comments are very nearly right, with the exception of the concept of 'risk based regulation'. No official or State run regulation at all is the most effective regulation. Private systems will develop to ensure that the best solutions arise. But, if you have any vestige of regulation - 'risk' in this context - you still will have a huge amount of regulation.
Risk is a pesonal thing. One mans low risk is another mans high risk. Risk is subjective. It depends on who is measuring it as to how risky something is. Regulating for risk wil result in the same huge regulatory inflation that we have just seen. Furthermore regulating for risk will strangle innovation (witness the Trabant / Ford Mondeo).
As a businessman I took relatively massive risks with my own concept as to how retail financial services should work. This was in about 1990. The concept was way ahead of the general view and was said to be far too risky by everyone, the product providers, the banks, the investment managers, my peer group and especially the regulatory system. Of course our clients loved it and still do. Under Browns regulatory system I have struggled to pursue this model, his box tickers just could not cope with it, so I decided that the only way to continue was to as far as possible completely ignored the FSA, except to challenge it every opportunity.
Now, suddenly under the FSA's latest stupidities - 'Treating Customers Fairly' and the 'Retail Distribution Review' they have decided that the model I developed all those years ago is the right low risk one for the future. Trouble I am already onto another idea, which no doubt they will consider too risky.
It really is so pathetic, and it would be funny if it was not so damaging.
And just to be clear as to my views the only reason we need to specify banking capital and liquidity ratios is because the UK£ is a monopoly. Repeal the Legal Tender regulations and let all banks issue their own money. Under Greshams Law (Bad money drives out good, if it is at the same price) privatising money will drive up the quality of money as we will abandon Banks whom we perceive offer bad money.
It won't happen of course since control of money is power. It allows irresponsible politicians to pursue fiscally and economically damaging agendas that impoverish the taxpayer and citizen, who inconveniently won't do as they are bid, so must controlled by heavy regulation, which is where we came in.
This is of course related to regulation of ALL business but it applies to financial services as well.
In May 2005 Brown launched the Better Regulation Action Plan and said ..
" We will look to apply on a wider basis the principle of risk based regulation to financial services legislation and the work of the FSA. The FSA, which we set up in 1997 as a world leading example of how to regulate financial services, was itself a merger of nine regulators into one.
It has already done valuable work on adopting a risk based approach and I welcome the thinking it is doing about how it can further reduce the burden of financial regulation. "
However - despite all the high sounding words I suspect the reality on the ground descended into just a bureaucratic tick box culture.
The reality of the failure of regulation goes beyond thes ;better regulation' though. its the whole cats cradle of the tripartite system which Brown set up which failed. The BoE and FSA and the Treasury lost the plot and dropped the ball between the yawningcracks in the system
Simon 10.05. What you are identifying is Brown's monetary failures, not his companion regulatory ones. If Brown had run sound money, controlling its supply and maintaining its quality, there would not have been the massive credit expansion and consequential massive rise in house prices. Brown hosed the economy with cash through the conduit of the banks. And as I read somewhere else (Simon Heffer?) hosing cash at banks is like giving a five year old a hand grenade - giving a monkee a machine gun is my preferred simile.
Every way you look at this it all comes back to Browns uselessness. he clearly has no understanding and respect for money. I think he just sees it as another tool to use to get his own way. He is a megolomaniac. And having the opportunity of the monopoly of money he used it.
(BTW he was in my town - Ipswich last week. There was no publicity at all. Lucky for him as I for one would have been on the barricades. And being the Jonah he is his visit has put the willies up me).
Trevorsden said "However - despite all the high sounding words I suspect the reality on the ground descended into just a bureaucratic tick box culture. "
It did. The FSA rulebook is EIGHT FEET high (if printed out).
Lola
My point is more about that people have, retrospectively, in the power of regulation when the same people would have complained bitterly about regulation had it been rigorously enforced at the time.
Sorry, I mean
"My point is about the faith that people have, retrospectively, in reglation...."
The evidence to the Parliamentary Committee this week shows that Brown was encouraging the FSA to run a weak and risky regime. So the words "the risk based approach - is based on trust in the responsible company, the engaged employee and the educated consumer". Shows how Gordon has demonstrated in abundance, the bombastic fool he is.
Thanks for the link, Ian, very useful. Do you perhaps also have a link to the chorus of criticism from the Conservative benches, calling for tighter regulation?
I only ask...
Iain is there not some inconsistency between this, and your last post on ticket touts, where you slam Labour's "default preference for regulation"?
Never mind what the Opposition has said or done. Brown, cheered on by his (variously) stupid, venal, compliant and principle-free back-benches, not to mention the fat-cats whom he despised (it's mutual), was and is the man. He has been the man since 1997.
Except he doesn't say "we shouldn't regulate at all", does he? He says we should regulate according to risk. Stop making silly political points Iain.
"Light Touch" describes how the media deal with Brown.
If the Tories had got us into this mess the BBC would be ripping them to shreds.
The 'risk based approach' wasn't ever going to work because Gordon's favourite bankers were wilfully ignoring their own Risk Managers' warnings.
The FSA wouldn't touch those bankers even if it had the inclination because they were 'close to Gordon Brown' and had been honoured by him etc. Indeed it hired at least one of them (of whom they had suspicions).
jdc, the key point in Iain's ticket tout post is: 'it won’t stop street touts – instead, they’ll have the market all to themselves and will line their pockets.'
The main thing with regulatory systems is to make sure they don't make matters worse. This seems to be have been the case with the tripartite system.
The banks found it easier to subvert one super-regulator than the nine regulators. Especially once the BOE was made toothless in regard to bank regulation. Big is not always beautiful.
It was not just Gordon Brown that wanted to remove regulation, Tony Blair was also of the view that the FSA was inhibiting business, through over regulation.
In a speech to the IPPR, in May 2005 (around the time of the Better Regulation initiatives from the Government).
http://www.number10.gov.uk/Page7562
"But something is seriously awry when teachers feel unable to take children on school trips, for fear of being sued; when the Financial Services Authority that was established to provide clear guidelines and rules for the financial services sector and to protect the consumer against the fraudulent, is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone;"
Hardly surprising that Lord Turner, in evidence to the Treasury Select Committee, 25/02/09, said
“there had been a regulatory approach that encouraged a light touch with the banks."
"There was a philosophy routed in political assumptions which suggested the key priority was to keep it light rather than to ask more questions,"
"Regulators did not ask enough questions about strategy at banks"
"Doubts were not as deep as they should have been."
I work in credit derivatives in the one bank who came out of this mess with it's reputation intact. I have also worked for risk management companies and ok trading floors for 20 years. Regulation over the past 8 years has been bottom up and focused on individual trades and traders. This was the result of Nick Leesons Barings trades. Regulation has not focused on business models or business strategy. Regulation seems to develop as a response to a crisis because without a the weight of failure there it is no motivation to adopt it. Even with the current regulation several rogue trades, such as Paribas, have resulted in massive losses.
I feel that it will be very difficult to regulate against risky business models as that would be to invasive. Regulating bonuses would have little impact as alternative remuneration schemes could easily be developed. Even if Browns regulation works the next crisis will come from another unforseen excess.
If Brown really wants to reduce the probability of another crisis he needs to examine the nature of the governance of large corporates. Global corporates are like large undemocratic states with too much power and whose shareholders have too little power to control them.
"no inspection without justification, no form filling without justification, and no information requirements without justification, not just a light touch but a limited touch."
Gordon Brown, CBI 2005
"Some of the practices now being discovered in our banks are not only unacceptable, they are indefensible and they have got to be cleaned up now."
Gordon Brown, Bristol, 28th Feb 2009
You see, it's not that Brown got it wrong that angers the British people.
It's not that we think he was alone in the world in getting it wrong that makes us angry.
It's that he takes us for fools, time and time again, that makes us angry.
Don't claim with shock and horror that bad practices are only now being discovered as if it's due to some catastrophic event beyond your control.
It's what you wanted Gordon. Irony, or ironies, it's the risk of your risk based system.
If you have risk based regulation without adequate supervision then guess what? If everyone misses a risk there's no backstop.
And whilst I'm ranting - when is Peston going to do his job and report to the British people how it was Brown's rules and regulations that gave a home in London to the off-the-wall financial instruments that allowed the credit bubble to grow?
It started in America but it was inflated in London on Gordon's watch.
Brown's Boom.
Brown's Bust
Brown's Bankruptcy
Come on Sir Fred, show us the bodies. WHat discussions did you have with Brown and Myners befor buying ABN Amro?
R56
Rexel No 56 said "Come on Sir Fred, show us the bodies. WHat discussions did you have with Brown and Myners befor buying ABN Amro?"
Well said, That would be extremely revealing!
My first thought was that this man could, AND SHOULD, bring this rotten government down!
Re: Simon 10:05AM & Lola 10:17AM
I like to think that if the Conservatives had been in power they would have noticed house prices getting out of control and intervened to stop it on ideological grounds because of a belief in the "property owning democracy".
We'll never know for sure of course.
the perceptive "Ironies Too" Blog says
"This blog stated from the start that HBOS would destroy Lloyds, it repeated the warnings throughout the long run-up to the final take-over just one month ago and noted concern at Legal and General in particular having supported the merger on 20th October last year, here, and again on 22nd November.
The report that the books of HBOS contain debts of 80 billion pounds Lloyds considers unacceptable is from The Independent this morning. It hardly comes as a surprise and if anything probably still understate the situation as things continue to deteriorate at a far faster pace than Lloyds even now anticipates - witness the US fourth quarter GDP shrinkage adjusted yesterday from minus 3.8 per cent to minus 6.2 per cent.
The UK media continues to be distracted by one individual's excessive pension while one opposition party leader remains in mourning having neglected his political duties for years and another even more pathetically continues on paternity leave! It is generally accepted that the nation's Prime Minister and Chancellor of the Exchequer are drowning, while atop the shoulders of English taxpayers!
Iain,
Of course you "got" GB here.
The problem, for you surely, is though that light regulation of business was pretty much a hallmark of post-Thatcher conservatism.
I suppose you response might be that you believe in "good" as opposed to "bad" regulation.
From my point of view, I see the bunch of university educated and over-self-confident control freaks in charge of the Labour Party and government as people who have screwed up. But they are not, by and large, the people who actually hold major wealth, nor the control of boardrooms.
The Tory leaders, now, seem slightly less self-confident (which is a good thing), but as group they are completely tied to the business, educational, and, let's say it, upper-middle class elite.
I don't see how that puts them into a better position to run things.
Warren Buffett explains in his usual accessible style why regulation of these financial institutions should not have been difficult - in a nutshell:-
"Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have
made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away
from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments."
It does not seem to me to challenge the wit of man to make this fundamentally important to the lending institution. The rest, the excess complexity, the fancy financial chicanery is just noise preventing proper view of this central truth.
It really wasn't Brown's fault, although I agree he went along with things. See The NYT's take down of AIG today - http://www.nytimes.com/2009/02/28/business/28nocera.html?em=&pagewanted=all
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