Making bank regulation work

Lord Turner scored high marks for his review of financial regulation which has been described as intelligent, comprehensive, rigorous and measured. It has been designed to make British banks safer and restore trust in the system. And if, as is hoped, it is adopted internationally, it will enable the City to claw back at least some of its reputation and help it return to its desired central position on the global financial stage.

But the Review itself is only part of the process. The real question is how successfully will the UK Financial Services Authority (FSA) implement its review. Will it score as highly in the practical as it did in the theory?

Regulation is only as good as the regulator that conducts the investigation and our regulators will need to be as skilled as our bankers to ensure that the Turner Review is really effective. The recent experience from the ‘treating customers fairly’ regulations is not encouraging. The FSA set out some very simple and sensible principles to make banks, insurance firms and other financial institutions treat customers fairly. However in implementing these principles it has got itself into a mess. Its attempt to implement has led the firms into a mass of complex document collection and form filling with absolutely no evidence that behaviour towards customers has changed one bit. In sum, a waste of management time for the firms, a waste of money for shareholders and little to show in terms of benefits for customers.

The heart of failure of this type of regulation is that it tries to boil complex issues of fairness down into something that can be dealt with by a regulator using a clipboard. The reality is far more complex and requires an experienced person to use skill and apply professional judgement as to whether the firm is working in the way that the regulations expect in spirit as well as in letter. The auditor is asked to sign off accounts as being ‘true and fair view’ of the company’s financial affairs. This is not a tick-box exercise and requires careful judgement. In the same way the FSA must apply intelligent judgement in its attempts to measure fair behaviour of its regulated firms.