25 Jan, 2008
Samantha Shaw - 25-Jan-2008
be an unkind thought but I can't help thinking that Zippy, George
and Bungle could regulate the financial services industry during
the good times.
Readers and their clients may have noticed that not every asset
class is rising now. The FSA is facing its first property bear
market and possibly its second equity one though it was in its
infancy when the dotcom bubble burst.
The slightly unkind thought about the characters from the
children's TV programme Rainbow occurred to me last year when John
Tiner gave himself a glowing end of school report as he left the
Among other achievements, Tiner decided he had saved the UK life
insurance industry from itself. But how are things in Hector's
house today and indeed in the houses of all the other regulators
I would say they are not very good at all.
The first conclusion is that capitalism's most reckless side is
alive and well and untamed by regulation so in large part
regulation has failed, defeated by the pace, sophistication in the
nastier sense of the word, and lack of concern about the underlying
loans from the secondary debt markets and those global banks which
drove them. The greed and stupidity of the some of these global
brands may well have left everybody in the SH One T as granny used
To have a situation where market makers for credit backed
securities were also some of the major buyers beggars believe. To
see a bank guarantee to buy back underperforming assets if they did
not perform strays close to madness.
These actions were stupid on a more spectacular scale than the
original owners of the debt - the US lenders who pushed sub prime
loans while telling their borrowers that if they couldn't keep up
payments they could always sell because property wouldn't go down
In comparison, even Northern Rock's out-gone chief executive Adam
Applegarth, the closest thing we have to a pantomime villain in the
UK, was defeated as much by circumstances - the disappearance of
his funding lines along with everyone else's - rather than by
any particular recklessness.
Now I'm not suggesting that all is rosy in the retail market.
Directors of firms which offered property funds need to make sure
they emphasised the fact that some restrictions might apply given
the illiquidity of those assets and that advisers and their clients
One also has to ask questions about asset allocation and risk
profiling when the first move into a new asset class such as
commercial property came at the top of the market. In all the
arguments about asset allocation, Mark Dampier seems to have got
this essential point right. I also have more than a sneaking
suspicion that many investors had a lot of more their portfolios in
property than the oft-discussed 10 per cent.
I would also bet my bottom dollar - even as it becomes worth less
and less in Sterling terms, that if property prices fall and UK
repossessions climb further and faster than expected then the
lenders and mortgage brokers are going to take one hell of a verbal
beating from the Government.
It will be something of a measure of whether the FSA is the
Treasury's patsy if it makes similar noises or if it resists the
pressure to find a scapegoat. Good mortgage advice remains good
mortgage advice and bad mortgage advice bad, regardless of what the
Government thinks, though admittedly the bad advice may become more
obvious this year.
While I would never suggest that the retail market should escape
regulatory scrutiny, I wonder whether the FSA should really be
planning to spend so much time on the retail market.
Many things have gone wrong in the past and been exposed by
falling markets - precipice bonds and split caps have been the most
notorious failings but tech funds and overoptimistic drawdown plans
should get mentioned in the grim list of failings too. It also
seems the bad habit of chasing performance just before the peak has
still not been kicked.
It would be nice if that could be left to the day traders but that
probably is a pipe dream. But in cases where risky products were
pushed too hard or mis-marketed or where some bad advice was given,
there was at least the Ombudsman and the compensation scheme.
The system worked at least up to a point. Contrast this with the
big investment banks, which despite their battalions of compliance
officers, whose actions have helped push the global economy to the
brink of a recession.
Now we have a rogue trader, discovered at Soc Gen, by reputation
supposedly a very well run bank. The hole was discovered, thank
goodness, but not before he had managed to cost £3.7bn. It
will probably be impossible to tell if Soc Gen's unwinding of its
position contributed to stock market falls globally. But as one
fund management chief said to me over lunch this week if, in this
world of gearing and debt, he hadn't been found until next month or
the one after what then? Could £3.7bn have turned into
To rephrase my slightly facetious point at the start of this
piece, John Tiner for all that he achieved a lot in terms of
reorganising the FSA had life relatively easy in a period of rising
markets. Hector Sants does not have that luxury. I only hope he is
looking in the right place. And I don't think IFAs - for all the
fact that they may represent a massive collective pain in the
backside for FSA staff - are the right place to be looking.
The chief exponents in translating the greed of the financial
system into fear for everybody else are to be found elsewhere and
that is in the big institutions not the small. They are also better
at hiding their misdeeds until it is too late.