Back in December when the Bernard Madoff scandal first hit, I wrote a post, Madoff as a signal to go for “regulation heavy,” suggesting that Madoff was emblematic of a reckless period in the United States, symbolized by the lax oversight of the S.E.C. and the easy money of the Federal Reserve. While it can be debated what level of regulation is actually necessary to bring things back in order, I foresaw and still see a likely move to regulation-heavy in the U.S., if due purely to populist-political motives.
The same is very much true in the United Kingdom, where the move to regulation-light was instrumental in allowing the excesses that were manifest in Britain during the past decade-and-a-half. Now, the U.K. regulator, FSA has come out warning bankers to prepare for a brave new world.
The main City regulator today signalled the end of “light touch” regulation as it warned bankers to be “very frightened” of a new hard-hitting and intrusive watchdog.
Hector Sants, chief executive of the Financial Services Authority, said he wanted to end a box-ticking culture in the Square Mile that had failed to detect the increased risks taken by banks. In its place, the regulator will impose a more draconian regime of checks that will include an assessment of banks’ business models.
“There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA,” he told a meeting of executives at Thomson Reuters offices in Canary Wharf, London.
The speech follows a warning yesterday by Sants to pension funds that they were partly to blame for the crisis after they failed to exercise oversight of the businesses they own. He told a conference of the National Association of Pension Funds that shareholders, including pension funds, would need to take their place alongside regulators as a check on the excesses of buccaneering managers.
Sants said the shift in policy was necessary because the market was influenced by people who lacked principles, and rules needed to be drawn up to keep them in check.
He added: “I continue to believe the majority of market participants are decent people. However, a principles-based approach does not work with individuals who have no principles.”
The FSA has begun a recruitment drive to hire an extra 280 staff, who will mainly be involved in assessing the business models of finance firms and the risks they are taking with shareholders’ capital and their clients’ money.
The political realities of a post-bubble world demand action. These actions will include more stimulus on the fiscal and monetary front amongst even fiscally conservative nations like Switzerland. But, they will also include a move to a much more stringent regulatory environment. Willem Buiter has made the argument that “it is better to over-regulate now and subsequently correct the mistakes than to risk another era of self-regulation and soft-touch under-regulation of financial markets, instruments and institutions.” I suspect most politicians will find this argument compelling, setting the stage for regulation-heavy.
So, whether we like it or not, the regulatory apparatus worldwide is about to change – and in a very drastic fashion.