Hector Sants, Chief Executive of the FSA, made two strong speeches last week. In one he blamed Gordon Brown for his contribution to the economic crisis. In the other he warned of a tough new attitude to regulation which ought to focus minds somewhat.
“It is quiet out there. Too quiet”. I am not sure whence I get this expression, with its intimation of pending violent attack. It could have been in one of those novels of war or Empire which I read as a child – about Hornblower or Richard Hannay or, later, of Flashman; it might have come from one of the old war films, with John Mills peering across the trenches, or scanning an empty sea or sky for the threatening Hun; perhaps it was in a Western, as John Wayne’s instincts told him that a cloud of arrows could be expected anytime soon. These stories often include a powerful but evil figure whose outward success conceals a past which is uncovered in the closing chapter or the last reel. His reputation might, for example, have depended on an alleged “economic miracle” which is shown to have been a sham, bringing misery for millions as it fails.
This sense that something is about to happen has been hanging over those whose business involves litigation and regulatory or internal investigations. The battle analogy is an apt one. Some of the units have been fighting hard since the economic “war” began; others have seen their numbers thinned out as they wait for the coming conflict. As in all the most gripping war stories, the attack is expected on more than one front.
One of those is litigation. The lull in the UK has lasted for ten long years. The CPR achieved its object of persuading parties out of the court system not, as was intended, by encouraging parties down the flower-strewn path to mediation but by making it too expensive to litigate. There is no one baddy here, but several: we can blame the government for its neglect of civil justice and its contempt for that admirable principle of “access to justice” which it mouthed even as it hiked court fees and cut Legal Aid; we can suggest that the rules and those who administer them have paid excessive attention to encouraging settlement and too little to the basic mechanics of case management; we can point to lawyers whose disdain for cutting the hours spent has been obscured by complaints about the rates per hour; not least we can point to clients who produce sow’s ear data and whine about the cost of turning it into silk purse evidence.
Litigation is essentially a voluntary activity. You can weigh the costs and risks of bringing or defending a claim and decide that forgoing the claim or opting for settlement makes more financial sense. You get no such option when your industry’s regulator bangs on the door.
That front too has been an area of little overt activity, at least in the financial sector. As the markets and the commentators cast around for people to blame, the FSA’s light rein is high on the list of perceived causes of the bubble. Its new leadership (Hector Sants took over as Chief Executive just before Northern Rock collapsed and Lord Turner was appointed Chairman later) cannot be blamed for the debacle and both have accepted that the FSA could have done more. The “It is quiet out there” feeling to which I referred in opening relates to the period since then. War might be expected on two fronts – an attack against those whose regulation falls within the FSA’s remit and a battle – offensive or defensive depending on who fires the first shots – with the government.
There is more at stake in the latter battle than mere blame-shifting and buck-passing. Although regulators are supposed to be (and generally are) independent of the government, that does not prevent government from by-passing or emasculating them if their independence proves inconvenient. An article in the Times last week by Tom Winsor, the former Railtrack Regulator, reminds us that New Labour was prepared to legislate specifically to bar Winsor from increasing Railtrack’s income. The government wanted to take Railtrack from its shareholders and had decided to “engineer the solution through insolvency”, over-riding the interest of investors, who were contemptuously dismissed as “a few grannies [who] would lose their blouses”. Since Winsor would not bow to threats, legislation was needed to by-pass him. Faced with this, Railtrack’s directors caved in, Transport Minister Stephen Byers obligingly lied to Parliament to conceal the origins of the plot, Railtrack fell under state control, and the investors (many of whom were Railtrack workers) had their investments taken from them. This was the moment when Britain’s standing as a trustworthy party to agreements, international or otherwise, was lost. When that silly little woman Harriet Harman recently invoked the “court of public opinion” as the arbiter in the matter of Sir Fred Goodwin’s pension in place of his contractual rights, she showed that New Labour’s contempt for the rule of law is undiminished.
I take you down this apparent by-pass because it shows that the regulator has more on his plate than just getting on with his job. The FSA already had three constituencies – those whom it regulates, those whom the regulation is designed to protect, and the government. The first of these is unlikely to appreciate tighter regulation; the second is bruised and in the mood to blame anyone in sight; the third, the government, is simultaneously fighting for its own reputation and pandering to the “court of public opinion”. It is not surprising that Sants and Turner have bided their time.
Their opening shots in what appears to be a concerted attack came a couple of weeks ago when Lord Turner hinted to the Treasury Select Committee that the FSA had come under Treasury pressure to regulate the banks lightly. Hector Sants followed that when (in the words of the Times report of his speech of 11 March) he “blamed Gordon Brown for contributing to the economic crisis, coming close to accusing him of stoking the credit-fuelled housing boom and bust”. There was, he said “a prevailing mindset in government and society promoting the benefits of credit and asset inflation, notably in housing”. When one looks at how low Brown was prepared to stoop to pick up a railway company on the cheap, what will he not do when his decade of alleged prudence, the years of the so-called Brown boom, are thus characterised?
The Regulator followed that speech with another on the following day which brings me back to my primary theme and the Second Front in the War of the British Recession – that companies who are subject to FSA regulation can expect an end to the lull which they have enjoyed for so long, courtesy, if Lord Turner is right, of the Treasury’s (that is, Brown’s) express demand for light regulation. “There is a view” Hector Sants said “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…. We will use all our powers, including criminal prosecutions, to deliver our mandate”.
Graphic from The Times
“What took him so long?” you might ask, perhaps minded to assume that this is all talk. I would not bank on it, and would assume that the subject comes up now because it is only now that the FSA is ready to act. The economic and political context can hardly said to have stabilised yet, and there has been much fire-fighting which is not conducive to devising a strategy – and it is strategy we need, not the kind of knee-jerk, grab-tomorrow’s-headlines reaction which is what the government offers as its version of strategy. Over-reaction is as bad as no reaction, as Sants recognises: “too aggressive intervention will stifle innovation and…reduce risk to a level that inhibits economic prosperity”, he said.
Any attempt hitherto to gauge what society expects from its financial regulator would have been obscured by demands which were either too narrow and sectional, or too sweeping. Politicians surrender to the loudest voices, or to those who pay the most or who bring political advantage. We have had more than a decade of that. Regulators are expected to take a more considered view as to what is right.
There has been a practical impediment as well. The FSA was staffed to a level which reflected the government’s requirement of light regulation. Tighter control needs more staff, and suitably-qualified people are neither easy to find nor quick to train, especially when the target is a moving one. The FSA has apparently recruited an extra 280 specialist staff, a headcount increase of 30%. One assumes that they are now ready to roll.
I know Hector Sants a little – not enough to know what his views are on all this (my sources are all public reports and the surmises my own) but enough to know that if he says something he probably means what he says. The FSA’s warning shots in Brown’s direction may have been pre-emptive strikes to caution him against adding the FSA to his list of people to pass the buck to – “it came from the US, it was the bankers, it wasn’t me” as the FT put it. The Railtrack story is worth re-telling to show that Brown has form, as it were, in the context of tampering with regulators’ independence. This time he cannot skulk in the background pulling the strings, with Stephen Byers as the expendable footsoldier. He will not apologise, but he is unlikely to interfere with the regulator. Quite apart from anything else, wanting a strong FSA is one of the factors which differentiates Brown from the Conservatives, who are said to want to dismantle the FSA and return its functions to the Bank of England. The alleged motive, weirdly, is to “punish” it for perceived regulation failures.
Meanwhile, the FSA’s army is poised to move. The military analogy with which I began offers a more precise parallel for what we may be about to see. Between 21 May and 7 June 1917, the ridge at Messines was subjected to a heavy Allied bombardment involving 2,300 guns and 300 heavy mortars. Such bombardments were the usual precursor for a battle, and when it stopped at 2.50am on 7 June, the Germans rushed to defend their trenches from the anticipated frontal attack. Instead, twenty minutes later at 3.10am, 19 mines comprising 600 tons of explosives went off under the Messines-Wytschaete Ridge, killing 10,000 defenders and amply fulfilling General Plumer’s promise that “we may not make history tomorrow, but we shall certainly change the geography”. The Prime Minister, Lloyd George, is said to have heard the explosion at 10 Downing Street.
Hector Sants’ warning may be considered the preliminary bombardment. The explosion will follow shortly. The Prime Minister will certainly hear it. Compliance officers might take to getting into the office a bit earlier than usual. The IT departments could double-check that the document retention policy (you do have one of those, don’t you?) is to hand and that it has been complied with. The lawyers will check that their BlackBerrys are switched on, and those who provide software and services for identifying, culling and filtering documents and data will make sure that calls get routed quickly to the right place.
It is about 3.00am on the ridge at Messines and all Hell is about to break loose.