A Farewell to Pussyfooting
With dismemberment looming, the FSA finds its claws.
NOT so long ago the Financial Services Authority (FSA), London’s erstwhile “light-touch” regulator, was widely regarded as a paper tiger exerting only minimal control over Britain’s largely laissez-faire financial system. Yet faced, after the general election in May produced a new government, with the prospect of being broken up and absorbed into the Bank of England, the tiger appears to have located its claws. What happened?
Hector Sants, the FSA’s chief executive, is clearly enjoying the new dispensation. He regularly exhorts his team to pursue an agenda of more intrusive regulation. His enforcement director, Margaret Cole, has vowed to crack down on what she terms “criminals in suits”.
Both are proving as good as their word. On June 29th the regulator launched a very public investigation into “with-profits” business: pooled and often opaque investment funds that are typically run by insurance companies. Two firms are accused of exposing policyholders to “particularly acute” risks and now face possible punishment by the FSA.
That investigation highlights the metamorphosis taking place inside the regulator. Before the crisis financial services were devised, wrapped up, sold and consumed, with the regulator inclined to rubber-stamp almost any new product it found on its desk. The newfangled FSA, by contrast, talks a lot about “conduct supervision” and has taken the scalpel to a clutch of hard-to-understand investment products. It has also started to second-guess the institutions it regulates, homing in on any service it deems insufficiently transparent or just plain dodgy.
No one, all of a sudden, is beyond the law. On July 6th the regulator handed down a £350,000 fine to Henry Cameron, the former chief executive of Sibir Energy, a Russian oil and gas explorer once listed on London’s second market, AIM. Mr Cameron was accused of dispensing a $300m (£200m) unsecured loan to a leading oligarch shareholder, Chalva Tchigirinski, to buy undisclosed Russian “real estate” from Sibir. Sibir claimed it had paid just $115.4m, and that it was an advance on property it intended to buy from Mr Tchigirinski. The regulator trumpeted publicly its disagreement.
The FSA has been pursuing its campaign against fraud in the mortgage market, too. On July 5th it banned six mortgage brokers and fined one of them. All six “lacked honesty and integrity”, the regulator said. On July 7th three partners in another mortgage broker were also fined.
Even JPMorgan, a big American investment bank, was hauled over the coals last month for failing to keep clients’ money segregated from its own. Its punishment, apart from the disgrace, was a fine of £33m. The FSA now has a special unit watching the handling of client money.
Critics may rightly wonder why it took the regulator so long to get its game face on. Three reasons, none of them pretty, spring to mind. First, tougher financial supervision is now a vote winner, commanding strong political and popular support. Financial crises are not pleasant events, and individuals want to be shielded from predatory moneymen.
Second, culpability in the credit crunch of 2008 was broadly apportioned among indulgent lenders, lax regulators, greedy borrowers and supine politicians. If a new tremor rocks the market fingers will point directly at Mr Sants. He will face the question, “Where have you been? You had years to fix this stuff,” predicts Peter Hahn, a fellow of City University’s Cass Business School and an adviser to the FSA.
Finally there is the matter of gainful employment. Mr Sants startled the City when he announced in February his intention to step down from the FSA this summer. He surprised financial folk again when he allowed the chancellor of the exchequer, George Osborne, to persuade him to stay. Mr Sants cited his sense of “public duty”, not the fact that he earned £742,000 last year, including a performance-related bonus of £108,000.