Monday 30 January 2012

Effective Finanacial Regulation and behaviour part 2

It is clear that the financial crisis of 2008 was a failure of both the regulated and the Regulator(s)(this seems to be the overwhelming consensus). The behaviour of regulators also needs to be carefully considered. Of course system changes need to be made e.g. increases in capital ratios (see FSA.gov.uk) but these are not a substitute for effective regulation! Effective regulation has to be properly resourced and the regulated must know that enforcement is certain, serious breaches could lead to the closing down of a business and, where appropriate, custodial sentences would be applied. In the past the regulated knew that none of those three principles would apply.
Writing out of the equation so called "Trading Activities" - Hedge Funds, Commodity Trading and Foreign Exchange Trading which should not be compared with lending for investment in real world business - manufacturing, construction, infrastructure and retailing suggests differing taxation treatment with the latter much preferred to the former  (which in all honesty can only be described as gambling) in tax policies (this appears to be the position of the majority of EU States). This I suggest would make the regulation much easier. The downside, some would argue, is that all of these things together would make lending for the real economy perennially difficult (can it get more difficult than now - the consensus view is that banks are not lending because they are unsure or are unwilling to divulge their real liabilities see Liam Halligan, Sunday Telegraph Business 29th January 2012 p.B4). However I do not believe this to be a foregone conclusion as the differing taxation treatment referred to above would mean that returns on real economy projects could provide a better home for the surplus cash that is floating around (trade surplus nations and the effect of printing money.The behaviour of regulators would need to be different. We must find a way of containing the bureaucracy so businesses can operate well, while properly fulfilling the regulatory requirements. This therefore is not mainly about form filling, ticking boxes nor being in constant contact with the regulator. It is about exercising objective judgements. It is difficult to be completely objective if you believe your next career move is Poacher becoming Gamekeeper (or in this instance the reverse could apply equally).
Further in relation to behaviour - Regulators will have to be ultra professional (you really cannot have umpteen lunches and dinners and perhaps other "freebies" with people and organisations who you are monitoring for compliance with regulations - look at the recent case of the Inland Revenue - there may be nothing in it but it is well established in the public service that the perception is as bad as the actuality, something that seems to have been forgotten in the past few years). Consideration should be given to a restriction on those (obviously in positions of some considerable executive authority) leaving the regulator whereby they will not be permitted directly or indirectly through third parties from engaging in the businesses/industry which they were regulating. It would help in this regard if the government stopped messing around with Public Sector pensions with such requirements and restrictions as those proposed.
It is perfectly possible for these public policy objectives to be achieved what is needed is the will. 

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