I’ve written before about the major regulatory failures of the last 30 years. However, this blog is not about Keydata specifically, for which the FSA received considerable criticism, but looks at how we tend to see regulatory failures, and some other perspectives we might use.
The most common way of judging a regulatory failure centres on consumers’ losing money, either through misconduct/mis-selling or, at the extreme, when a firm fails. In such cases, the measure of the failure tends to be the total financial loss. As we know, the financial crisis led to all sorts of severe losses, including to the British taxpayer and UK households, the scale of which partly accounts for the anger it still evokes.
But there are different types/areas of regulatory failure. At their simplest, they could be classified something like this:
1. Rules: The failure to put in place regulations (e.g. around capital and liquidity) that prevent firms from taking on destructive amounts of risk.
2. Process: The failure (e.g. with Northern Rock) to follow existing process around assessing risk, taking actions and escalating problems quickly.
3. Knowledge: The failure to understand the business models, products and individuals involved (e.g. PPI), leading to ineffective strategies.
4. Inertia: The failure to act quickly enough and/or to bring to bear the full weight of regulatory powers (e.g. BCCI) to avoid a known problem crystallising.
5. Judgement: The failure to assess signals properly, or to set them in the right context (e.g. RBS), leading to use of the wrong tools and, sometimes, targeting of the wrong problem.
6. Foresight: The failure to identify patterns of behaviour and increasing concentrations of risk (e.g. around mortgage-backed securities) sufficiently early to take effective action.
7. Prioritisation: The failure to choose correctly the most important issues, and to deploy resources, by both quantity and quality, accordingly.
Of course most major regulatory failures tend to result from a combination of several of these, and often it is the combination that ramps up their impact.
Interestingly, regulatory strategies tend to focus most on the last three of these types – judgement, foresight and prioritisation. The first four, by contrast, are sometimes not mentioned. This is true of both the FCA and the PRA, and, going back, of the FSA and Bank of England also. Arguably, most attention of all is paid to prioritisation, an attempt to articulate more publicly how and why regulators make choices.
This approach is perhaps inevitable, given the nature of the political debate around regulation and the overall tenor of the dialogue between regulators and the industry. However, it may also be mistaken.
Much regulation relies for its effectiveness on two broad sets of activity: on painstaking, potentially boring, analysis of numbers, words and personal interactions; and then on navigating successfully the governance that is required before taking any significant regulatory action. It goes without saying that these activities are heavily dependent on avoiding the first four types of failure set out above.
This is not to say that judgement, foresight and prioritisation aren’t important, but if regulators fail in these other – more prosaic, less glamorous – areas, major failures are much more likely. The first four areas also have the considerable virtue of being much more controllable.
There is a compelling case for judging regulatory failures through a broader prism than financial loss alone. This would involve rebalancing the debate around regulation back towards effective, reliable processes, and a focus on better understanding of firms and their business models.
By themselves, failures in these, more basic, areas rarely make the headlines. But they are invariably at the heart of those that do, and giving them more weight might reduce both the likelihood and impact of future failures.
The Upper Tribunal has today upheld the Financial Conduct Authority’s (FCA) decision to fine and ban Stewart Ford and Mark Owen, the former CEO and sales director respectively of Keydata Investment Services Ltd (Keydata).