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Light-touch regulation, late of the City of London and Canary Wharf, died quietly, if not peacefully, on March 18 2009, after a short but debilitating illness. Unloved sister to principles-based regulation; once the darling of politicians, the media and the financial establishment. Donations, in lieu of flowers, to Lloyds and Royal Bank of Scotland, c/o The Treasury, Whitehall.
How quickly we forget. Light-touch regulation, officially buried by Lord Turner, chairman of the Financial Services Authority, on Wednesday, was the thread that ran through commentary on, coverage of and cheerleading for UK financial regulation from the late 1990s. It was also one of the tenets of pre-FSA supervision of the banks by the Bank of England. Yes, that Bank of England. The one many now believe could have saved RBS, HBOS and the rest from their own excesses.
Now, we can’t get away from the wake fast enough. Alistair Darling, chancellor of the exchequer, says he never argued for deregulation and a lighter touch. Gordon Brown has forgotten his adulation for the feather-fingered approach. As City minister, Ed Balls defended the light-touch approach. It’s said the FSA even urged him to stop using the phrase, which the watchdog has never liked. He has certainly repented since, telling a meeting last September, that “those who think the global market economy can be run without regulation or with self regulation or light-touch regulation have been entirely routed”.
And before the Tories start to crow, remember that the whole light-touch movement took off in the late 1980s and 1990s, when Margaret Thatcher and John Major were fighting the red tape of civil servants and eurocrats.
Even within the City, few tears are being shed. Successive Lord Mayors were in the forefront of calls for softly-softly regulation. Yet Ian Luder, the current mayor, while still standing up for the competitiveness of the Square Mile, admits the “old mantra of ‘light touch’ is not going to resonate with legislators and opinion-formers”.
All this smacks of Italy after the war, when cynics joked that every Italian had turned out to be an anti-fascist partisan. City denizens have far less to be ashamed of. “Light touch” was always too glib, too reminiscent of “soft touch”. But the FSA’s alternatives – principles based, proportionate, outcomes based – were never as well-suited to the media pantomime. In any case, if you mentioned the watchdog’s light touch to bankers, even at the height of their prosperity, you were likely to get a hollow laugh and an invitation to visit their expanding compliance department or read the 9,000 pages of FSA rules.
Regulatory flexibility and good judgment remain preferable to the legalistic approach of the US (which also failed). But correcting the semantics will not help avoid future failures. Risk-based regulation flopped because it addressed the wrong risks, not because others gave it the wrong name. It addressed the wrong risks, because everybody believed risk had been spread safely across the system. Instead, it was forming toxic pools in big banks and financial institutions.
Lord Turner took the FSA job last September. Asked last month, whether he would have made the same mistakes had he joined earlier, he generously admitted: “I fear I would have.” In other words, he too would have been party to the catastrophic intellectual blunder that allowed the crisis to develop. Compared with that tragic error, the old cheers for light-touch regulation – and the boos now resounding over Westminster and the City – are mere noise.
Daylight Bank robbery
Nominations for chair of the Court of the Bank of England – following the Treasury’s veto of candidates with a past in, er, banking – are flooding in. Some are even serious. Ex-senior partners of big law firms, often ruled out for being “too detail-focused and risk averse”, might now get their moment, says one reader.
Another suggests “any Rothschild”, because the family has survived “at least three Kondratieff slumps” (part of the theory that economies go through 50- or 60-year “waves” of boom and bust). Front-runners, for now, are two fictional names: Monty Brewster, the baseball pitcher challenged to spend $30m within 30 days to inherit $300m in the film Brewster’s Millions (with quantitative easing, make that $300bn); and Moist von Lipwig, former arch-swindler who runs the Royal Bank of Ankh-Morpork in Terry Pratchett’s Making Money. Here’s a flavour of how his interview might go:
Moist: “But I don’t know anything about running a bank!”
Lord Vetinari (ruler of Ankh-Morpork): “Good. No preconceived ideas.”
Moist: “I’ve robbed banks!”
Vetinari: “Capital! Just reverse your thinking. The money should be on the inside.”
Further nominations welcome.