Financial Blueprint

In the light of today’s (18/3/09) FSA/Government proposals for the UK from Lord Turner, I offer my pennyworth of thoughts on what we should be doing about the financial services industry.

Lord Turner. Probably predictably - has come up with some outline proposals that are more or less on the lines I would suggest. I generally agree with him - but not entirely. As I thought, there is going to be far more interest in what the banks are up to from now on. Well about time! But I am concerned that there we my find ourselves in a less dynamic investment climate as a nee jerk reaction.

Some people are confusing a heavy-handed regulatory approach with the need to keep a close eye on the banks and any institution who has the potential to destabilise the whole economic system. We can still have a light-handed approach without being cumbersome or inelegant about protecting the system, Joe public, et al. If the FSA and the Bank of England had done their job properly in the first place, we quite honestly wouldn’t be in this mess.

It is true to say, as one commentator said today, that there was a time when all the governor of the Bank of England had to do was raise his eyebrow, and it gave a banker the collywobbles if the gov thought the bank in questionable mode might be contemplating or doing anything untoward or just too plain too risky in his wise eyes. Any banker considered taking leave of his common senses would have be given short shrift and would have hurried back to tarnished ivory tower with his tail between his legs. But of course in this climate of less deference, and where he who risks has been king - if not governor, almost anything goes - and quite honestly actually everything nearly has gone! The ship may have only just been saved from sinking just in time.

My sense is we just have to make sure the BoE and the FSA, indeed any state regulatory body, does its work, unimpeded and with adequate resources. The lesson has to be that the watchman must be at the gate and not sleeping. I suggest a Government inspectorate checks up on the FSA, to make sure it is doing its work. Such an inspectorate would perhaps also drop in on a number of Government sponsored bodies, just so systems are checked to be sufficiently robust, and that even the FSA isn’t sleeping, or neglecting its duties, and is adequately resourced for any future onging or pressing needs, and that in this way, it ensures a cosy relationship is not allowed to develop between the watchdog and any of the dogs it is supposed to be watching. I suspect this is all too easily possible, and probably had some bearing on why we are where we are today.

It does seem entirely sensible to me to separate the commercial banks from high risk investment activity, ostensibly to protect the economy from collapse! If the two areas of activity were to be seperated, then overburdensome regulation can be avoided, and the risky investment ventures can almost do what they like, as long as they themselves make their strategies clear and accessible to the potential or actual investor. But if this is not feasible - and there is differing opinion here on this point which needs airing as soon as possible - then I would suggest some pointers here.

To be succinct, and for now, only in outline proposal, here is my list of suggestions for what should happen next …

1. Closer scrutiny of the banks, financial institutions and lending vehicles.
2. Punitive and preventative powers over banks from using high-risk strategies, or from using investment vehicles that are too complex and opaque (lack of clarity breeds instability and lack of confidence).
3. Establish an international watchdog that meets regularly and has powers to adequately scrutinise the loans and investment industry.
4. Bolster-up the FSA and make sure all financial watchdogs in every country are adequately resourced (money and staff)and meet universally agreed best practice standards, to ensure robust and effective regulation that protects both investors and borrowers and protects the industry form itself.
5. Implement minimum cash reserves to ensure loan do not exceed reserves.
6. Spot checks on banks to make sure of the following:-
   - Sufficient cash reserves are in place
   - Maintaining loan to cash ratios
   - Banks not getting involved in too complex investment vehicles or strategies that
   leave bank over-exposed.
7. Strengthen standards of rating agencies, including spot checks and most importantly that business is not conducted on a commission fee basis which could lead to a conflict of interest between client and agency.
8. Eliminate commissions fees for selling loans, including mortgages (which has led to inflated property prices and unwarranted lending in the past).
9. Ensure greater clarity of accounts in banks
10. Have banks publish data more frequently - at least limited to BoE and FSA.
11. Banks should not be strangled or stifled, but the eye and breath of the watchdog should be felt by banks so they know they cannot get away with unwarranted behaviour. This will do away with the high risk competition between banks that has played a key part in destabilising the system.
12. Separate commercial and investment banking where possible.
13. Government should ensure local government receives adequate financial planning and investment guidance and supervision, so that local government capital is adequately protected and sensibly invested, with an emphasis on best practice.