Friday, 9 December 2011

Whilst you were looking at Europe the regulatory turn happened here

You'll recall, of course, that there is a popular narrative in the UK investment world about stupid Eurocrats meddling in stuff they don't understand. The plebs on the continent are unable to grasp the understated elegance of 'comply or explain', for example, and just want to try and 'regulate' bad behaviour or poor decision-making out of existence. That in turn means we need to defend our model against this threat by demonstrating that a market-driven approach is inherently superior to any silly ideas the EC might come up with.

What to make of this then (another excellent scoop from Sky man Mark Kleinman it has to be said)?
Regulators should be given greater powers to block hostile bank takeovers in order to avoid a future crisis like the one that forced Royal Bank of Scotland’s (RBS’s) into a £45bn taxpayer bail-out, the chairman of the Financial Services Authority (FSA) will say next week.
So we are now at the point where the FSA believes it should be able to block hostile takeovers because of potential systemic risk. This is important for several reasons, when thinking about just how market oriented our system really is. Firstly it means that regulators get to decide on takeovers before shareholders do. You might want to vote to take the cash, but the FSA might block a deal before you get a chance to. Secondly, it clearly implies that regulators think that shareholders may not spot/oppose deals that are extremely risky. Thirdly, it could come to set a benchmark, whether intended or not, of 'FSA approved' takeovers. This is not insignificant.

But there's more:
The report, which runs to about 490 pages, contains recommendations about the future of banking regulation. These include raising the prospect of bank directors being forced to prove their innocence in the event of a future bank failure; being obliged to forfeit remuneration; or toughening laws governing directors’ liability in the event that their bank goes bust.
So, potentially much tougher standards for those involved in the corporate governance of banks, including potentially changing their liability for failures. This goes a bit further than the Corporate Governance Code, doesn't it? An obvious question, and an argument that we'll no doubt hear pretty quickly from the banking lobby, is whether this will stop people wanting to become directors of UK-regulated banks.

And there's more:
In his introduction to the report, Lord Turner, the FSA chairman, argues that in contrast to the boards of other companies, directors of banks should place less emphasis on profit maximisation and more on effective risk management.
What to say? If accurate this is a fundamental challenge to the idea that we should just let businesses, even systemically important financial institutions, pursue their own interests because it ought inevitably to benefit us. It's almost a 2008 vintage mid-crisis perspective.

And there's a bit more:
I’ve learned that as part of its inquiry, the FSA wrote to former non-executives of the bank, including Sir Tom McKillop, the chairman at the time of RBS’s collapse, to gauge whether they had felt intimidated or bullied by Sir Fred’s notably autocratic style. I’m told that none of the former directors responded that they had.
I wonder if any of the large investment institutions, or their representative bodies, have done anything like this? I strongly suspect the answer is no. But, with the benefit of hindsight, it seems like such an obvious thing to do. Another indication that shareholders currently just aren't set up to play the ownership role? Whether or not that is the case, it certainly seems to be true that the FSA is playing an ever greater role in the governance of the businesses under its watch.

This is not an isolated incident. Remember, for example, that the FSA is looking into the Pru/AIA bid, and has apparently told Santander to strengthen its governance. Again these interventions are very significant because inevitably they will carry more weight than shareholders putting on pressure. This is particularly the case when any UK-listed financial institution with any smarts will know that a) there are investing institutions out there that would rather bite their own arms off than vote against and b) even where there is shareholder unease they can paly 'divide and rule'. Doesn't always work, but at least more of a fighting chance than when dealing with the regulator (bear in mind, for example, that neither chair or chief exec went from Pru despite the failed deal).

As I've been banging on for some time, we should not kid ourselves that the UK is purely-driven governance regime and should instead be aware that a more regulatory approach is already on the cards. The more I look at some of the commentary about sticking up for the UK model against EU regulatory interference the less I consider it corresponds to reality, at least in respect of listed financial institutions. And once you let regulators play a role in the governance of some sectors, why not others?

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