Wednesday, 26 March 2008

FSA Needs Help to Shut Northern Wreck's Stable Door

Hopes that the FSA's internal audit report into the (mis-)handling of Northern Wreck would quietly close the stable door have been dashed.

Not only do the recommendations in the report imply major shortcomings in the way "high impact" firms are supervised, but the fact that the revelations have come 8 years and so many scandals into the agency's existence also suggest that the FSA is incapable of closing the stable door on its own.

But the FSA is not so much to blame, as our expectations.

It does seem unrealistic to expect the FSA (any more than every bank it supervises) to hire enough people of sufficient calibre and to keep them sufficiently trained and informed to detect every significant hole in firms' evolving business plans/models that may be exposed by the latest financial wheeze. Even if the FSA could solve that staffing and data challenge, the chances of the FSA actually persuading bank management to accept that a particular hole exists and to plug it quickly enough seems very unlikely to work every time. After all, participating in financial markets inherently involves the assumption of risk, not completely eliminating it.

I guess there's no harm in the FSA continually striving to improve the likelihood of meeting these expectations - or aspirations - except for the ever-increasing budget that will be required.

One thought is for the FSA to rely more on third party firms to do the specialist business and economic analysis, leaving the FSA to focus more tightly on commissioning, reviewing and reacting to their reports and managing the regulatory relationship with firms. That would allow for clearer segregation of the detectives from the prosecutors. The profit motive might enhance the economic efficiency with which the analysis is done, and also enable deeper expertise to be built over a longer period than the FSA's career ladder might allow.

I hear howls about more money being spent by government on consultants, and that too needs a good overhaul for sure, but it's no argument for depriving the government of private help.

Whatever happens, the private and public elements of the financial services industry will have to work better together if more Wrecks are to be avoided.
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