This Year's Misadventures In The Cryptoverse

Looking back over the posts on these pages over the past few years (and my Twitter feed!), readers may wonder if I've focused on anything other than Britain's political woes. Fortunately, I've been distracted by numerous legal developments, covered extensively on The Fine Print, Keynotes, Ogier Leman's "Insights" pages, LinkedIn and, most recently, Mastodon. A prominent theme is commentary on attempts to introduce legal certainty and controls into the volatile world of cryptoassets, alas too late to avert the string of collapses that have peaked (so far) with FTX... Contagion still lurks and has crossed into traditional financial firms, including Australian pension funds. Two main thoughts leap out from the morass:

• Tech evangelists should stop pleading for ‘light touch regulation’ and explain any significant externalities associated with their technology which need to be addressed. There may be no ‘choke points’ within the energy guzzling Bitcoin protocol itself but consider the role of crypto-exchanges, wallet custodians and decentralised finance (DeFi) operators that enable lending, trading and so on: FTX demonstrated that greed and stupidity still lurks around crypto-tokens, so the tech still needs regulatory tools to guard against related human misconduct; and

• Similarly, the fact that major venture capital firms invested in FTX while receiving investments through FTX's trading arm - and their due diligence seems to have 'missed' the complete absence of ‘traditional’ governance/controls - raises questions about (a) potential tracing claims by FTX clients' assets into the VCs' funds; and (b) whether FTX was effectively an unincorporated association with an array of corporations designed to encourage the idea that it was a 'traditional' corporate group, such that the participants may have unlimited liability... 

The last point should also be considered by those proposing formal recognition of  'decentralised autonomous organisations' (DAOs) which also tend to involve related companies and other 'body corporates' for various purposes.
Well, at least that's off my chest.

There's No Single Market For Consumer Finance: What Next?

Perhaps it's not what the European Commission intended, but its green paper on retail financial services is a great explanation of why there is so little cross-border activity in consumer finance: 3% for payment cards, current accounts and mortgages; 5% for loans (less than 1% between Eurozone countries!) and only 3% of gross insurance premiums. For a very long list of reasons, it's just not practicable for most retail financial services providers to operate across EU borders, as the EC has known since at least 2007. Could it be time, therefore, to scale back EU requirements for firms that only focus on their national market, so consumers have a clear choice between national and genuinely cross-border suppliers and products?

The Commission concedes that its vast, confetti-like attempt to harmonise EU financial regulation  has proved futile in catalysing a single retail finance market, yet it continues to ask what more can be done.

One issue in particular that the Commission is huffing and puffing about is 'geo-blocking', the use of technology to identify and block or re-direct consumers based in certain countries.

But the Commission's own findings are that few players have the resources to focus on cross-border markets. Suppliers who do target multiple countries typically use separate local operating entities to deal with all the problems listed in the green paper, so they don't even properly qualify as 'cross'-border. At any rate, how can you force a Spanish motor insurer to sell policies to Germans if it simply can't afford to administer claims in Germany? How would that be in the policyholders' interests? Even assuming the focus solely on Spanish customers is the supplier's own choice, rather than due to some legal restriction, wouldn't requiring the firm to deal with Germans or Swedish consumers put it at risk of going bust, leaving the whole market to a few big players who can afford to serve customers everywhere?

In its response to the green paper, the UK's Financial Conduct Authority quite rightly urges caution on the economic impact of more (futile) regulation, as well as careful analysis of consumer needs and behaviour before churning it out. The FCA points out that existing regulation must be allowed to 'bed-in' before assessing its real impact; and the Commission needs to consider that EU consumers are not some amorphous clump of flesh waiting eagerly for Greek insurance policies homogeneous, but diverse in their needs and behaviours - so a 'one-size-fits-all' approach won't be universally acceptable and risks crushing local financial services that are working well.

The FCA hints at the idea of a range of EU-approved products that might be provided by any EEA firm to any EEA consumer in a standard way, though this still begs the question whether the providers are able to manage this operationally. 

I guess it's possible that those able to target cross-border markets would benefit from some kind of voluntary EU-cross-border safe harbour scheme that enables them to adopt the same approach to marketing, contracts, customer service, complaints handling and enforcement and so on throughout their target market(s). It could even be very a attractive product in some national markets that are currently under-served or where consumers are being fleeced.

But that's more or less what the current regime allows, yet few firms are bothering to do it: the whole point is that we know it is futile to impose a cross-border scheme on firms and consumers who just want to focus on their own national, regional or local market.

Which begs the question: rather than add more regulation, why not allow member states to scale back EU requirements for firms that wish to remain nationally focused? This would allow further differentiation between national and cross-border suppliers and products, presenting consumers with a clearer choice to make.

Why Bankers Make Poor Managers

If UK banks ran our restaurants, we'd all be spending a lot more time in our smallest rooms.

In the latest example, the Financial Conduct Authority found that only 2 of the 164 RBS and NatWest mortgage sales reviewed actually met the required sales standard. Even the banks’ own tests confirmed the problem that borrowers were at grave risk of being sold the wrong type of mortgage. Yet it took the banks nearly a year to stop fiddling and begin taking proper steps to resolve the issues. Worst of all, this took place in 2011 and 2012 - long after the events of 2008 had alerted everyone to just how poorly these banks were managed generally; and after numerous specific failings had been detected in their retail operatons. The same banks had just been fined for failing to screen customers and handle complaints appropriately - and had even failed to enable customers to pay bills or access money. 

Of course, RBS and NatWest are not alone, and the banks' problems are not confined to their retail operations. Most of the major banks are embroiled in scandals arising from lack of operational controls of one kind or another.

Over at heavily-embattled HSBC, the Chairman and Chief Executive have been whingeing about the 'cost of compliance', as if it's a dead weight they're forced to bolt-on to the side of their sales process, rather than a set of largely common-sense business rules that should be embedded in their operations. 

They don't seem to realise what a sad indictment it is on the level of management skill in the financial services industry that successive regulators since 1986 have felt obliged to spell-out in minute detail how to operate a financial services business at every level and in every scenario. As a result, no human could possibly lift a printed version of the FCA's 'Handbook'. 

The same charge can be made for failings in longer term strategy. The government had to force the banks to invest in faster payment processing capabilities, for example, and it took an extensive series of court battles before banks were finally shamed into 'voluntarily' reducing overdraft charges. The most recent indictment on the levels of skill, enthusiasm, initiative, vision and energy at the top of the UK's banks is that the government will have to regulate to make them refer rejected business funding applications to alternative lenders. 

That's right, UK bank executives aren't even up to negotiating simple lead-referral arrangements.

Which begs the question: what do UK bank executives actually do all day?

Why, they fight regulation, of course, and all the operational rigour it seeks to impose.

HSBC Still Doesn't Get It

You would not expect a conglomerate under heavy regulatory fire to use its latest results announcement to campaign against regulation. But that's HSBC for you.

Yesterday, the CEO complained that the group now spends $800m a year on 'compliance and risk programme', an increase of $200m, with more to come next year. In other words, even after years of scandals and massive fines, HSBC remains under-invested in compliance and risk controls.

Even more alarmingly, the Chairman says that such resources would otherwise be spent on customer-facing staff, who he says are becoming too risk-averse. But that's exactly what regulators, customers and taxpayers are afraid of - the biggest banking group in Europe spending an extra $200m a year selling toxic crap without adequate controls over an aggressive salesforce. 

Bizarrely, HSBC's Chairman is also pushing for the ring-fencing of the retail bank to be deferred at the very same time as a major Portuguese bank goes under.

Not a great attitude to regulation from the leadership of a bank that has 3 years to go under the deferred prosecution agreement it signed with US authorities for money laundering and sanction breaches - ending HSBC's involvement in $100bn worth of businesses. That's in addition to claims for market rigging, mis-selling PPI and interest rate swaps, not to mention it's starring role in the 'Magic of Madoff'. 

I can't imagine that Res Publica's Virtuous Banking report went down terribly well at HSBC HQ.

At any rate, with revenues already down 9% and pre-tax profits down 12%, in the year to June, you can expect a lot more bad news from these bozos. 

Short Selling Hygiene

Good to see the short sellers doing the regulators' work for them again - not that the authorities like it. 

Last week, Spain's stock market regulator called on the SEC and the FCA to provide information about short seller Gotham City at the same time as its dodgy target, Gowex, was declaring GC's fraud allegations to be "categorically false". But yesterday, Gowex's founder admitted to falsifying accounts for past four years.

It defies belief that short sellers should be able to find such golden opportunities amongst listed companies. 

Just goes to show that auditors still need to understand the nature of scepticism. And that regulators could benefit from hiring some traders of their own.

The Hideous Cost Of Banking 'Standards'

I'm a great fan of trade bodies that introduce necessary self-regulation and create an efficient bridge between industry and officials. But news that UK banks will add to their enormous lobbying efforts by spending an extra £7-10m on a new "Banking Standards Review Board" definitely strikes me as overkill. 

I mean, what's the British Bankers' Association for, if not to ensure decent industry standards? Does the need for a new 'standards' board mean that the BBA has failed? If so, shouldn't it be dismantled? What about the Lending Standards Board? It's role is "to monitor and enforce the Lending Code and to ensure subscribers provide a fair deal to their personal and micro-enterprise borrowing customers." Surely it failed in that aim long ago?  Or is it that such bodies are really just lobbying outfits that merely pay lip service to effective self-regulation? In 2011 alone, The Bureau of Investigative Journalism found that the City spent £92m on lobbying regulators and politicians, which it described as an "economic war of attrition." Even the Confederation of British Industry has been captured by the banks.

Lord knows how much it really costs to run these lobbying outfits and face savers. But you can bet that customers and/or taxpayers end up paying for them in the end - not to mention the 2000 extra staff that the Financial Ombudsman Service has had to hire since 2012 to deal with the million complaints about payment protection insurance, or the endless Parliamentary time, or the £20bn in PPI compensation that the banks must fund. In fact, the London School of Economics found that poor conduct among the world's top 10 banks, including 5 UK outfits, had cost nearly £150bn by the end of 2012, and there have been vast fines and compensation payments since. 

Isn't it time for the banks to stop talking their way through everyone's money and just get on with the job of supplying decent financial services?

Towards A Diverse, Sustainable Financial System

It's not every day you get to brainstorm ways to bring diversity and sustainability to Britain's ailing financial system amidst a broad cross-section of officials, economists, entrepreneurs, think-tanks, technology suppliers and advisers. And yesterday's Finance Innovation Lab workshop was a golden opportunity to do just that.

While the Lab will report the output in due course, I thought I'd share a summary of my notes from the breakout sessions in which I participated. These looked at regulatory barriers and lack of financial awareness. Others explored the unfair advantages enjoyed by estalished providers and ways to encourage innovation. We operated under the Chatham House Rule, hence the absence of names or affiliations.

The UK financial system is neither diverse nor sustainable. 

There is plenty of evidence that the UK's financial system is suffering from a lack of innovation and competition, and is unsustainable in its current form. Rates of market entry and exit are low, relative to other industries. Few customers switch and customer trust is lowest for financial services on several leading surveys. The unit cost of intermediation remains high in financial services compared to other retail markets, while management and staff have reaped the benefits of any increased operational efficiencies (even while legacy systems remain prevalent). Banks rely on a huge back-book of deposits on which they pay little or no interest to finance loans to fund trading in financial assets rather than loans to productive businesses. After all, a single giant property loan does more to grow the bank's numbers than lending the same amount of money to thousands of small firms. 

Regulatory barriers

 

Against this background, we concluded that the current regulatory framework, including subsidies and incentives, is essentially designed to both protect the 'financial system' and 'customers' - i.e. to minimise the risk that consumers and small businesses, in particular, will be mis-sold 'products' by unscrupulous suppliers. 

In effect, however, that framework obliges policy officials (Treasury) and regulators (FSA) protect the system as it is, rather than to ensure that it evolves to encourage and accommodate innovation in line with customer requirements. That's because the framework and those who police it are organised in silos according to existing product types and types of suppliers, and not according to types of customers' and their day-to-day activities. 

The customer protection regime mirrors this approach, being organised according to limited sets of product types and types of suppliers, as well as types of promotional and business activities in which suppliers are engaged (not their customers). As a result, the impact of regulation, complaints and potential for changes are all viewed through the lens of existing products and firms, and any actual changes reinforce those lines of distinction. 

The perverse nature of this can be seen in the fact that, if I want to allocate £100 to a project that I'd like to support, it's easiest for me to donate the money, a bit more complex if I want the money repaid with interest (as a loan), very complex if I want to be able to freely trade that right to be repaid with interest (a bond) and the most complex thing of all is to receive an equity share in the project. This discourages diversification and the search for opportunities to get a decent return on surplus cash; and limits the availability of funding to new businesses, on which most new jobs depend.

Hard-wiring the markets according to types of products, suppliers and ways of dealing with them also artificially limits the number and range of suppliers, product types, and the corresponding markets. In addition, taxpayer guarantees and subsidies in the form of savings and pension incentives are aligned with existing regulated suppliers and product types. Therefore, the regulations and incentives work together to enable the suppliers in the regulated markets to charge higher fees, make higher margins, reward staff more generously and pay more for marketing - resulting in less innovation and competition.

The overall result is a financial system that is not designed to evolve in line with the requirements of consumers, small businesses or even big business. It is designed to suit incumbent suppliers - those who play well with the system, regulators and policy officials. Yet there is no single set of policy officals or regulators tasked with understanding how the regulations, subsidies and incentives actually work together as a whole or whether they distort any aspects of the financial system within or outside the regulated areas.

A broad range of solutions were suggested, as you can imagine, and the Lab will report on these shortly, and include them in a submission to the Parliamentary Commission on Banking Standards. However, suggestions included: 

• creating a Parliamentary Select Committee to focus on encouraging financial innovation;

• limits on market share by product type;

• controls on gross leverage; 

•  separate banks' credit creation process from financial intermediation (the process of allocating that credit);

• central bank guidance to banks on how much to lend productive firms;

• levelling the playing field on subsidies and tax incentives/allowances;

• a target of 200 new local banks by 2016;

• publishing details of national banks' regional/local banking activity;

• making it easier to get low risk financial businesses authorised;

• publishing the amount of the subsidies to major banks and oblige them to set aside a proportion of their subsidy for future crises;

• treating payments systems and credit reference data as utilities (i.e. public goods).

Lack of financial awareness

The scale of financial mis-selling across many different types of products and lack of diversification by investors suggests a widespread lack of understanding of financial services. This was seen to be caused by a lack of financial education, on the one hand; and by product complexity on the other. In turn, product complexity is driven by both regulatory complexity and an unwillingness to invest the extra effort required to simplify products and better align them with customer requirements.

The lack of financial education is essentially a failing of our education system. Yet there is little faith that the Department for Education accepts any responsibility for delivering a sound financial education. It's also clear that no other government department sees this as part of its mission. Rather, financial education seems to be a specialist area confined to universities and business schools or professional bodies. It was felt that this will only change with a determined effort by the Department for Education to measure financial 'literacy', collect best practice for teaching it and including those measures in the national curriculum. Measures of success would include improvements in financial literacy exam results, fewer complaints to the Financial Omudsman Service and improved diversification amongst savers and investors.

Removing product complexity requires a commitment to reducing regulatory complexity, the removal of the regulatory barriers to innovation and competition discussed above, as well as incentives that drive both simpler products and diversification, rather than the concentration of funds into a few regulated asset classes.

In short, more pragmatism and less politics should go a long way.

Kickstarter's Kick In The Butt For UK Banks

The news that Kickstarter, a US rewards-based crowdfunding operator, has opened a dedicated UK platform is hugely encouraging for anyone concerned about our banking problems.

No doubt Kickstarter is responding to demand from the UK-based entrepreneurs and their supporters who were already using the US platform. But it's also a big bet on the future of alternative finance in the UK, and Kickstarter's expansion will mean a lot of focus on the different ways that people can directly fund other people's personal finances, projects and businesses.

The term 'crowdfunding' first gained currency to describe US 'rewards-based' peer-to-peer platforms like ArtistShare and Kickstarter, and similar platforms already operate in the UK (e.g. Peoplefund.it, Crowdfunder and those mentioned here). These platforms are designed to raise money for small budget projects via the internet without infringing laws that control the offer of 'securities' to the public. Entrepreneurs can post 'pitches' seeking donations, and may offer a 'reward' of some kind in return.

Other peer-to-peer finance platforms enable markets for personal loans and small business loans - called 'person-to-person lending' or 'peer-to-peer lending'. Examples include Zopa, Ratesetter and Funding Circle in the UK, Comunitae in Spain and IsePankur in Estonia which just announced that anyone from the EEA and Switzerland can lend to Estonian borrowers.

The peer-to-peer model has also been adapted to fund charities or not-for-profit projects, which is known as 'social finance' (e.g. Buzzbnk); and to enable many people to fund tiny local businesses in developing countries - referred to as 'micro-finance' (e.g. Kiva, MyC4).

Finally, the peer-to-peer model is being developed to enable direct investments in return for shares and more complex loan arrangements (debentures). This has proved impossible to date in the US, where even Lending Club and Prosper have had to register their peer-to-peer lending platforms with the Securities Exchange Commission. But in the UK, Crowdcube and, more recently, Seedrs and BankToTheFuture appear to have found ways through the regulatory maze to enable the crowd to invest in the shares of start-up companies. Abundance Generation enables funding for alternative energy. Kantox enables people to switch foreign currency and Platform Black enables the sale of trade invoices. CrowdBnk, Trillion Fund and CrowdMission say they're coming soon.

There are signs that the regulatory maze will become much easier to navigate. Both the US and UK governments have recognised that more needs to be done to encourage the growth of these alternative forms of finance. 

The US passed the JOBS Act to provide ways to enable crowd investment in securities. And against a backdrop of proposed legislative changes in the UK, the government has praised self-regulation by the industry and set up a working group to assess the need for changes to the legal framework. That working group includes representatives from the Office of Fair Trading, the Department of Business Innovation and Skills, HM Treasury, the Financial Services Authority and the Cabinet Office. The Department for Culture Media and Sport is also interested in the potential for peer-to-peer finance to fund the development of arts and entertainment. 

The European Commission is also taking an interest in this field, and a regulatory summit is being planned in early December to introduce industry leaders and EU/UK policy-makers and regulatory officials to discuss proportionate regulation to encourage the responsible growth of peer-to-peer finance.

Kickstarter has made a pretty solid bet.

More Early Warnings - Now!

Last year I cheekily suggested we should allow financial regulators to short-sell the stocks of companies that are subject to the slow grind of enforcement action. Refreshingly, the Treasury seemed to acknowledge such concerns and the Financial Services Bill includes a power for the Financial Conduct Authority to disclose that a warning of enforcement has been issued to a firm - a so-called 'early warning notice'. The Standard Chartered 'wire stripping' saga provides an excellent illustration of the issues.

Radio silence on enforcement actions is explained as investor protection. Yet it leaves innocent investors to continue piling into stocks they might have avoided had they known of the alleged misconduct. Instead, enforcement action should merely be about regulatory penalties, and the fact an action has been commenced should be disclosed as a material fact about which investors (and customers) can draw their own conclusions. Short-selling has a similar effect. Generally speaking, short-sellers go looking for mismanagement and/or misconduct and back their suspicions with a market price. I gave the example of Greenlight's campaign against Allied Capital (and later Lehman Brothers), and noted that DE Shaw had a £100m short position in Barclays in February 2011. That at least acts as timely opportunity for long-only shareholders to consider selling, and would-be investors to steer clear.

Our banks, in particular, continue to present examples of long term operational misconduct that show why early warning is a good idea, the latest being the saga of Standard Chartered Bank's alleged 'wire stripping' activities. A key issue is whether $250bn or $14m in US dollar transactions were rendered invisible to the US authorities, preventing scrutiny to establish whether they breached sanctions against Iran. SCB claims that it's been working with various US federal authorities to settle allegations about its practices for some time - precisely the sort of cosy arrangement that leaves everyone else in the dark. But the New York State Department of Financial Services has decided to go it alone. In April it notified the federal authorities in April that it would pursue SCB more widely than the $14m in transactions that SCB say are in issue. The resulting allegations were published on Monday - perhaps not exactly an 'early warning' to the market, but it will do for argument's sake. SCB's share price dropped significantly on the news, later recovering somewhat, so these are clearly matters of concern to investors.

SCB has naturally reacted defensively in the face of the NY State regulator's broader allegations. It's running the traditional defence of cosy enforcement activity, saying its reputation with investors has been harmed before all the facts are out, and people have lost money 'unfairly'. It claims the NY State regulator is wrong on the merits of the case, and should thrash it out in a settlement quietly like the Feds. But the fact that the share price recovered somewhat from the initial fall might suggest that investors are still making up their minds. In other words, the 'early warning' has not been the unmitigated disaster some might claim. Similarly, short-sellers often need to incur the cost of holding their positions for many months - even years - before they're ultimately proved right or wrong.

Personally, I think the merits of whether or not the relevant transactions were affected by sanctions and should have been subject to scrutiny pales into insignificance beside SCB's apparent approach to that issue. It's one thing for the bank to take the view that the transactions are out of scope and argue the toss with the authorities while complying with scrutiny procedures in the meantime. There are also instances where regulation is clearly outdated, flawed or unduly awkward and a pragmatic 'fix' is acknowledged by the authorities as acceptable. But would be quite another thing to apparently make a judgement call privately and then deliberately alter transaction data - or require it to be altered - to shield the transactions from scrutiny. That sort of attitude to compliance risk makes you wonder what other risks are being run and at what scale. And the initial impact on the share price shows that at least some investors are just as interested to know that such risks are being run as the regulators. Neither investors nor regulators like surprises.

Interestingly, the City's propaganda machine has chosen the SCB saga as a point from which to launch a counter-attack on behalf of banks generally. The Financial Times, 'reports' a "backlash against naming and shaming of banks" - a kind of backlash against a backlash, if you will. The FT cites a proposal by Lord Flight to amend the Financial Services Bill to prevent the Financial Conduct Authority being allowed to give early warning notices. Interestingly, Lord Flight has introduced an extra note of moral panic that pension funds have lost money as a result of the NY regulator's disclosure of its allegations against SCB. Any time you see a gratuitous populist reference like that you should smell effluent. 

Let's be clear: investors have lost money because they didn't realise that SCB was running a risk of enforcement activity on a grand scale. That kind of problem seems to be particularly rife in banking. We need more early warnings - now!

We Need A Lot More Little Things To Go Wrong

As Nietzsche said (I always wanted to begin a post that way), "That which does not kill us only makes us stronger."  Or as my first boss was fond of saying, "We only learn when things go wrong."

Both are right. But implicit in both sayings is survival and survivability. 

Survival of the fittest, building strength through adversity - this is how species evolve. It's what makes Kipling's poem "If" so stirring. It's the difference between all those 'best practice' presentations at corporate off-sites (let's be honest, they're about rescued screw-ups) and the whirring of shredders at Arthur Andersen. It's what turns complaints into fixes, features and products instead of fines.

Yet all the research suggests it's impossible to 'pick winners'. In fact almost all significant events in our history are Black Swans - surprise events that have a huge impact and which we rationalise by hindsight. We have no real idea which ventures will succeed and which will not until the facts and figures emerge. And even then we don't know how sustained that success will be. Indeed, sometimes we don't even know what success looks like, expecially with not-for-profit projects or organisations (including government departments - and the European Commission). In his book "Adapt" (a veritable bible on the importance of survivable failure) Tim Harford explains the need for built-in feedback to distinguish success from failure in such contexts. 

But, hey, the Euro had built-in entry criteria, and they were ignored because the politicians refused to countenance failure as an option.

And there you have it. Above all, as Harford emphasises, the critical thing is to accept the risk of failure, but to ensure that such failure is survivable.

Our political and economic leaders don't grasp this any more today than their forbears did when negotiating the Maastricht Treaty. Because they see it as their job to protect 'the system'. But by continuing to back the same institutions, the same systems, and essentially replicating and deepening the same old regulatory regime, they're merely resisting the tide of evolution. Rather than cutting their losses, they're busy hurling the big dice again, and again, and again like so many casino junkies.

It's impossible to mix too many metaphors in a situation like this. So here's another: if Necessity really is the mother of Invention, then we have to get her to a fertility clinic.

We need more trials and more errors of the survivable variety. In other words, we need a hell of a lot more little things to go wrong before the big things start going right.

Maybe we should make it our leaders' job to promote innovation instead of protecting the system?

No More Undue Deference

By now we've witnessed the disasters that resulted from a lack of critical thought amongst auditors, ratings agencies, the Federal Reserve, the IMF, the UK Parliamentary Fees Office, the HBOS audit committee, and Gordon Brown's cabinet. So you would've thought a few lesssons had been learned. Yet I was peeved to hear last week that the protocol for meetings within the Bank of England demands complete deference to its officials - even an expert from another regulator must not speak unless asked to, and their unsolicited questions or observations are pointedly ignored.

Now, I'd like to think that somehow overstates the position - especially in light of Mervyn King's increasingly vociferous assaults on the banks he oversees - and I'm very happy to be put right in a comment. But I also fear someone will laugh and point out that every wing of the civil service works the same way and probably many other large organisations to boot. 

But if this is true, it does not bode well for the levels of co-operation and cohesion that will be required amongst the UK's new financial authorities.

I'm not advocating a culture of disrespect, impoliteness or disobedience - the opposite of deference. I'm against undue deference - the kind that amounts to acquiescence, capitulation, complaisance, condescension, docility and submission. If organisations are going to adapt to facilitate solutions to our problems rather than their own, they should welcome thoughtful contributions from every angle, not allow their management to hide behind phoney rules. 

In short, like Australian troops during the 'Great War', we should only salute officers who earn our respect.

Image from The Philosopher's Magazine.