Post-Brexit City must be freed from European-style over regulation
It has always been perceived wisdom that it was greedy bankers to blame for the financial collapse of 2008/9. The truth, however, is very different.
Looking back, years of Establishment “too big to fail” support for uneconomic banking and financial institutions which began in the 1970s and culminated in the Greenspan intervention to save markets from meltdown in 1987 was where the problem began.
It led to a decision in the late 90s under Gordon Brown, to consolidate all the different financial services regulators in the UK. Well intentioned investor and consumer protection then passed into law under the “Financial Services and Markets Act 2000” (FSMA 2000).
This top-down legislation, poorly interpreted by the Financial Services Authority with its controversial “handbook”, merely helped to foster herds of lawyers, consultants and in-house compliance officers, the result of which led to more confusion and obfuscation.
The concept of delegated industry regulation was thus trampled underfoot as complexity abounded and the Regulator took control. The industry itself took the view that as long as the rule book allowed for a practice, it must be acceptable, even if common sense said otherwise. Subsequently idiotic examples such as that which happened at Northern Rock when it “borrowed short” and “lent long” went unchallenged by the deficient regulator. Bemused by all the complexity Parliament opted for a Pontius Pilate approach finding it easier to blame the greedy bankers than the equally greedy lawyers and regulators.
This regulatory mess was further compounded by the introduction of two editions of new EU MIFiD Regulation where Parliament was replaced by the EU as the top-down legislator allowing vested European interests to restrict and adjust activities to suit their political objectives.
MIFiD II, imposed in 2018, was specifically designed to restrict equity market investment across the EU and in doing so badly damaged the City of London which, unlike most of the rest of the EU, has a history of risk taking to facilitate trade by matching the risk taker with the innovator/trader. By contrast EU culture is based on bank lending.
The introduction of MIFiD II has badly damaged the UK’s entrepreneurial track record. Why for example is the market capitalisation of Apple capable of competing with our top 100 companies? Is it because US capital markets are a more fertile seed bed for nascent technology companies?
The City of London is a highly valuable centre of financial expertise which currently produces a very large surplus in excess of £50bn for the UK. I know from my time on the Board of LIFFE, the importance of volume to the functioning of a market. Volume attracts volume and makes competition from plagiarists difficult.
The EU covets our financial market success. Through MIFiD II we are now suffering from the trojan horse of self-harm. This will only give more opportunity to our aspiring competitors whilst also holding back the development of our small, but innovative, growth companies.
In the recent Brexit deal the Conservative government has clearly failed to support the City of London, our most valuable export, so the EU is able to undermine our dominance.
The recent attack on UK clearing of financial transactions is an example. It is now a matter of urgency that the role of the FCA and PRA are reviewed and radically reformed to ensure that financial markets are repaired in order to support the British economy post Brexit.
Both organisations waste millions on market abuse and sustainability, choose their own agenda to impose maximum fines on market practitioners and are not sufficiently accountable to Parliament. They have become an expensive impediment to post Brexit Britain which needs active equity investment from both institutions and private investors.
The Bank of England itself, headed by Andrew Bailey, is currently still the ultimate Regulatory Authority in the UK.
Mr Bailey ran the FCA for some time and presided over several extraordinary failures of which LCF must be the worst. Controversy has swirled around his participation in the LCF review but the fact remains that the FCA failed to stop investors from losing large sums of their money in an avoidable way – despite flashing warning lights.
It seems it is easier for the array of FCA lawyers and their acolytes, with little market experience, to issue Section 166 notices to market participants and bludgeon them into paying unfair fines after lengthy delays in order to limit the damage to their businesses. This shows an unfair and wrong move towards an obsession with the detail while overlooking the more important principle of an honest ‘market culture’.
Two questions are therefore left outstanding – how do we urgently unwind the extensive self- inflicted damage being done to the Golden Goose called the City by messianic regulation and who regulates the Regulator?