The uncertain hand of the regulator

As our political betters meet to agree still more strict and worldwide regulation, it is instructive to ask why it has failed in the past that we should need more of it. The conclusion of world saviours such as G.Brown is that there was not enough.

I beg to differ.

Much depends on the design of regulation. Most now agree that our tripartite system was badly designed, among other things because it meant that the Bank of England with natural and regular contacts with banks was removed from oversight. The Bank was unsure how far it could intervene, and the SFA had their own problems. In the case of childcare regulation, it is clear that in many cases regulation had the effect that everything was seen as the success in ticking boxes, and that responsibility for actual children was secondary to ticking boxes.

Much depends on the willingness of the regulator to report and if necessary protest against government action. The Glass-Steagall conditions, which controlled how far orthodox banking and mortgage lending could be intertwined, was relaxed in 1999 in the U.S. Here, and in the U.S. lenders lent to borrowers who were never going to be able to repay. The result was sub-prime mortgages. Did any regulators protests at what the US and UK governments were doing? Yes George W. did try to change things, but was defeated by his oppnents in Congress.

Perversely, as is now appearing from the Madoff case, the fact that an operator was supposedly being supervised by an official regulator could actually add falsely to the reliability of the operator. Unfortunately the regulators were not up to standard. When eight or so years ago other financial bodies reported their concerns and suspicions about Madoff to the regulator appropriate action was not followed up. The result was devastating losses for many people, which could have been reduced by early action.

Regulators may become so overbearing and demanding of those that they supervise that they actually reduce ethical businesses to withdraw and even to fail. Larger operators, however, who are part of the network and look for posts in regulation in due course can perhaps better conceal their activities.

There may be other reasons, but there surely must be a better way to avoid the huge costs involved, in both supervision and compliance, than the ineffective bureaucratic methods we have now. These methods often involve the regulators becoming too involved with politics and with those they supervise. In many case full disclosure and competitive pressures will do better than government meddling in regulatory regimes. Competitive markets work very well, and the government would do much better promoting competition rather than interfering in an ad hoc way.