Friday, 27 April 2012

Mr. Sants will not be missed.

Every time I listen (or read) a speech by Hector Sants, I can't help but smiling at the naivety and childish tone it has. At the same time, I get annoyed at the paternalistic nature of it and scared of the consequences of his words. Mr. Sants, who will be leaving the FSA at the end of June, delivered his final speech as CEO of the FSA on the 24th of April with the grandiose title of: "Delivering effective corporate governance: the financial regulators role". Although the speech is mostly concerned with the role of boards and the governance framework, I would like to focus on several, more general, statements in this speech which I think clearly reflect the mindset of Mr. Sants and the philosophy he has brought to the FSA, and which are becoming a major threat to financial services freedom of enterprise.

Firstly, Mr. Sants, in a statement that can be interpreted as a defense of the 'more intrusive supervision' approach, declares that "we cannot rely on markets alone or on individuals doing the right thing all of the time. What is needed is a strong regulatory framework and a determined and knowledgeable regulator willing to intervene". I agree that financial markets need, as any other sector, a strong regulatory framework which sets the 'rules of the game'. I also agree that individuals and markets are not perfect, and sometimes end up creating a big mess. But I utterly disagree with government interventions in the private affairs of individuals or companies. The main role of a regulator is to watch and punish those trespassing the limits, not to tell financial markets entities how to act of behave. Any action or intervention that the regulator takes will simply be 'what the regulator considers to be right' at that time, and will be based on the regulator's interest, which can never be legitimately said to represent the interest of all players and stakeholders in the financial markets or in the society as a whole. Therefore, it cannot be argued with any convincing claim that the regulator's actions are the 'the right actions' and all other are wrong. Cleverly, and to avoid critics, Mr, Sants is quick to remark that regulator's intervention "will not guarantee failures are avoided.  Neither would that be desirable". So, if it does not guarantee avoiding failures and, as explained below, it can create other failures in itself, what is the purpose and benefit of this intervention?

Regulator interventions in the financial sector are those of a self-interested player who instead of playing by the rules is exerting unjustified coercion and can intentionally alter and direct the natural forces and interest present on any human relationships, including those present in the financial markets, for its own benefit or interest. The most daunting consequences of this is that, as the Public Choice theory exposes, these actions are very likely to lead to 'government failure' (read here 'regulatory failure') with consequences even more catastrophic than those created by the markets (e.g. we just need to observe the chaos in the Eurozone to see a current example of this). As Eamonn Butler's extremely interesting book 'Public Choice – A Primer' explains, "the market may be unable to deliver certain things, but government action...is not necessarily an ideal way to deliver them either. Indeed, the problems that government intervention creates can be even more damaging than those it is intended to correct."

Secondly, a paternalistic statement by Mr. Sants in support of the 'credible deterrence' philosophy: "history tells us that we cannot rely on the motivation of individuals alone and that we need credible enforcement to require individuals to be driven by principles rather than just commercial expediency. Commercial success should not place an individual above the law." Although, in essence, I agree with the basic concept Mr. Sants is trying to express, there is a single word I fully disagree with and which exposes what the regulator really means: 'credible'. The meaning of 'credible' implies an element of publicity. It denotes that the crucial element is not whether enforcement actually punishes the wrongdoers, the important element is that the punishment is made public and consequently introducing a sense of fear on individuals. Therefore, the risk is that enforcement activities are pushed too far and sanctions are pursued merely to achieve that fear factor instead of for genuinely punishing of offenders.

Finally, Mr. Sants argues that "ultimately, the purpose of financial markets is to serve everyone not the personal interests of individuals." This is the scary bit. This comment is the kind of meaningless and contradicting rhetoric of an authoritarian politician in a banana republic who is ramping up his populist speech before intervening in a specific sector or seizing a 'strategic' company 'for the benefit of the country'. When Mr. Sants talks about 'everyone' he means that ghostly concept of 'public interest' that we know from a practical point of view to be a fallacy. As Eamonn Butler cleverly vindicates: "we live in a world of value-pluralism and, as far as economic decisions taken by government are concerned, people value different goods and services differently. Inevitably, the different interests of different  people will clash and agreement on what constitutes the 'public interest' is impossible".

Mr. Sants was a successful investment banker at Credit Suisse First Boston before he joined the FSA and as such he has done a fine job. He has implemented an aggressive culture and has expanded the powers and resources of the regulator to levels never seen before. Since he became CEO, the FSA's budget has gone up from £323m for 2008/9 to £543.5m for 2012/13 and the number of staff boosted to around 4,000. His blueprint has been deeply rooted in the culture of the regulator and so far there are no indications that the imminent dismantling of the old FSA will have any impact at all. This was his last speech but his long shadow will remain for a long time. For many working in the industry as well as for those that believe in free enterprise and free markets, Mr. Sants will not be missed.

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