Ask the regulator

By Reuters Staff
March 2, 2009

Hector Sants, Chief Executive of the Financial Services Authority, has agreed to take questions from Reuters readers after he delivers his first major speech on the future of financial market supervision on March 12th at the Thomson Reuters Building in London.

Sants, who was appointed just before Northern Rock was plunged into crisis, said last month that fresh thinking was needed in financial market supervision, pledged to get more involved in assessing the competence of senior bankers and waived his entitlement to a bonus for last year amid criticism of the FSA’s performance.

So what should the FSA do to sort out the banks and the markets? Reuters columnist Jim Saft gives his assessment of the challenges facing the regulator:

Thomas Raber, Managing Director of Alvine Capital, sees changes to the regulation of hedge funds as important:

Send us your questions via the comments section below or if you’re on Twitter use the #askfsa tag and we’ll try to get as many of your questions answered as possible. See the Great Debate twitter site to follow other debates hosted by Reuters.

Comments

Can the regulatory college system be made to work between Europe and the US? Better global coordination reies on interaction with the Fed and the SEC – but they are not showing much willingness to share their supervisory authority with European regulators.

 

Dear Sir, are any of the following topics likely to be addressed by your action plans?:
1)Changes to the Risk/Reward culture of (financial) corporations with respect to the compensation.
2)Residential mortgage securitization rules esp. on leverage limits
3)Mortgage origination rules (loan underwriting standards)
4)Guaranteeing of mortgage loan portfolios by lenders
5)Reduce dependence on banking sector. The preoccupation of the government with helping the banks gives them little incentive to manage their own risk. Clearly define the terms upfront
6)Separate investment and regular banking
7)Reduce conflict of interest between credit rating agencies and credit issuers
8)Prohibit public purse reward for private commercial failures
9)More transparent disclosure of investments/assets by institutions with government held equity
10)Executive loans disclosure

Posted by Franz Kafka | Report as abusive
 

Are hedge funds part of the solution? If so, shouldn’t we be giving them some good press?

Just as Lloyds syndicates are backed against assets of people willing to take the risk, hedge funds fulful a similar role for financial disaster. When banks play that game, maintaining the capital adequacy ratio forces a collapse in discressionary lending – hence a powerful feedback loop for economic melt-down.

How do we prevent off-balance sheet deals from increasing banking risk?

 

How well does banking risk management cope with forward-looking risk? Do we know what happens in scenarios like these:

- Major earthquake in California
- Googled ‘Volcano crop yields’, seeking the depressed crop yields during the middle ages I read about in “making a living in the middle ages”, couldn’t remember the volcano

 

To what extent does financial risk manage forward-looking risk for major disasters? I mean things like:

- Volcano (e.g. Krakatoa depressed crop yields for 2 years)
- Major earthquake (California, Japan?)
- Global outbreak of disease (1918 flu, SARS, effect of quarentine measures)
- Major war
- Large-scale defaults on sovereign debt leveraged by derivatives
- Substantial decline in US house prices (or did we have that?)

 

1)Given the boastful claims made recently by a large number of hedge funds over the massive profits made by shorting various ftse sectors in packs for how much longer can the FSA maintain the naive philosophy that shorting is beneficial and improves liquidity. Is it not about time they realised that they have a duty of care to act for the benefit of UK plc as a whole and protect investors and companies from the violent share price movements resulting from shorting which not only destroy a company’s stability and confidence but further cause major problems for others dependant on share value to prove an asset base eg Pension Funds.

2) Given the problems caused by indebtedness amongst the least creditworthy segment of society why has there be no clear initiative to outlaw self certification mortgages and mortgages which lend over 100% of the value of the underlying asset to name but two of the prime creators of toxic debt.

Posted by Nigel Smeal | Report as abusive
 

It is now evident that the FSA, with John Tiner as Chief Executive, failed to adequately regulate the banking system to avoid our current crisis. What operational steps have you taken in order to ensure that, in future, systemic risks within financial services are acted upon when identified? Specifically, what are your plans to deal with systemic risks within the derivative and insurance markets?

Posted by Steve | Report as abusive
 

Dear Mr Sants;

When are you going to deal with the Liar Loan issue? When are you going to realize that the FSA has to enforce RIGOROUSLY that mortgages of 3.5 x ACTUAL TRUTHFUL salary MUST be the ABSOLUTE maximum allowed?

When are you going to hunt down and prosecute the vast number of lenders who deliberately urged people to lie about their incomes, thus driving up property prices so that honest and prudent people can’t put a roof over their head?

Posted by Paul | Report as abusive
 

Many people consider the “big bonus” culture of the all these finance companies as “money laundering” as the money was paid to many managers who failed terribly.

It is very obvious that no one really understood the working of “derivatives” inclusive of the employees of the FSA(I make note of the “all clear” to the HBOS group from the FSA before it collapsed.

It is plain for the ordinary people these “derivatives” were scams, therefore, criminal offence. Is the FSA now going to bring criminal charges these people with along with “Madoffs” of the world and recoup these big bonuses back under money laundering legislation ?

If the FSA is serious about regaining ground on its shattered credibility it will have to do something of a serious nature,such as, start throwing these people at the court system.

Or is this impossible for the fear of exposure of the FSA serious failings itself,or,expose the Chancellor !

I personally have lost all faith in the FSA as they apparently seem easy meat for the finance sector.

Posted by Allan | Report as abusive
 

Isn’t it time we looked at a complete change in the banking and monetary system we use in the world? The whole system of expanding the supply of broad money through privately owned banks for private profit is an undemocratic system which supports existing holders of money and disadvantages new entrants to the system – our own children.

This system, coupled with the greed and fear inherent in human nature, is almost entirely the cause of boom/bust cycles, as over optimism leads to expansion of debt (broad money) and over pessimism leads to the destruction of money and increase in the burden of debt.

All the bailouts are transparently attempting to shift the debts of some private citizens and corporations onto everybody else in order to keep this morally questionable system from outright collapse.

Posted by Darren Sawyer | Report as abusive
 

Is it “Treating Customers Fairly” to allow the financial system and the country is fall to pieces?

Posted by Andy Irons | Report as abusive
 

I completely appreciate the problems banks have lending to new mortgage customers in a falling housing market (fulfilling capital adequacy ratios etc, which I won’t go into). In order to kick start the market, do you think there is an argument to relax or perhaps even ignore those rules for first time buyers with small deposits? Would that not in turn increase activity, stem house price falls and ease the very rules (Basel 2) that are crippling the mortgage market?

Posted by Richard Campo | Report as abusive
 

The current regulatory move to principle based regulation has lead to reliance on high level supervision of senior management and the stress testing and adequacy of financial resources. The level of lower level “testing” conducted by supervisors has reduced and firms are not being monitored by the FSA to previous levels, which may lead firms to reduce the focus on compliance. In current market conditions, will the FSA review its focus on Principle based regulation and increase it’s level of policing?

 

Dear Sir,
Is it not about time the FSA started to employ people from the businesses they are actually trying to regulate?
In my experience there is a distinct lack of knowledge needed to police the Banking & Securities industries.

Posted by David | Report as abusive
 

Why doesn’t the FSA have a clearer system for the industry/public to suggest improvements in regulation.

As an example there are glaring holes in the supervision of insurance commissions. Yet when asked the FSA simply says what their rules cover and have no interest in those areas which may have been omitted from the current regulations.

Posted by martin boyd | Report as abusive
 

The FSA has taken a very softly softly approach to the shenanigans that go on in the financial services industry, especially amongst so called investment and securities houses that tend to crop up during boom times. When will the FSA actually take action against the culture of irresposibility and outright dishonesty that goes on in some of these companies.

 

Don’t the negatives of shorting outweigh the benefits to the extent that an outright ban would help confidence, sentiment, put a straightjacket on opportunists and return us to the simple, straightforward business principle of “if you haven’t got it, you can’t sell it”?

Posted by Matthew Hutchin | Report as abusive
 

As I object strongly to the government bailing out banks, and by definition the culture that seems to have been encouraged, would it not be more prudent in future, once the dust has settled, to regulate banks as follows; no bank that accepts deposits from the public is allowed to speculate in any form of derivatives, etc. None at all, no skirting around to find the loophole – none at all! That way, if private companies want to “bet the farm” on/against the dollar or yen – let them. Let them also pay whatever bonus they see fit. But not with my money!
Warren Buffett and his partner Charlie Munger have been banging on for years about “financial weapons of mass destruction, but nobody wanted to listen. Nobody, that is, who had the faintest idea what was going on.

Posted by Spike | Report as abusive
 

As an afterthought, can somebody with a sharp pencil do the following math; add all the “profit” that banks and other financial institutions (AIG, etc) earned since Labour came to power in 1997, then deduct all the bonuses, and deduct the cost of the bailout to date. My question is would the answer be negative or positive? The former I think, which begs the following, if all the teenage “bankers” stayed home, would we notice the difference??

Posted by Spike | Report as abusive
 

What is wrong with putting regulation back where it belongs in the BOE’s lap.Brown’s decision to change it appears to be where regulation or should I say regulators have failed and not the regulation per se?
Also how many heads have rolled at the FSA over this debacle?

 

Hi,

Is it not invevitable that taxpayer guaranteed deposit taking institutions should be forced to completely separate out the investment banking operations from their retail banking operations.

In effect, banks can take enormous risks in their investment banking operations safe in the knowledge that because they are also deposit taking institutions, the taxpayer will always bail them out if needed.

Regulation alone will not prevent that risk taking. Indiviudal greed will ensure that some method is found to circumvent, subvert or ignore regulationss.

Posted by asvin dattani | Report as abusive
 

How many bankers other investment industry “professionals” have you put behind bars so far?

Posted by S.McDonald | Report as abusive
 

The FSA David chases Goliath to his border. Goliath crosses and continues his rampage having first turned to say sorry and got a pebble bounced off his head for his hypocrisy. When are the euro if not the global regulators going to merge and become a giant themselves instead of a lot of little Davids? International rather than national regulation would help maintain fundamental standards, avoid wasteful repetition and variations on a theme. We need the “UN of regulators” ie not perfect but divided we fall or rather fail. The current crisis stemmed from global problems didn’t it? The institutional causes are themselves global but the FSA and other regulators, perocial.

Posted by TR | Report as abusive
 

you are all crocked ,all the people i know think this,
nobody trust people like you anymore,what is your response to this?????

Posted by trissie | Report as abusive
 

Dear Hector,
What operational details do the BANKS have to disclose to the FSA and how often? Is anything compulsory?
Thankyou.

Posted by David Clift | Report as abusive
 

A market is supposed to be open and free for all to participate. I as a private investor can buy and sell shares just like a hedge fund. I cannot borrow shares to short a share. Where is the fairness in that.
Just make lending shares to a third party illegal. Simple

Posted by Mike Childs | Report as abusive
 

The world today is run by the international rich. This small group that owns the vast majority of the worlds assets and wealth, have been and always will be far out of the reach of badly run, short term governments and their departments including the FSA. What can you possibly hope to achieve in the short term you will be in charge, other than to further your own career like most in the government of the day?

Posted by David Carpenter | Report as abusive
 

“Did the FSA adequately respond to Paul Moore’s challenges to the HBOS senior executive over risk?”

Posted by Lee Jones | Report as abusive
 

Hector:

1 – why are fund reporting requirements to investors antedeluvian? they are not required (and do not) give more than aggregate performance to date, which is downright untruthful where a fund has changed hands, and little better even if not – We need to know whether a fund manager is actually performing, as we are still expected to invest in the crap available to derive a pension.
2 – How can the FSA retain credibility when its hires are second rate and it jumps when the master frog (HMG) so requires ?

Happy to discuss “second rate” accusation publicly.

Love

A taxpayer

Posted by D IVORY | Report as abusive
 

Reaction from Kate Day of the Daily Telegraph

[youtube]http://www.youtube.com/watch?v= aCKWydU7ZqM[/youtube]

 

This event has now taken place and a number of your questions were put directly to Hector Sants (see the archived video at http://uk.reuters.com/news/globalcoverag e/newsmakerFSA).

Please feel free to leave any additional observations or comments below but this forum for direct questions with the FSA is now closed.

 

Reaction from Michael McKee of DLA Piper

[youtube]http://www.youtube.com/watch?v= 5CXrAf15Ts8[/youtube]

 

what should FSA as regulators or other regulators do and what should be done at macro level and at micro level to solve the problems of the UK banking sector, or more broadly the banking sector in the developed world.

Posted by elizabeth reed | Report as abusive
 
  •