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Financial Services Authority

My Lords, I do not intend to follow the remarks of my noble friend Lord James or the noble Lord, Lord Smith of Clifton. I have never had any reason to initiate procedures aiming to involve the FSA in following up a problem. Indeed, I rather think that I never would have done because my indirect impression is that the FSA is of little account. It has not managed to establish itself with a personality and a track record and has made a bad start to its seven years’ existence. What steps are being taken? A major management change has occurred. The new chairman, the noble Lord, Lord Turner, has been in place for not quite six months and the new chief executive, Hector Sants, has been in place for some 18 months. As your Lordships will know, last week they appeared before the Treasury Select Committee down the other end of the Corridor. As I think has already been said, the chairman promised fundamental change amounting to a revolution. Whenever I hear about revolutions, my mind turns to Edmund Burke and I become suspicious. Like him, I do not really believe in revolutions. Institutions have a life of their own. They make a start, which may be a good or bad one, but, above all they operate—as does the FSA—under a long and complicated Act of Parliament. Although we have had much discussion in your Lordships' House recently of financial stability, interestingly it is not mentioned in the Act which sets out the FSA’s four objectives: market confidence; public awareness; protection of consumers; and reduction in crime. They are expanded in the next section in what I can only describe as very imprecise language. Indeed, it is a feature of the FSA’s language that it is in general imprecise and even woolly. I think that it is fair to compare a regulator with a policeman. The Act tempted the FSA to become Dixon of Dock Green and not the CID, and the FSA fell for that temptation. But it gets worse than that. The objectives are qualified. The FSA is to be careful because others running institutions also have responsibilities. It is to be proportionate and it is to work out whether any of the costs incurred as a result of its regulation exceed the benefits. It is to be wary about competition. It is to encourage competition, not to reduce it, and to remember that London is very important internationally. Finally, it is to encourage innovation. Of course, we all know where innovation has led us. You can imagine the dialogue between the FSA and one of the larger financial institutions in which the FSA makes its points and the larger institution says, "But I thought you were supposed to be the gentlemen of the light touch and to keep your hands off us". I think that the FSA accepted that and became PC Plod interested in relatively small fines and not Inspector Morse. It is no wonder that the FSA says: ""There are many situations where our statutory objectives are potentially at odds with each other"." That is a bureaucratic euphemism for saying "We have been given a muddle and we don’t quite know how to solve it". Last week, the noble Lord, Lord Turner, was for driving through the middle of these problems with the "revolution" and the "fundamental change". At the heart of what he was saying was that there should be less process and less bureaucracy. Or was he really saying that in addition to the process and the bureaucracy there was a need to have an understanding of the system as a whole, a detailed evaluation of the position of large financial institutions and a willingness to reach judgments about impending risks and the likely pattern of events? If he is to be as bold as that, he does not have a particularly good inheritance. What he inherits are 2,500 inward-looking people who have been trained to see the trees rather than the wood. A massive cultural shift would be needed to achieve what the noble Lord, Lord Turner, promised the Select Committee last week. Of course, many staff would find that massive cultural change very uncomfortable and quite possibly unacceptable. In the discussion in the Treasury Committee as to whether or not the evidence given by the chairman and the chief executive meant that the FSA was or was not fit for purpose, the chief executive almost wondered aloud as to whether his chairman’s vision was within the statutory remit as it existed in the 2000 Act. That is a very good question. The Act is not fit for purpose if the view of noble Lord, Lord Turner, of the FSA role in the tripartite structure is correct. Of course he may try it. Who would object if he tried it anyway? However, the question would then be: how much progress will he make? The FSA’s outstanding need is the interpretation of the highest order of market intelligence. That is unlikely to be available within the FSA. Surely, therefore, it would be a better bet not to increase numbers, as is being suggested, but to spend the money on high-level advice from those closer to the market and to the way in which the operators in the market behave, particularly when under pressure. The FSA may be able to raise its game. Given its first seven years, it will not do so from within. Its chairman would do better to streamline the organisation and to look for the help that he will need from wherever he can find it.