Moving retreads around

Moving the chief executive of the Prudential Regulation Authority (PRA), fresh from overseeing the farcical crash of the Co-operative Bank, to run the FCA smacks of moving retreads around. It is for Bailey to prove us all wrong.

History is not on his side. Arguably, the former heads of the Financial Services Authority (FSA) and FCA have all left under something of a cloud, or turn out to have failed in their agendas. Sir Howard Davies built a structure around risk management, Arrow, and desk-based monitoring that proved catastrophically weak when low-risk banks started collapsing and mis-selling scandals kept emerging around every corner. The application of management consultancy to regulation did not work. John Tiner watched while the banks headed towards catastrophe and failed to kill off personal loan-based payment protection insurance mis-selling as it stared him in the face.

Sir Hector Sants now stands accused of inertia while the UK banking system blew itself up in spite of the early warning provided by the run on Northern Rock. The recent spate of reports on HBoS from the Parliamentary Commission for Banking Standards, Andrew Green QC and the PRA show that the Sants FSA was run by people who failed to meet their public commitments and preferred to hit easy enforcement targets rather than challenge anyone running a major bank. The Treasury could not renew Martin Wheatley’s contract after the Simon Davis report on his enfeebled authorisation of the deliberate advanced leaking of the business plan to a journalist, and his indecisive handling of the market movements that followed.

So, what does Andrew Bailey’s past tell us? He is a consummate Bank of England insider; a product of the organisation that missed the macro-implications of the banking crisis and was stressing the importance of limiting deposit protection as members of the public were withdrawing their money from the UK’s more vulnerable banks. Mr Bailey himself was moved to run the FSA’s shadow PRA operation in 2011. At the time, the Co-operative Bank was supposed to be buying over 600 of the Lloyds Bank branches. A journalist raised the point at the time whether the FSA was concerned the bank had yet to integrate its IT systems following its acquisition of the Britannia Building Society. Nobody at the FSA seems to have checked at this point whether the Co-op could actually afford the branches concerned, in spite of the battering that the banks’ balance sheets had suffered during the 2008 crash. RBS had effectively been doomed by its purchase of ABN-Amro. Nobody wondered whether the Co-op might not have the same problems with its acquisition of Britannia.

Under Mr Bailey’s leadership, the FSA allowed the Co-op to announce its branch purchases formally in July 2012. Early the following year, it became increasingly obvious that the Co-op could not handle the process. By June 2013, the bank had essentially failed, having wasted a small fortune on its Lloyds branches purchase. It is never easy to identify who is responsible for what in regulation but Mr Bailey was clearly the man in charge of bank solvency in the UK from April 2011 onwards. He almost certainly inherited a demoralised team that had clearly failed the banking crash ‘test’ set in 2007-2009. He also had to administer the chaotic creation of a new organisation with the formation of the PRA and Sir Hector’s on-off appointment to run it. One can argue that the complex bail-in solution saved the Co-op from costing the taxpayer any money. However, that is much more to do with the shareholding and debt arrangements within the bank than any regulatory masterstroke. The bank is still haemorrhaging money and failing stress tests even in relatively benign economic conditions. The Andrew Bailey-run PRA essentially earned a D grade for its handling of the Co-op.

One of the hopes of those who created the PRA was that it would enable the new regulator to have a coherent solvency policy. However, at least as a publisher, the Bailey-run regulator has been a disaster. The PRA rulebook has dribbled out in an incoherent mess and is surprisingly difficult to follow. One may hate the FCA rulebook but at least it is relatively easy to navigate. The Bank of England website hides crucial pieces of information, such as its tortuous enforcement procedures. Again, the FCA’s may not be good, but at least one can find them in the Decision Procedure and Penalties manual.

The PRA and FCA share one major problem: the lack of ethnic diversity in its senior management. For organisations operating in London, their record in this area is shocking. Martin Wheatley asked Tracey McDermott to lead efforts in this area while she was also head of enforcement, but the latter job was rightly always going to have priority in her diary. This problem is long-standing and more important than it appears. Our financial services regulators have all suffered from a certain sameness, and have almost all ended up as failures. A different perspective might improve on the FCA’s current mediocrity. Greater diversity in senior management would also encourage people from a sizeable proportion of London’s population to consider a career in regulation which they would currently be best advised not to follow if they have ambitions.

There is a danger here of engaging in a faintly Maoist obsession with personalities. A chief executive will not himself be able to change the workings of a regulator in the short term, and as Mr Wheatley’s period at the FCA shows, this may be all the time he has. Andrew Bailey will almost certainly not make or break the FCA. The organisation is large, with deep-seated middle management, structures and attitudes built up since 2001, and the chief executive’s job does not allow its holder to be everywhere and understand everything going on.

All one can hope for is a system of reward based on individuals’ ability to make the big decisions correctly and deliver positive outcomes rather than be swayed by the cut of people’s jib or the lack of threat they pose to senior management. Another re-structure will not help the FCA overcome its decision-making problems. As the FCA is fond of telling the industry, corporate culture is the key. In the last year, the Davis report on the business plan pre-briefing scandal and the Andrew Green QC report on enforcement at HBoS has shown the way in which junior to middle-ranking staff at the FSA/FCA often made the right decisions, only for senior management to mess things up. If Mr Bailey can have that junior staff run his organisation for him and remove those who would have gone along with the business plan leak and the original FSA decision not to investigate HBoS’s senior management, he will have done well. Otherwise, we can all prepare for the next FCA disaster.

Adam Samuel is a freelance journalist and compliance consultant

Key points

Andrew Bailey’s appointment as chief executive of the FCA was greeted with something of a yawn.

Mr Bailey is a consummate Bank of England insider, a product of the organisation that missed the macro-implications of the banking crisis.

All one can hope for is a system of reward based on individuals’ ability to make the big decisions correctly.