Saturday, 26 May 2012

Banks as puppets of politicians must end.

It is very common nowadays to hear politicians and regulators claiming that banks are only interested in profits and greedy bonus and that banks do not give enough importance to their customers’ interests and relegate them in favour of their own interest and profit. It is fascinating to see how easily politicians argue that the whole system is flawed every single time a bank behaves (according to these same politicians, but still arguable) below the level they consider adequate.  

However, asking banks to put their customers’ needs before their own is superfluous. Banks know very well that they need to satisfy clients’ demands if they are to survive. Clients’ needs and they protection of the bank's reputation are always present in the minds of anyone working at a bank, from top managers to junior employees. In this sense banks are not much different from any other company in any other sector. In a properly established market system banks and financial institutions would, most of the time, behave in such a way that both parties are satisfied: banks provide a product or service for a price and customers are willing to pay for it because what they receive is worth the price. Banks are very aware of this trade off.  However, we do not live in a free market system, and if sometimes banks do not deliver for customers, it is mostly due to government interference, in one way or the other, and not in the willingness of banks to please their customers.

Banks, as any other company, know very well that if they do not provide value for money customers will stop purchasing from them and will go to another bank across the road. All companies compete for customers and strive to provide good products at attractive prices. The financial sector is no different in this regard. If politicians really want a financial system where banks produce what customers really need and want, there is no better way than implementing a purer market system where banks that do not deliver value for money will be disregarded and disappear. Of course, as in any other sector (including governments), there are certainly some individuals who may sometimes behave in a way which is not in their customers’ interest and which is solely in their own personal benefit, even if it implies committing illegal activities. However, these are sporadic cases though attracting huge attention. Politicians normally neglect that banks are naturally inclined to care about their customers and will use any wrongdoing as an excuse to ramp up control. 

But it does not stop there. For some politicians, the financial sector is also “strategically important”, “essential”, “special” or whichever other terminology they think of to argue that it has an additional function well beyond that of providing for their customers. It is not uncommon to hear politicians and regulators saying that the financial sector has a “social responsibility” that it cannot neglect. Some go even further and say that banking must pursue the ghostly “public interest”. However, these are not a simple concepts. Public interest is not just one but many, as different groups of individuals always have different and sometimes opposed interests. In reality, every time a politician or regulator claim that banks have a social responsibility to pursue the public interest, what they really are saying is that more intervention and control is needed. What politicians really mean is that banks should act in a way which supports their particular view of the “public interest” or their particular level of care for their clients. And then is when real intervention begins.

In some countries governments will simply seize banks and take the steering wheel themselves. However, in so-called developed countries politicians are more sophisticated. First, governments will pass laws to put the banking system on a specific track so that certain activities are discouraged while others are promoted. Secondly, a powerful regulator will be created to supervise and direct individual firms, or the system as a whole, in a specific direction determined beforehand. Hence, the financial sector becomes a puppet of the government. Politicians in developed countries know very well that direct control of banks is not an option. The country will be seen as an authoritarian regime and therefore discourage investment. Also, they know that private companies are better run privately and without political intervention. Therefore, they favour using this stealthy and indirect control instead of explicit intervention.

It is always good intentions that cause the worst catastrophes. Simply, look at the recent financial crisis created by the noble intention of providing affordable housing for everyone. However, regardless of how honourable politicians’ intentions are we cannot use the financial system as puppet for politicians to pursue their political agenda. If we are to avoid banking failures and promote a healthy financial system where customers receive what they want at affordable prices we should stop political interference and furtive control of banks. Unfortunately, the world is moving in the opposite direction.

Thursday, 24 May 2012

Mis selling of current accounts? Let's get a Happy Meal!


Mr. Andrew Bailey, from the Bank of England claims that free in-credit banking may lead to mis selling and therefore he argues that the regulator could intervene and push banks to charge for these types of products.

There is something that really strikes me in his argumentation: can anyone explain me how, for example, the simplest of the simplest banking product, a current account, can be mis sold? Or how, and why, providing free current accounts could, in Mr. Bailey's words, "encourage" mis selling? Mr. Bailey argument that the "unclear picture" of how free banking products work may have led to mis selling of other products (like "payment protection insurance" or PPI) simply does not have any logical basis. Certainly there is some truth in the argument that some banking products are complex and hide the true costs but that is not a current account or a PPI. According to his logic, every time I'm given a free gift if I buy a Happy Meal, that could also be mis selling. In that case McDonalds has run the biggest and longest mis selling scandal ever. 

Surely, the best protection for consumers is to make sure that products are as transparent as possible, including transparency of any costs associated to them. However, if the Bank is really prepared to intervene in the sector and require banks to charge for current accounts, it will be the most ridiculous idea ever. And definitely not the one the priorities the Bank should have in mind right now. If Mr. Bailey is serious about tackling mis selling he should forget about intervention. It should not be up to a regulator to decide how banks charge their clients. The regulator’s role is simply to ensure that banks provide clear, easy to understand and transparent information about benefits and costs of the products they offer as well as to ensure benefits and costs are presented fairly and evenly to the consumer who, eventually, has the responsibility for taking the decision. Intervening in this market would not only be irresponsible, it would be a lack of respect to the intelligence of UK people. 

Tuesday, 15 May 2012

Risk taking is a necessity.


The prestigious American Economist Allan H. Meltzer once said that "Capitalism without failure is like religion without sin. It doesn't work". 

Anyone who believes in Capitalism will agree that individuals and corporation need to fail. If we are to create a healthy and competitive market place that is able to bring the maximum possible degree of development and progress for all, we need to allow bad companies, ideas or strategies to fail in order to give way to better and more efficient ones. However, it is not only absolute failure (e.g. bankruptcy and liquidation) what Capitalism need. A healthy form of Capitalism also needs to allow market players to make mistakes. There is no doubt that mistakes are good for Capitalism in two ways: first, they allow market players to learn and therefore is an optimal way of improving performance; and, second, if we are to commit the same (or different) mistakes repeatedly, it will more likely lead to an ultimate failure of inefficient propositions.

However, “failure” is just the consequence. The cause is “risk”. If we fail in our objectives, or if we achieve them, the reason will be that, at some point, we have decided to take a particular course of action without knowing for certain what the result will be. In other words, we have taken some degree of “risk”. For example, when Christopher Columbus set off for the East Indies, he took a risk. So did the Catholic Kings of Spain who funded the expedition. And certainly, so do companies in every decision they take. Therefore, risk is an essential human necessity to achieve success, although it has a negative downside: “failure”.

Yet, it seems that some financial commentators and politicians are unable to grasp this elemental fact. And accordingly, when JP Morgan announced last Thursday that it had a $2 billion loss from a trade going sour in its Chief Investment Office in London, they seemed to have been taken aback by the fact that the bank was taking a risk and are now decided to push forward a change to the regulatory framework so that it cannot happen again. 

Individuals and companies have an intrinsic incentive to control the risk they take if the are to achieve success instead of failure. Yet, this incentive can be distorted (read here anti free markets policies such as government support of failed institutions) and hence there still may be a case to promote rules that will protect unconnected third parties, such as taxpayers or clients of the institution, when everything goes awfully wrong. Nonetheless, if we are to cultivate an advanced and developed society, individuals and companies should be allowed to take risks, and hence fail, or make mistakes regardless of how painful the can be for the maker. Responsibility for the decision taken and its consequences (failure or success) are a key element of capitalism that regulators and politicians should always bear in mind. For that reason, law-makers and regulators should abstain from pushing through politically driven and impulsive regulation and simply ensure that any rules protect innocent third parties while permitting companies and individuals to take risk.


Friday, 11 May 2012

Quick post: A view on the JPM embarrassment.


JPM’s loss of capital as a result of the London Whale bad trade is a mere 0.2%. Even if it was larger, the bank is very well capitalised to stand bigger shocks. There has been no harm to clients. The real damage is simply in the reputation of the institution and a bad quarter. Many people will use this incident to press on for the implementation of the Volcker rule in the US and the ring-fencing of retail operations in the UK. However, this incident shows that good capital buffers for unexpected blows are the best precaution. If things get even worse, recovery plans and living will do the rest. Although incidents like this are undesirable and there should be controls to avoid them, we need to allow risk taking if we want progress and development. We just need to ensure that if it goes sour, third parties are protected and it hurts only the risk taker.


Wednesday, 9 May 2012

A critic to the FSA's approach to regulation, supervision and enforcement.

The functions of any financial services regulator steer around three basic pillars: regulation, supervision and enforcement. However, there are many different approaches to each one of these pillars which the regulators can choose from to create the regulatory framework. This article attempts to explain how the FSA’s chosen combo poses serious risks to the freedom of individuals and corporations in a market economy and exacerbates the potential for abuse of power by the regulator, creates legal uncertainty and compromises the values of the rule of law.

In terms of regulation (i.e. writing rules), the FSA has always favoured a ‘principles based’ and ‘outcomes focused’ methodology. In this sense, although UK’s financial regulation comprises an extensive handbook with detailed and specific rules, the jewel crown that underpin the entire framework is the 11 ‘principles for business’ that financial firms must observe. Moreover, individuals registered with the FSA as ‘approved persons’ (normally senior managers and client facing bankers) must comply with a set of 7 ‘statements of principles for approved persons’. Most of these principles for firms and individuals are extremely general and can embrace almost any activity. For example, some of these principles state that individuals and firms must act with integrity and due skill, care and diligence. This approach, which is diametrically opposed to the box-ticking, ‘rule based’ system, implemented in other countries such as the US, has also an upside as it is, to some extent, believed to be more beneficial for the financial sector as it allows a degree of freedom and flexibility for companies to decide how to achieve those outcomes and comply with the principles. However, for this methodology to work efficiently, any interference from the regulator should be kept to a minimum.

In relation to supervision of financial markets and firms, The Big Fish already explained in a previous post (in fact the very first one) how, since its inception, the FSA’s attitude has steadily changed and become a major threat to freedom of enterprise in the UK. The old FSA system of ‘light touch’ regulation is now a thing of the past and the trend is moving rapidly to the ‘more intrusive supervision’ approach spearheaded by a more powerful and determined regulator than ever before. This entails making ‘judgements on judgments’ and taking a more pro-active and pre-emptive view of regulated firms’ internal affairs.

Finally, and in parallel with the ‘more intrusive supervision’ approach, the FSA has also intensified its enforcement activity and made its ‘credible deterrence’ attitude the flagship element of its approach to enforcement. This ‘credible deterrence’ enforcement style involves the stated intention by the regulator to pursue high profile cases in specific areas of concern.

By nature, any ‘principles based regulation’ system is to some extent imprecise and has vague borders. Consequently, any action taken by a regulator on the basis of generic principles is likely to rely heavily in opinions rather than facts. On the contrary, in a rule based system, either there is a breach of a rule and it is proven so or there is not. In a principle based system it is possible that prosecution occurs if the expected outcome of a particular principle is not met up to the level the regulator wants. Indeed, if one looks at the rationale behind most enforcement actions the FSA has taken in 2011 and so far in 2012, it is palpable how the reasons supporting these fines and sanctions are increasingly based on the breach of principles only, as opposed to specific rules, or on behaviours which fall short of what the regulator expected in order to meet its desired outcomes.

Therefore, it is not surprising that, when such a vague and borderless system of principles is combined with an intensive and intrusive supervision and a prejudiced enforcement, the likelihood of the regulator to exceed and even abuse its powers increases significantly. The consequences are a potential for limitations of freedom as well as the presumption of innocence. The rule of law is likely to be strained and tainted because of sudden changes in the interpretation or implementation of these principles, normally based on the needs or interests of the regulator instead of objective factors. In other words, ‘principles based regulation’ gives companies more leeway in dealing with its private affairs but it also gives regulators more leeway in judging the actions of a company and as a result it may create unnecessary and unfair legal uncertainty.

However, the problem is not ‘principles based regulation’ in itself which, as explained earlier, has some benefits. The problem is the way this system of regulation is applied by the regulator. On the one side, a gentle and balanced application of a ‘principles based’ system has potential for smarter regulation that helps the markets work more efficiently. On the opposite side, an intensive, intrusive, impulsive and biased application of the principles is very likely to distort the legal system by creating uncertainty about the application of the rules and has potential to produce unjust and abusive results. Unfortunately, the latter is the route the UK FSA is taking.

Sunday, 6 May 2012

The hypocritical regulator.


Governments and Regulators are the least trusted institutions by the general public. Yet, in a stunt of either arrogance or naivety, the regulator shows, once again, his hypocritical side by criticising the lack of trust on the financial sector and forgetting his own. Furthermore, when regulators are less trusted than banks, an attack to the financial sector on the basis of low levels of trust lacks any legitimacy.

Last Friday, Martin Wheatley, current Managing Director of the FSA’s Consumer and Market Business Unit, gave a speech at the Chartered Institute of Bankers in London titled: “Rebuilding trust and confidence in banks and bankers”. Mr. Wheatley, who will soon become CEO of the Financial Conduct Authority (FCA), maintains that it is only in recent years that banks, like other financial services, seem to have lost people’s trust and confidence. and, as a consequence of this distrust by the general public (and the occasional misselling scandal), Mr. Wheatley goes on to argue that the regulator is entitled to continue cracking down on the sector and watching it even closer.

The idea that Mr. Wheatley intends to transmit in this speech is an old one: that the regulator will use its more 'intrusive supervision' approach in the fighting against practices which put profits before customers. The line of attack will be three-fold:  a) product banning and product regulation; b) greater attention on the business model and whether it can deliver good outcomes for consumers; and c) the role and engagement of boards and senior executives.

As a factual basis to his argument that the public trust in banking and financial sector is at record lows, Mr. Wheatley mentions the “annual barometer of trust” put together by the PR firm Edelman. Specifically, Mr. Wheatley explains that “financial services came bottom this year with just 45% of survey respondents saying they trust the industry to do what is right.” To be fair with Mr. Wheatley, it is true that Financial Services comes at the bottom in the trust ranking for the business sector, with technology right at the top. However, what Mr. Wheatley conveniently hides is that governments, government officials and regulators are trusted a great deal less than the financial sector.

So, let’s have a look at the following slides taken from the same survey (apologies for the quality of the slides, but please follow the link above for the original presentation):

1) Trust in government enjoys, by far, the lowest level of trust among the four broad sectors analysed (NGO’s, Government, Business and Media):

  2) The decline in the trust people have in governments hits record lows and is significantly lower than the trust in businesses: 

 3) The credibility of government officials and regulators is right at the bottom of the table, being the biggest decline in the barometer’s history.


Tuesday, 1 May 2012

Can Europe return to its glorious liberal past?

The dream of a liberal society, respectful of freedom and individuals is, unfortunately, becoming more and more uncertain every day. However, the wishful answer to the question of whether Europe can become again a liberal society as it was in the past, is that yes, it can. Sadly, the only certainty is that it will take us a long time to get there and the road ahead is a mine-field full of uncertainties and difficulties. The change, if it happens, will most likely be a slow and stealthy, almost unnoticed, transformation and will require at least two more generations as a best estimate. There are of course, potential accelerators such us revolutions, wars or other calamities which may well trigger a faster change and a rethinking of the world we live in, however, History teaches us that most changes take long time even if, when we study them, specific events are recognised as speeding up the adjustment. 


Since the middle of last century, Europe has been the witness of the entrenchment of a social welfare economy and mentality which will take some time to disappear and give way to a more liberal system of managing countries and their economy. Since the big wars, social security systems and big governments were implemented across Europe and the trend continues to be “bigger” governments instead of leaner ones. However, the crucial problem lays in the very minds of individuals, their past and their culture.

The generation of individuals who grew up in these “social” states were provided with free education, free health system, job security, unemployment benefits and many other, apparently free, gifts which they saw as the achievement of a long-awaited aspiration by their parents and grandparents. Their offspring were born in a world were most countries (bar couple of sporadic reactions to unsustainable models such as those led by Lady Thatcher or Ronald Reagan) were accustomed to certain living standards that were no longer negotiable and did not want to give up at any costs. Not even a catastrophic event such as the financial crisis that started in 2008, and which is a clear proof that the model is broken, has been enough to awaken that second generation, now mostly in their late 30’s and 40’s. Similarly to drugs, social welfare systems have hooked millions of individuals and has consequently allowed the entrenchment of governments which are willing to keep the patient sedated in order to maintain their power and own privileges. However, Europe is running out of this drug and very soon the next generation will begin to wake up to an uncomfortable hangover. I cannot read the future, but it is not a wild guess to imagine that this generation will feel the “cold turkey” in its crudest form and the reactions are absolutely unpredictable. Certainly they will be upset and will fight back to recover their parents’ benefits and living standards, but the reality (i.e. unsustainability) will render them to find new ways and innovate, as humans have been doing for centuries. Slowly, they will learn to survive on their own, and so will do their children. And this is the time when liberalism can triumph again.

At some point in the near future, upcoming generations will need to make a choice: to return to the “granny state” (whereby slowly and painfully Europe will decline and die while being overtaken by developing countries) or to embrace a completely different system by which individuals re-invent themselves and are reborn as a different thriving country and economy. No one knows what that system will be and the former option seems more likely to this pessimistic author, but if the seeds are correctly planted now, the chances for a more liberal world with smaller governments may increase. As Hayek put it, “we must make the building of a free society once more an intellectual adventure, a deed of courage. Unless we can make the philosophic foundations of a free society once more a living intellectual issue, and its implementation a task which challenges the ingenuity and imagination of our liveliest minds, the prospects of freedom are indeed dark. But if we can regain that belief in power of ideas which was the mark of liberalism at its best, the battle is not lost.”

On the bright side, we are witnessing changes in the political, social and economical landscape. The rise of political parties on the right and left of the established centre are a living proof of movements in the tectonic plates of the society. The strong comeback of liberal voices like Hayek and the Austrian School are also a good sign, as is the fury and rage against politicians and governments that in a diffused way permeates many different layers of society.

On the dark side though, we can foresee how politicians will manage to maintain their “status quo” and even expand their powers. As Hayek irrefutably said, “’Emergencies’ have always been the pretext on which the safeguards of individual liberty have been eroded.” Governments can still manage to muddle through and provide individuals with a softer drug enough to debilitate their will and keep them calm until the good times return.

Almost 70 years ago, in his masterpiece “The Road to Serfdom”, Hayek said that “the first need is to free ourselves of that worst form of contemporary obscurantism which tries to persuade us that what we have done in the recent past was all either wise or unavoidable. We shall not grow wiser before we learn that much that we have done was very foolish. If in the first attempt to create a world of free men we have failed, we must try again. The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century.” This remains as true today as it was in his time.

The Big Fish in the news.

The Big Fish Blog and Twitter (@TheBigFish­_UK), which have been running for just over a week, were born with the aim of providing a serious and expert analysis, commentary and critic of financial regulation developments in the UK and worldwide from a free markets, free enterprise and personal freedom perspective. Secondarily, we also intend to comment mainly in relation to relevant news or developments in the Economy, Business, Financial Markets and Political sectors in order to denounce any attacks against freedom and propose sensible and workable solutions. Therefore, we seek to reach the general public and become a point of reference so we have our say in the debate and our voice is heard. 

We have already engaged with multitude of Twitter users and specialised blogs, news sites and think-tanks, in order to spread our opinion, and although it is just a small step in our journey, we are very proud and honoured for having been selected three times already in the Cityam Forum "Rapid Responses – Top Tweets" section. Here they are:
  • 1st May 2012: The FSA are the worst enemy of free markets. Why is everyone so passive about this?
  • 27th April 2012: The Leveson Inquiry is becoming a political ballgame. It should have ended long ago and the job left to the police.
  • 24th April 2012: Sarko socialist, Hollande far-left, Le Pen extreme right. Is there any real pro business party in France?

Please, keep following us on twitter (@TheBigFish­_UK) and on this blog. Meanwhile we will keep updating this space with further developments in the future.

Many thanks,

The Big Fish team.