Is He One Of Us?
The Bank of England and FCA reports on the collapse of the Halifax/Bank of Scotland businesses at the heart of the 2008 financial collapse, issued today, point fingers at both the bank management and the regulator, then the Financial Services Authority (FSA) (often referred to by Private Eye as ‘the Financially Supine Authority’). I haven’t has the opportunity to read the full reports, but the FCA do comment on their predecessor’s activities and find them lacking, What isn’t fully exposed is the reason behind that lack.
I can comment on this, because I heard about this even in advance of the collapse, albeit only anecdotally. But it exposes something that I’ve been concerned about for quite some time – my earlier post on my former employer, Ofwat, should give you a flavour of my concerns.
Ofwat was one of the group of sectoral regulators set up during the privatisation of utilities in the UK. As the government of the day got a feel for regulation, and in line with the general setting of operational arms of government at arm’s length from the legislators and the Government itself, more regulatory bodies were set up – the Office of the Rail Regulator, Ofsted, the Care Quality Commission and so on. And in an increasingly de-regulated financial sector, independent regulators were equally seen as being the Next Big Thing. Hence the FSA.
As regulation as a discipline in its own right was still fairly new, the regulators decided that they should meet from time to time to talk around burning issues of the day. And so arose an informal body called “the Regulators Group”. I suspect this came about in part through the leadership of my former boss, Ian (now Sir Ian) Byatt, whom I have mentioned in these blogs before. Ian Byatt and Stephen Littlechild, then electricity regulator, were two of the originators of the theory and practice of regulation – indeed, Ian Byatt had literally written the book on the subject – and they were both concerned very much to see that regulation demonstrated itself to be a practical and robust mechanism for delivering benefits to both the political leadership and the consumers in whose name they were acting.
The Regulators Group would meet three or four times a year, and it would consist of a good dinner followed by a round table discussion of issues. This was very much Ian Byatt’s way of working; quite early on in the life of the department, he ordered a supply of notepads with Ofwat branding, thin enough to fit discreetly into a suit inside pocket, sized so that they would sit unobtrusively on a dining table, and on good enough paper so that they would not look out of place amidst fine china, silver cutlery and a damask tablecloth. (We’re well beyond the rubber chicken circuit here.)
The practice was that once the dinner had reached the coffee stage (I never had the feeling that Ian was a brandy and cigars man – at least, not every time!), the conversation would be halted with the tapping of a pen on a wine glass, and Ian would announce “Gentlemen,” (and it was pretty much usually gentlemen) “the topic for discussion tonight is…”.
Now, I never got to go to these very select gatherings of the Great and the Good. But I did work directly to people who did. And one story came back that stuck with me. (And if Sir Ian ever gets to read this, I am only reporting what was passed around the office; and if he has a different recollection, I invite him to contribute.)
The topic of the anecdote was the FSA, and its effectiveness. And the explanation for its ineffectiveness was that they had recruited their senior specialists from the second echelon of bank management. The line taken by governments of both political colours during the 1990s and later was that the Civil Service was too inward-looking, too eager to promote its own, and too reliant on people who were deemed ‘generalists’, who did not have a professional specialism. So from the late 1980s onwards, there was an increasing habit of bringing in people from industry to hold fairly high managerial positions in the Service. But being the public sector, the money on offer could only be so much, and it ultimately had to come out of one budget or another. So the Service, on the whole, could only go so far up the industry management tree to get their managers. This had a whole range of knock-on effects in matters of competency, public probity or the impact on pay for everyone else to name but three.
And there was also the question of political direction. Margaret Thatcher had started the direct politicisation of the Civil Service with her question of one senior manager “Is he One Of Us?” This was replicated across almost all of Whitehall in the following years; and by the time Labour came to power in 1997, “One of Us” was more likely to mean someone from the Establishment. And if that meant that some academics came in with a leftist slant, they were more than balanced out by managers from industry – especially those industries courted by New Labour – whose political orientation was either ambivalent, or more corporatist than political.
So the FSA recruited second-tier managers to act as their regulatory leads. But they still retained a degree of awe at those who they would be regulating, the senior managers and board members of the banks who had previously been above them. And at the same time, those managers and Board members looked at those the regulators were sending out to keep them in check, and their reaction was “But he was only ever a Deputy Director…” There were even tales of quite senior FSA people being left to cool their heels in corporate waiting rooms for a couple of hours, a very clear indicator of the level of respect the regulated had for the regulator.
I cannot imagine anyone in a water company ever doing that to Ian Byatt.
Ian Byatt was from the old school of Civil Service values. He had all the academic skills to be master of his subject; but his motivators were not mere money. As a Grade 2 civil servant – one grade below the Permanent Secretaries who run the big Departments of state – he would have been paid (in the middle 1990s) about £50-75k less than the CEOs and Chairmen of the companies he was regulating. But that meant little to Ian. What was more important was the status he wielded as Regulator, appointed by government and answerable only to Parliament. Give him a good dinner and a reasonable expectation of a knighthood on retirement, and he was happy; and those issues of relative status and financial worth meant very little in comparison to those more intangible, traditional Civil Service values.
It was really only by setting up a parallel set of values that the British Civil Service was able to develop its tradition of relative freedom from corruption, and also gave its senior people the ability to lock horns with captains of industry and hold their own against them. Ofwat, in the Ian Byatt years, was a highly effective regulator because it dealt with the personalities in the industry in that very way. Even I, fairly lowly as I was, once had to write to someone in a water company who challenged Ofwat’s senior engineer’s authority to issue some (comparatively minor) instructions, to tell them that “Under Schedule 2(a) of the Water Act 1989, the Director General can devolve any of his powers to any person he may from time to time designate. Dr. E’s letter of (date) should therefore be read as having come from the Director General himself, and it carries his full authority. We therefore look forward to receiving the information we asked for at your earliest convenience…”
If the anecdote that I heard is correct, it seems very much as though the senior officers of the FSA either did not understand the extent of their powers and authority, or did not have the confidence to exercise those powers to the utmost in the pursuit of their objectives. If I, as an Acting Higher Executive Officer, felt able to exercise those powers on behalf of the DG, as set out in statute, then surely (you would think), people higher than me in the FSA should also have felt able to do that. But apparently not.
And this is why we had an independent Civil Service. And the diminution of those powers and influence for merely political ends in the 1980s and 1990s, and the resultant regulatory capture of the regulators by the regulated that we have especially seen in the last fifteen years, can be laid directly at the feet of politicians who sought that very same reduction of influence. Those very same politicians who will inevitably seek to shift the blame for the financial collapse of 2008 to regulators and the banks, and anywhere but the Westminster bubble, are as much responsible as anyone else for setting the ground rules and tilting the playing field against the regulators they now seek to blame.