Margareta Pagano: Memo to Sants - don't unleash a mad-dog regulator

FSA should focus on putting principles into practice
Click to follow
The Independent Online

Ouch. Hector Sants, chief executive of the Financial Services Authority, is on the warpath. Suddenly, he wants the financial community to be frightened of the FSA. He thinks the best way for the City's watchdog to create such fear is to reverse decades of principles-based regulation and go for a more prescriptive and hob-nailed boot approach. The former banker-turned-gamekeeper has been in the hot seat for nearly two years now, and has had every opportunity to frighten us all.

Maybe I am missing something, but I had thought that was precisely why the FSA existed. Isn't that what it's 2,000 or so staff have been spending millions of pounds each year doing? I think Sants has got it wrong; it's not that the principles-based system doesn't work, it's that the FSA didn't put it into practice properly. The reverse is true of what he says: there has been too much box-ticking and not enough principles-based supervision.

If Sants and his fellow regulators had just taken a step back over the past two to three years, they would have spotted the way in which mortgage lenders like Northern Rock and Bradford & Bingley, and banks likeRoyal Bank of Scotland, were going haywire.

Tightening up the UK's system with more box-ticking is not the answer. All the regulation in the world was at the FSA's disposal to do what it wanted to any bank, broker or mortgage lender under its umbrella. I'll give you an example of how it missed the elephant in the room. Last spring there were big questions being asked by bankers, analysts and the press of Sir Fred Goodwin's stewardship of RBS and the bank's need for new capital. It was an open secret that some of the City's biggest investors were deeply unhappy with Sir Fred, and didn't believe the bank's denials that it needed more capital. Apparently, those investors went to the FSA demanding changes to the RBS board, but were told that this would be not be helpful. A few months later, a technically bust RBS nearly brought down the UK's banking system.

If this is true, it may well be that if the FSA and RBS investors had worked more closely together, they may have made changes earlier. And the bank's collapse may have been avoided.

There's only one explanation for such a flip-flop in Sants's own principles. He must be feeling the heat of Westminster, and has decided to come out fighting for his job.

He is the one who is now running scared and is giving the politicians what he thinks they want: the promise of more and yet tighter rules. He's right to point out there are "limitations" to a pure principles-based regime, but he's wrong to suggest "a principles-based approach does not work with individuals who have no principles". There isn't a system on earth that can be devised to cope with the unprincipled.

You only need look at Bernie Madoff to see how the US Securities & Exchange Commission, one of the most prescriptive watchdogs ever created, failed to track down his $50bn-plus scam. Even with all its teeth, it lacked the will to bite. That's why Sants, if he wants to keep his job, should resist giving in to more mad-dog-style legislation. It never works.

Ex-bankers prove that outside professionals can make great teachers

One of my daughter's most inspirational teachers is an ex-mergers and acquisitions lawyer. The former legal eagle got so fed up with toiling late into the night over M&A documents for her US investment bank that she threw in the towel, slashed her salary and switched to teaching – out of choice and not because she lost her job.

Now she's teaching at the excellent Saffron Walden County High School on a range of subjects from Hitler through to poverty and wealth in the 19th to 20th century. She's inspirational because she adores her work – something I've seen myself from parents' evenings and not just from my daughter's excitement about the subject.

I am reminded of her enthusiasm by the Government's plans to cut teacher training from 12 to six months for entrants from other professions – and not, as you might believe from the coverage, just out-of-work bankers. Teaching unions are squealing because they worry that the proposal dilutes the profession's status, while others are up in arms at the idea of those bankers being rewarded. Both are wrong and short-sighted. You only have to look at the success of the six-week Teach First programme for graduates to see how successful fast-tracking can be.

When one in five school-leavers have no proper qualifications, you have to think outside the box. According to a new report, more than half of the pupils who got three As at A-level were at private school – where only 7 per cent of our children are educated. Both figures are such an indictment of our educational achievements that it's time for radical reform. It's perhaps no accident that the private sector opens its arms to professionals without teaching qualifications.

If bringing in new blood can improve our literacy then this proposal should be backed, even if it means ex-bankers teaching on the big, bad world of banking.

G20 or G2? America grapples with a Chinese conundrum

All the talk last week in the run-up to the G20 summit, which kicked off yesterday with the finance ministers' meeting in Lower Beeding in Sussex, was of tension between the US and Europe.

France and Germany are against the spending plan of US Treasury Secretary Tim Geithner, who wants everyone to agree on tax cuts and higher spending to kickstart the world's economy. But Geithner has much bigger things to worry about: he has to face up to China's concern about its $1 trillion investment in US government debt. Speaking in Beijing on Friday, the Chinese Prime Minister, Wen Jiabao, spoke in unusually forceful terms when he asked for assurances from the US that its debt was safe. It's a tricky one for Geithner as the less the US government spends, the smaller the market for Chinese goods. The US is already importing 17.4 per cent less today than it did a year ago.

If this G20 is going to work, it really needs to be a G2.